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GLOBAL MARKET STRATEGY IN THE CONFECTIONERY INDUSTRY: THE
CASE OF HERSHEY FOODS CORPORATION
By

Chun Zhang

A PLAN B PAPER
Submitted to Michigan State University
in partial fulfillment of the requirement

for the degree of
MASTER OF SCIENCE
Department of Agricultural Economics

Spring 2001

ABSTRACT
GLOBAL MARKET STRATEGY IN THE CONFECTIONERY INDUSTRY: THE
CASE OF HERSHEY FOODS CORPORATION
By

Chun Zhang

This study uses Hershey Foods Corporation as a case to demonstrate how to formulate
global product strategy to penetrate growing international markets. In recent years,
confectionery markets have been growing around the world. Hershey Foods Corporation,
the North American confectionery leader, however, has been experiencing some setbacks
in international expansion. This study uses the global strategy framework (Yip, 1992) to
analyze the strategic position and resources of Hershey Foods Corporation, and to
diagnose confectionery industry globalization potential. The focus of the study is the
formulation of global product strategies for Hershey’s future expansion into strategically
important markets. Benefits and costs of a global product strategy and the organizational
ability of Hershey Foods Corporation to implement a global product strategy are also

evaluated.

Dedicated to
My mother Liu, Yuying, to my father Zhang, Kaiyin, and my sister Zhang, Yan

For all their unconditional support and inspiration during my overseas study.

ACKNOWLEDGEMENTS

I would like to express my sincere appreciation to all those faculty, staff,
colleagues and friends who assisted in the completion of the paper. I am deeply indebted
to my major professor, Dr. Christopher Peterson, who provided continuous and valuable
academic guidance and financial support during my two years of study. I also would like
to express my appreciation to Dr. David Weatherspoon, who reviewed this manuscript
and served on my guidance committee.

Thanks also to my colleagues and friends, Youssouf Camara, Amy Damon,
Kelley Cormier, Carlo Russo, Lorie Srivastava, and Lulama Traub. I sincerely appreciate
their patience with my English, their believing in me, and their spiritual support. Their
friendship enabled me to cope with pressure and frustrations in my two-year study, and to

accomplish my academic goals.

Chapter 1

Chapter 2

Chapter 3

Chapter 4

TABLE OF CONTENTS

Introduction ......................................................................... 1
1.1. Background Information ..................................................... 1
1.1.1. History of Confectionery Industry .................................. 1
1.1.2. History of Hershey Foods Corporation ............................. 3
1.1.3. Current Situation of Confectionery Industry ............... . ....... 5
1.2. Problem Statement and Objectives ........................................ 6
1.3. Research Questions ....................................... ‘ ................... 7
1.4. .Structure of the Paper ........................................................ 8

Methodological Framework: Globalization Strategy Framework. . . . . 1 0

2.1. Description .................................................................. 10
2.2. Data ........................................................................... 12
2.3. Analytical Methods .......................................................... 13
2.3.1. Position and Resources of the Business and Parent Company14
2.3.2. Industry Globalization Drivers .................................... 17
2.3.3. Global Strategy Lever: Global Product Strategy. . . . . . . . .......18
2.3.4. Benefits/Costs of Globalization .................................... 19
2.3.5. Organization Factors that Affect the Implementation of Global
Strategy ........................................................................ 20
Analysis of Positions and Resources ........................................... 23
3.1. SWOT analysis .............................................................. 23
3.1.1 Performance Evaluation ............................................ 23
3.1.2. Hershey Foods Corporation’s External Environment .......... 24
3.1.2.1. Competitive Forces .......................................... 25
3.1.2.2. Change Forces ................................................. 28
3.1.2.3. Opportunities and Threats ................................... 31
3.1.3. Internal Environment ............................................... 34
3.1.3.1. Strengths ...................................................... 35
3.1.3.2. Weakness ...................................................... 37

3.1.4. Strategic Synthesis ................................................. 39

3.2. Core Strategy Analysis ..................................................... 43
3.2.1. Discussion of Desired Accomplishments ....................... 43
3.2.2. Hershey’s Current Core Strategy ................................. 45
3.2.3. Recommendations for a New Core Strategy ..................... 49
3.3. Conclusions ................................................................... 52
Diagnosing confectionery industry globalization potential .................. 55
4.1. Diagnosing confectionery industry globalization drivers .............. 55
4.1.1. Market Drivers ........................................................ 55
4.1.2. Cost Drivers .......................................................... 59

Chapter 5

Chapter 6

4.1.3. Government Drivers ................................................. 60

4.1.4. Competitive Drivers .................................................. 62
4.1.5. Conclusions ........................................................... 64
4.2. Overview of International Confectionery Markets ..................... 65
4.2.1. Asia/Pacific Markets ................................................. 66
4.2.2. Mature Western Europe ............................................. 69
4.2.3. Eastern Europe ....................................................... 70
4.2.4. Latin America ......................................................... 74
4.2.5. Summary of Regional Market Analyses .......................... 80
Global Product Strategy of Hershey Foods Corporation ..................... 83
5.1 Approach to Analysis ....................................................... 83
5.2 Selection of Markets ...................................................... 84
5.3 Discussion of Ideal Products Strategies for Hershey Foods
Corporation ................................................................. 89
5.3.1 Asia/Pacific Markets ................................................. 90
5.3.2 Western Europe ....................................................... 93
5.3.3 East Europe ........................................................... 94
5.3.4 Latin America ........................................................ 96
5.4 Review of Actual Product Strategy of Hershey Foods
Corporation ................................................................. 99
5.4.1. History of Internationalization ..................................... 99
5.4.2. Review of Market/Product strategies of Hershey Foods
Corporation ........................................................ 101
5.5 Recommendations for Changes ........................................ 103
5.6 Benefits/Costs of a Global product strategy ......................... 105
5.7 Organization Ability of Hershey Foods Corporation to Implement a
Global Product Strategy ................................................ 107
5.7.1 Examination of Hershey Foods Corporation’s Organization
Ability .................................................................... 108
5.7.2 Recommendations .................................................. 1 1 1
5.8 Conclusions .............................................................. 1 14
Conclusion ........................................................................ 1 18

6.1 Summary of Specific Findings/ Recommendation. . . ....l 18
6.2 Critique of the framework ............................................. 121
6.3 Recommendations for future research ............................... 124

II

LIST OF TABLES

Table 2-1: Global Product-Communication Mix Strategic Alternatives .................. 20
Table 3-1: Confectionery Industry Opportunities and Threats ............................. 34
Table 3-2: Strengths and Weaknesses of Hershey Foods Corporation .................... 39
Table 3-3: Three Scenarios for the Confectionery Industry ................................. 40
Table 3-4: Hershey’s Current Core Strategy .................................................. 45
Table 3-5: Hershey Foods Corporation’s Acquisitions in 1990’s .......................... 47
Table 4-1: Asia/Pacific Markets Sugar Confectionery Consumption as % of Total
Confectionery ........................................................................ 67
Table 4-2: Latin American Market 1997 Per Capita Consumption ......................... 79
Table 4-3: Characteristics of International Confectionery Markets .......................... 82
Table 5-1: Lists of Product Strategies for International markets ............................. 93
LIST OF FIGURES
Figure 2-1: A Framework for Global Strategy ................................................. 12
Figure 2-2: Industry Globalization Potential .................................................... 18
Figure 2-3: Elements of Global Organization ................................................... 22
Figure 3-1: Stock Closing Prices of Hershey Foods Corporation (Ten Year) .............. 24
Figure 3-2: 1998 US Total Confectionery Market Share ...................................... 26
Figure 3-3: Hershey’s Du Pont Formula ......................................................... 37
Figure 3-4: Hershey’s SWOT Analysis Diagram .............................................. 41
Figure 4-1: 1997 Growth Rates of Asia/Pacific Confectionery markets .................... 57
APPENDIX 7
Appendix 4.1.4: Chocolate and Products Imports in Million US Dollars .................. 126
Appendix 4.1.5: Sugar Candy Non-Chocolate Imports in Million US Dollars. . . . . . . . 128

III

Chapter 1 Introduction

Confectionery has grown from ancient delights to a US$21 billion industry in the
United States. The US. confectionery market leader, Hershey Foods Corporation, also
has grown from a small chocolate company in the countryside of Pennsylvania to the
leader of the North American markets. In recent years, confectionery markets have been
growing worldwide. However, Hershey is experiencing difficulty in taking advantage of
global growth. As a result of this concern, Hershey needs to reevaluate its strategies in

order to seize the present global opportunities.

1.1 Background Information

1.1.1 History of Confectionery

Human's desire for something sweet to eat goes back to primitive times and has
grown into a $21 billion confectionery industry in the United States. The industry
produces a universal food product using ingredients from many parts of the world. From
the cacao tree plantations of tropical climates, to the cane and beet sugar field, to the
comfields of the Middle West, to the fruit and trees in many parts of the world, to the
roots and herbs area, to the dairy lands in most countries, candy strongly affects
agricultural producers and their markets. Modern machines, skilled workers, and
executive, scientific and distributive techniques combine to meet the great demand for
confectionery products.

The recorded history of confectionery can be traced back to ancient Egyptians,
Romans, Greeks and Chinese. Nevertheless, the confections made at that time would

seem strange compared to modern candies. Ancient Egyptians made candy from flour and

crude starch, sweetened with honey, with additions of spices and sweets. By combining
honey with flour paste and fruits, ancient Romans and Greeks also enjoyed their
confections. Records dating back to ancient China show that the people made a variety of
hard candy by boiling barley and water to a hard consistency, spinning it into sticks and
then rolling these in toasted sesame seeds. At that time, candy was a luxurious treat that
only a few could afford.

The increased availability of sugar transformed candy fi'om an ancient delight into
a major modern industry producing a relatively low-cost food that millions of people
could enjoy. Candy evolved from ancient forms produced in ancient origins to a modern
industry centered in Europe. Venice had long acquired sugar through trade with the East.
In the 13th century, Venetians had a virtual monopoly on the European sugar trade. They
were also the first to improve sugar-refining methods. Eventually refineries sprang up in
Italy, Germany, Spain, England and Brazil.

The first confectioners in America were the Dutch backers Of New Amsterdam,
later called New York. At the beginning of the 20th century, there were about 1000
manufacturers in the United States. They employed 27,000 workers and the total annual
sales were $60,000,000 (Minifie 1989). Equipment until the 19008 consisted chiefly of
kettles, hand cutters, starch boards, shallow trays, and hand printers. The majority of these
were quite primitive. The introduction of European candy manufacturing inventions
modernized the candy industry in the United States. These inventions enabled mass
production of candy at a lower cost, improved the sanitary conditions of candy
manufacturing by eliminating work previously done by hand, and increased production to

meet the ever-increasing demand for candy.

World War I fostered mass production of candy and revolutionized the industry.
Almost every candy-making process, from the preparation of raw materials to the
packaging of the final product, was transformed to continuous operation. Candy became a
nationally recognized food, and its evolution from a mere delicacy to a world commodity
was complete. World War II also fostered many improvements in the candy industry.
Methods to help preserve candy flavors and freshness were developed and are still in
general use or advanced stages of development today.

Considering all the changes that have affected candy production and made it more
widely available, candy throughout history has never lost its consumer base.

1.1.2. History of Hershey Foods Corporation

In the United States, Hershey and chocolate are synonymous. Hershey Foods
Corporation is the largest US. producer of chocolate and non-chocolate confectionery
products and the company markets more than 50 brands worldwide (Hershey Foods
Corporation Annual Report 1999).

Milton Hershey established the Hershey Chocolate Company around 1900, after
selling his caramel-manufacturing business. The company was located in the rich
Pennsylvania countryside where there was a plentiful supply of fresh milk. After much
experimenting, Hershey developed his own method for making milk chocolate. The
Hershey Almond Bar and Hershey Milk Chocolate bar first appeared in 1894, and one of
the most popular items, Hershey's kisSes, was introduced in 1907.

Hershey's business prospered during World War II. The firm produced a specially
formulated chocolate bar for the US. government that would not melt in a soldier's

pocket, but would sustain that soldier if no other food was available. About 500,000 bars

were produced each hour, twenty-four hours a day at the Hershey factory. The Hershey
Company experienced healthy growth at the close of World War II (Broekel 1982).

However, after World War 11, under the conservative leadership of Percy
Alexander Staples, the Hershey Corporation had been through years of stagnation. The
company missed ideal opportunities to expand into European markets, lost its market
leadership position to Mars and had difficulties sustaining new product entries
(Zimmerman 1993).

It was also during this period that Hershey started to restructure management and
recruitment of talented young people for positions as junior executives. The 1960's was
the first time that Hershey Foods Corporation recognized the need for more professional
marketing and sales talents. The company introduced its first full national advertising
program in 1970 (Zimmerman 1993).

Hershey expanded both its domestic and international market shares through
acquisitions. Since the mid—80$, Hershey has bought a dozen popular brands. As of April
18,1999, Hershey held the leading position in both US. chocolate and non-chocolate
confectionery markets with a market share of 42.9% and 17.2%, respectively. After
Hershey completed a 96% interest sale of its pasta business in January 1999, the company
is now left with two major divisions: Hershey Chocolate North America and Hershey
International (Hershey Foods Corporation Annual report 1999).

Hershey Chocolate North America produces and markets many favorite American
brands, such as, Almond Joy and Mounds candy bars, Cadbury's cream eggs candy, and
Hershey's Cookies'n' Creme candy bars. This division holds not only the leading position

in the US confectionery market, but also the Canadian baking chips and sundae toppings

markets. In addition, it holds the number two position in the expanded chocolate bar
segment in Canada and in the chocolate confectionery and flavored milk drink categories
in Mexico.

Hershey International markets Hershey's branded confectionery and grocery
products in over 90 countries worldwide. It sells traditional Hershey's chocolate and
grocery products, as well as Hershey’s Extra Creamy Milk Chocolate, which is designed
specially to meet the taste preference of international consumers. Hershey’s branded
products also are available through licensing agreements with partners in South Korea,
Japan, Philippines and Taiwan.

The company’s ten-year compounded grth rate was 7.42% for sales, 4.77%
for net income, and 6.79% for total assets. As of December 31, 1998, the corporation
employed 14,700 full-time and 1,500 part-time employees (Hershey Foods Corporation
Annual Report 1999).

1.1.3. Current Situation of Confectionery Industry

In recent years, confectionery markets have been growing worldwide.
Opportunities range fiom the mature markets of Western European and the US. to the
emerging markets of Asia Pacific, Eastern Europe and South America. Per capita
consumption in the US has risen from 17.7 pounds in 1974 to 25.5 pounds in 1997 (US
Department of Commerce). From 1993 to 1997, the total growth rate of candy sales was
about 17.5% (IRI Infoscan 12/29/97). In 1997 confectionery sales growth doubled that of
the overall food market’s growth.

Internationally, between 1993 and 1997, Vietnam (10.5%), Brazil (9.1%), Ireland

(5.8%), China (5.7%) and the Czech Republic (5.4%) were the leading per capita

confectionery consumption growth markets in volume (Candy Industry 07/98). Data-
monitor, a strategic market analysis company, forecasts that the confectionery trading
pattern will expand further into regions such as Eastern Europe, Brazil and China.
Ranked first among snack categories and third among food categories in 1998, the
US. confectionery industry is a highly concentrated industry which is becoming
increasingly global. Eight firms account for 85% of market share (Hershey Foods
Corporation Annual Report 1999). Among these firms, several of the leading
confectionery companies are foreign-owned, but maintain or own manufacturing facilities
in the United States. In 1997, the US. chocolate manufacturers’ trade deficit increased by
52% to $44 billion dollars despite domestic chocolate exporters increasing their global

presence by 10% (Candy Industry 01/99).

1.2 Problem Statement and Objectives:

In spite of current domestic and international opportunities discussed above,
Hershey has been experiencing some in_adeduate performa_1_r_c_e. Starting fi'om the fourth
quarter of 1998, Hershey’s stock closing price has performed below that of the average
stock on the S&P500 for the first time in the past five years. In addition, as confectionery
giants based in established mature markets are exporting and manufacturing in emerging
markets, such as, Eastern Europe and Asia, Hershey is absent from this heated
international competition, focusing mainly on domestic and North American markets
(Brenner 1999).

Ignoring the high product development costs and the difficulty of making market

share gains, Hershey is still introducing new products to capture market share in the

mature North American markets. Hershey has one of the best innovation records in the
industry with three successful introductions in the United States and Canada during the
19805—Skors (1983), BarNone (1987), and Symphony (1989) (Yip, 1991). But this
success has not been transformed into international success.

In contrast to the other major players, Hershey does not rely on a few core, global
brands to build market share in new markets. For example, in Mexico, the joint venture
Hershey entered with National de Dulces in 1966 produces 12 Hershey products and
Hershey International exported an additional 14 brands (Yip, 1991). Mars’ approach of
direct control of manufacture and reliance on only a few standardized products has been
more successful. Mars’ market share surpassed Hershey’s in the very first year it entered
the Mexican market (Yip 1991).

The purpose of this paper is to address the globalization issues faced by Hershey
Foods Corporation. The paper attempts to evaluate the industry conditions (market, cost,
government, and competitive drivers) that provide Hershey with the potential for using

global product strategy.

1.3 Research Questions

As the North American confectionery leader, Hershey only ranked fifth in global
sales in 1997, far behind its archrival Mars (Travel Retailer International 1998). Hershey
continues to focus primarily on the North American market while major US confectionery
producers are competing with European confectionery giants in growing overseas markets
and reaping benefits from industries and technologies developed abroad.

The following questions then arise:

1. As to Hershey’s overall strategic posture: a) What are the strategic resources
of Hershey Foods Corporation?; b) How does Hershey position itself in the
industry?

2. What product strategy should Hershey take to best utilize its industry
globalization potential and to penetrate international confectionery markets?

3. What are the benefits/costs of a global product strategy for Hershey?

4. Does Hershey have the organizational ability to implement a global product

strategy?

1.4 Structure of the Paper.

Chapter 2 describes the methodology used in this study: a global strategy
framework. Different components of this framework are discussed and their respective
contributions to this research are justified.

Chapter 3 examines Hershey Foods Corporation's strategic position and resources
by analyzing its strengths, weakness, opportunities and threats, and overall core strategy.

Chapter 4 examines the confectionery industry’s globalization potential and
provides an overview of international confectionery markets. Four groups of industry
globalization drivers are analyzed, and international markets are selected according to
their globally strategic importance to Hershey Foods Corporation.

Chapter 5 discusses Hershey Foods Corporation's global product strategy. Ideal
product strategies for Hershey’s selected international markets are suggested. Hershey’s

current uses of product strategy are critiqued, and recommendations for change are

proposed. The benefits/costs of global product strategy and the organizational ability to
implement this global strategy are evaluated.

Chapter 6 summarizes the findings of the paper, reviews recommendations for
Hershey Foods Corporation's international markets penetration, critiques the framework,

and points out areas for further research.

Chapter 2 Global Strategy Framework

The methodological framework used in this study is Yip’s global strategy
framework (1992). Five components of the framework are: 1) position and resources of
business and parent company, 2) industry globalization drivers, 3) global strategy levers,
4) benefits/costs of global strategy, and 5) organization’s ability to implement a global
strategy. These various components are discussed and their uses in this framework are

justified.

2.1 Description of the Framework

The old models of multinational strategy are primarily "multi-domestic" in nature.
Hout, Porter and Rudden (1982) defined a global industry, in contrast to a multi-domestic
industry, as one in which a firm's competitive position in one country market is
significantly affected by its competitive position in other country markets. The
recommended response (Porter, 1986) is a combination of concentration and co-
ordination of value-added activities. Bartlett and Ghoshal used a somewhat different
definition. In their view, a "transnational" industry is one in which businesses are driven
by simultaneous demands for global efficiency, national responsiveness and worldwide
learning.

Building on a conceptual framework for competition in global industry (Porter,
1986) and the industrial organization link to competitive strategy (Cave, 1980), Yip set

out a framework that systematically relates global strategy choices to global industry

condition. This study will use Yip's global strategy framework to analyze globalization

10

potential of the confectionery industry and discuss global strategy choices for Hershey
Foods Corporation, the leader of the US. confectionery market.

Figure 2-1 shows Yip’s global strategy framework for diagnosing and developing
globalization strategy as adapted for this study. This framework starts with the discussion
of position and resources of the business and parent company. Attractiveness of
globalization strategy is firm specific. Resources and position of a company have direct
effect on the extent of the use of global strategy. Another important influence to the use
of global strategy is industry globalization drivers. These drivers (underlying market, cost,
government and competitive drivers) are externally determined by industry conditions or
by the economics of the business, and they create the potential for a worldwide business
to achieve the benefits of global strategy. Industry global strategy levers are choices
available to a worldwide business. Companies possessing different resources and
influenced by different industry globalization drivers use different global strategy levers
(global market participation, global products, global location of activities, global
marketing and global competitive moves). In order to achieve the benefits of a global
strategy and avoid the costs, managers have to set their global strategy levers appropriate
to the industry globalization drivers and also appropriate to the company’s position and
resources. The organization's ability (structure, management, culture, and people) to
implement the formulated global strategy affects how well benefits can be achieved. It
also affects how ambitious the global strategy should be, and conversely the desired

global strategy affects how the organization should be structured and managed.

ll

Figure 2-1 A Framework for Global Strategy

 

 

Position and Resources of

 

 

 

 

 

Business and Parent Company Benefits/Costs 0f
SWOT Analysis Global Strategy
Core Strategy Analysis
Global Strategy Global Strategy
Levers:
Global Market Participation
Global Products
Global Location of Activities
Global Marketing
Global competitive Moves
't
Industry Globalization Drivers: \‘t‘
Market \\
Cost ‘\
Government ‘
Competitive Organization's Ability
to Implement a Global
Strategy

 

 

Sources: Adapted from Yip (1989)

2.2. Data

This study uses data primarily fi'om secondary sources. Information for the
confectionery industry and Hershey Foods Corporation was gathered through trade
journals, industry reports, company web sites, the FAO web site, the World-Bank web

site and electronic library resources at Michigan State University. Interviews were also

12

conducted with representatives of both the National Confectionery Association and
Hershey Foods Corporation.

It should be noted that data were collected according to the various analyses
undertaken in this study. For SWOT and core strategy analyses, the following data were
collected: company product line, market share, expenses on advertising and promotion,
compensation program, grth rates of retail sales, financial statistics, acquisition lists,
manufacturing capacity, information system, industry concentration ratio, competitive
situation, global revenues for firms within the industry, distribution channels,
cOnsumption trends and government regulations. For the assessment of industry
conditions, the data needed were information on customer need, global customers and
channels, marketing, global scale economies, differences in country costs, product
development costs, trade policies, technical standard, marketing regulations, exports and
imports, global competitors. In addition, information on tastes and preferences, incomes,
distribution channels and trade policies of different regions was also gathered. The results
and conclusions from the first two analyses were used to formulate product strategy for

Hershey Foods Corporation.

2.3. Analytical Methods

Yip’s global strategy framework is adapted to guide this study, which involves the
following analyses: 1) Position and resources of business and parent company are
examined in order to assess a company's capability (strengths, weakness, opportunities
and threats) and core strategy. This helps to build up a solid foundation for further

discussion of a global strategy; 2) Industry globalization drivers are analyzed to diagnose

13

the confectionery industry globalization potential; 3) Global strategy levers are discussed
to evaluate the choices that are available to a worldwide business (this study in particular
focuses on one of the levers, global products); 4) the benefits and costs analysis allows
the evaluation of a global strategy; and, 5) organizational factors are examined to assess a
company’s ability to implement a global strategy. All of these steps from Yip’s
framework are applied to the case of Hershey Foods Corporation.

2.3.1. Position and Resources of the Business and Parent Company

In order to build a solid foundation for discussing global strategy, a rigorous look
at a company's core strategy, analyzing strengths and weakness, opportunities, and threats
is necessary (Yip, 1991). This study uses SWOT analysis and core strategy analysis to do
this.

SWOT analysis is based on the assumption that an effective strategy derives from
a sound "fit" between a firrn's internal capabilities (strengths and weaknesses) and its
external situation (opportunities and threats) (Pearce and Robinson 1994).

This study uses competitive forces (Porter 1986) and change forces (Peterson) to
identify opportunities and threats of Hershey Foods Corporation. The competitive forces
framework argues that the ultimate profit potential of an industry is determined by the
collective strength of five basic forces: the threat of new entrants, the bargaining power of
suppliers, the threat of substitute products or services, and the competition among current
rivals. Whatever their collective strength, a corporate strategist's goal is to find a position
in the industry where his or her company can best defend itself against these forces, or

can influence them in itsfavor.

l4

Aside from the five competitive forces, there are also changes of major trends that
will either provide opportunities or pose threats to a firm. The change force method
focuses on analyzing changes in the following areas: buyer demand, long-term market
growth rate, product and marketing innovation, technology and the speed which it
spreads, regulatory influences and government policy, business risk, economy and
increasing globalization of the industry. Less change corresponds to less threats, but
probably fewer opportunities. Greater change corresponds to more threats, but probably
more opportunities (Peterson).

A finn's strengths and weaknesses are analyzed through the following firnctional
categories: marketing resources, financial resources, human resources,
Operations/production resources, management/leadership resources, organization
resources, and information resources (Peterson). Firms are not likely to evaluate all
factors as potential strengths or weaknesses. Instead, to develop or revise a strategy,
managers would prefer to identify a few factors on which its success is most likely to
depend.

The SWOT analysis provides a foundation for the examination of the firm's
strategic position and resources. Based on SWOT analysis, a firrn's overall core strategy is
then discussed. Academic researchers define core strategy somewhat differently. Pearce
and Robinson define core strategy as the combination of generic strategy (cost leadership,
differentiation, and focus) and fourteen derived grand strategies varying in risk levels.
Thomson and Strickland propose similar generic strategies, and then define alternative
courses of actions for companies in different environments and with different degrees of

diversification as their core strategy. Yip specified core strategy as business definition,

15

strategic thrust, sources of competitive advantage, value-adding activities and competitive
strategy. Peterson groups core strategy into five categories: customer value/competitive
advantage, strategic initiative, strategic scope, industry role and vertical coordination.

The different categorizing of core strategy builds on the general understanding of
strategic choices, i.e., firms need to select core strategy to create one of two basic types of
competitive advantages: cost or differentiation. Therefore these core strategies are
homogeneous in nature. Peterson's grouping provides a reasonable approach to guide this
study and is discussed in detail.

The first component of core strategy as defined by Peterson, customer
values/competitive strategies, is similar to generic strategy. A firm's ultimate strength or
weakness is determined by its control over either cost or differentiation relative to its
competitors (Porter, 1986). Four types of strategies to create customer values are derived
from this notion: cost leadership, differentiation, focus, and total innovation. The second
component, strategic initiatives are a firm’s choices ranging fi'om grow, maintain/defend
to reposition, retrench, and exit. When defining the third element, strategic scope, firms
can choose to manage either a single/dominant business or diversified product lines. They
can also choose to develop their business lines either internally or through external
merger/acquisition. In terms of the fourth element, industry role, firms usually position
themselves as leaders, adapters, challengers or loners. Finally, firms use different vertical
coordination strategies, varying in the intensity of control over transactions, to coordinate
their behaviors with suppliers and buyers (Peterson). These five elements cover a firm's
overall strategic choices to position itself and develop its competitive advantages, and

therefore build a solid foundation for further discussion of a firm's global strategy.

16

2.3.2. Industry Globalization Drivers

Global strategy theory argues that industries differ in their globalization potential
because of underlying industry conditions (Porter, 1986; Morrison, 1990). In the case of
global strategy, these conditions can be called industry globalization drivers. Various
researchers have identified different types of industry globalization drivers: globally
common customer needs (Levitt, 1983); cost drivers, such as global scale economies
(Porter, 1986) or technological and advertising intensity (Kobrin, 1991); government
drivers, such as the absence of trade restrictions (D02, 1979); and competitive drivers,
such as cross-country subsidization (Hamel and Prahalad, 1985). The drivers identified in
the literature can be grouped into four categories: markets, cost, government, and
competitive drivers (Yip, 1989 and 1992). Together, these four sets of drivers cover all
the critical industry conditions that affect the potential for globalization. While other
groupings are possible, these four distinguish among the fundamental sources (market or
cost, etc.) of the drivers; therefore, they help managers to identify and deal with them
more easily. Drivers are primarily uncontrollable by a worldwide business. As illustrated
in figure 2-2, each industry has a level of globalization potential that is determined by
external drivers.

Market globalization drivers depend on customer behavior, the structure of
distribution channels, and the nature of marketing in the industry. Cost drivers depend on
the economics of the business. Government globalization drivers depend on the rules set
by national govemments. Competitive drivers depend on the actions of competitors. Each
group of drivers is different for each industry and can change overtime. Therefore, some

industries have more globalization potential than others, and these potentials change

17

across time. Recent changes, such as, convergence of lifestyle and tastes, accelerating
technological innovation, have increased the globalization potential of many industries,

and spurred the interest of managers to pursue a global strategy (Yip 1992).

Figure 2-2 Industry Globalization Potential

Market Drivers

 

 

 

 

Cost Industry Government
Drivers ' Globalization Drivers
Potential

Competitive
Drivers

Source: Adapted from Yip (1989, 1992)

2.3.3 Global strategy lever: Global product strategy

Globalization strategy is multidimensional. There are five such dimensions:
market participation, products/services, locations of value-adding activities, marketing,
and competitive moves. This study focuses on the most commonly identified feature with
global strategy: product strategy.

Developing products that satisfy market needs are the essential requirement of an
effective strategy. The products or services a company chooses to sell to the selected

targeted market constitute the basis for development of the company's world-wide

18

marketing programs and determine the company's role in the world market, in relation to
both customers and competitors.

In a multi-local product strategy, the products and services offered in each country
are tailored to local needs. In a global product strategy, the ideal is a standardized core
product that requires a minimum of local adaptation (Yip 1992). Proponents of the global
product strategy argue that in a world of growing internationalization, the key to success
is the development of global products and brands (Levitt, 1983). However, others point to
the numerous barriers to standardization, and suggest that greater returns can be obtained
from adapting products and marketing strategies to the specific characteristics of
individual markets (Fisher, 1984; Kotler, 1985; Vedder, 1986). Nevertheless,
standardization occurs along a continuum. The benefits of global product can be achieved
by standardizing the core product or a large part of it, while customizing peripheral or
other parts of the product (Yip 1995). The extent to which products/services should be
standardized depends on industry globalization drivers.

Keegan's discussion of global product strategy widened the standardization
discussion and identified three global strategy alternatives: extension, adaptation, and
creation. The strategy alternatives are a firnction of the product need satisfied, conditions
of product use (consumer preferences and purchasing power), and ability to buy products.
Based on the three strategy alternatives, six strategies are formulated: dual extension,
product extension-communication adaptation, product adaptation-communication
extension, dual adaptation, product invention, and dual extension with price invention

(Table 2-1). Each strategy has been applied by companies to different situations (Keegan

19

1969 1995). This study uses Keegan's product strategy matrix to evaluate Hershey Foods

Corporation’s product strategy and formulate recommendations.

Table 2-1 Global Product-Communications Mix Strategic Alternatives

 

 

Strategy Product Conditions of Ability to buy Product Communication
function or product use products strategy Strategy
need satisfied (as % of base case)
1 Same Same 100 Extension Extension
2 Different Same 100 Extension Adaptation
3 Same Different 100 Adaptation Extension
4 Different Different 100 Adaptation Adaptation
5 Same Different 25 Invention Create
6 Same Same Limited Financial Extension Extension
Resources

 

Adapted from Keegan, 1995

2.3.4 Benefits and Costs of Globalization

Industry globalization drivers allow the use of global strategy to gain various types
of benefits: cost reductions (Kogut, 1985a), improved quality of products or programs
(Yip, 1989), enhanced customer preference (Levitt, 1983), or increased competitive
leverage (Hout et a1. 1982; Hamel and Prahalad, 1985). Globalization, however, can also
incur significant management costs through increased coordination, reporting
requirements, and even added staff. Globalization can also reduce management
effectiveness in individual countries if over-centralization hurts local motivation and
morale. In addition, each global strategy lever incurs particular drawbacks. Product
standardization can result in a product that does not firlly satisfy customers anywhere.

The most successful worldwide strategies find a balance between over-globalizing
and under-globalizing. The ideal strategy matches the level of strategy globalization to the

globalization potential of the industry.

20

2.3.5 Organization Factors that Affect the Implementation of Global Strategy

Based on industrial organization theory, strategy choices and outcomes are
significantly determined by industry conditions. In the case of global strategy, these
conditions are industry globalization drivers, as defined earlier. In a "perfect" world, that
of traditional economic theory, industry factors of industry globalization drivers would be
the only determinants of strategy. But in a world of company heterogeneity and human
actors, this linkage from industry to strategy must be moderated by other factors,
including organization structure, management processes, human resources, and corporate
culture. In particular, these other factors can delay or change the global strategy that
should be adopted given industry drivers. Thus, there will be a gap between the optimal
global strategy and the strategy achievable by a multinational company. The organization
section in this framework addresses this gap. Organization factors, such as structure,
management process, people, and culture (Figure 2-3), clearly affect how well a desired
global strategy can be implemented, probably more so than for most other types of
strategy (Prahalad and D02, 1987; Ghoshal 1987; Bartlett and Ghoshal, 1989).

In summary, the global strategy framework allows some flexibility to incorporate
the analysis of the position and core strategy of a company such as Hershey Foods
Corporation. Following this framework, Hershey Foods Corporation’s resources and
position are evaluated using SWOT and Core Strategy analysis. Confectionery industry
conditions (market, cost, government, and competitive drivers) that might favor the use of
global strategy are diagnosed, and the aspect of global product strategy is discussed. In
addition, the benefits/costs and the organizational aspects that affect the implementation

of Hershey’s global strategy are examined. As the Hershey case is examined, the

21

relevance and effectiveness of this particular combination of Yip’s framework

supplemented by Peterson’s and Keegan’s methods will be tested.

Figure 2-3 Elements of Global Organization

Organization Structure
Centralized global identity
No international division

Strong business dimension

 

 

Management Processes
Global Strategy
Information System
Cross-country coordination
Global strategic planning
Global budgeting

Global performance review
and compensation

   
  
  

 

Ability to Develop
and Implement
Global Strategy

Culture

Global identity
Cormnitment to worldwide
employment
Interdependence of business

Source: Adapted from Yip, Loewe, and Yoshino (1988)

22

 

   
  
  

 

 

   

People
Use of foreign nationals
Multi-country careers
Frequent travel
Statements and actions
of leaders

  
  
 

  
 

Chapter 3 Analysis of Position and Resources

This chapter develops the first component “positions and resources of business
and parent company” of Yip’s global strategy framework using SWOT and core strategy
analyses. SWOT analysis examines the environment Hershey is operating in, and
summarizes Hershey’s key strategic issues. Based on SWOT analysis, Core Strategy
Analysis evaluates Hershey's current core strategy and proposes a future core strategy that

addresses Hershey's strategic issues.

3.1 SWOT Analysis

3.1 .1. Performance Evaluation:

Hershey Foods Corporation is the leader of the US. confectionery industry. Its
sales have been growing in recent years. However, the growth rates of both its sales and
net income have declined. In 1998, Hershey’s sales growth rate of 3.1% compared with
7.8% in 1997 failed to meet stockholder expectations (Security and Exchange
Commission 1999). The corporation’s inadequate performance was reflected in its stock
prices. Starting from the fourth quarter of 1998, Hershey’s stock closing prices have been
performing below that of the average stocks on S&P500 for the first time in the past five
years (Figure 3-1).

In their 1999 armual report, Hershey Foods Corporation attributes their weak
performance in international markets as one major reason for the decline of its stock
prices. Other reasons cited in their report are the overall decline of food industry stocks

and increases in input prices.

23

Figure 3-1 Ten Year Stock Closing Prices of Hershey Foods Corporation in Comparison
with S&P 500.

I HSY I S&P 500
i 04‘ Fri Ju 1 -28-2000 Dal 1y
46.56 up 125.767. since SIN/1991

l-BY hi 76.38

-80

" .:. ~70

-SO

.' , in
i i -40

3O

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I |
u v, 1 .k .- .
. u 5 \
* 2t 1 - 20
W16
I-SY lo 18.25
1 r I r 1 1 l n r._
91 92 O3 0‘ .5 .0 O7 .8 O. 00
. . ' . ' S
A- ., . :u-.bI-..li "I. .. '1" fl 4
i 'n I 3
r . I - . ' 1
I
p.-..—.<-~ - o
(c) 2000 Stockfiastcr .com I vo l umc (M i I I ions)

More recently, a technology rollout problem in 1999 delayed Hershey’s shipments
to its retailers and dropped Hershey’s third quarter earnings by 19% over 1998. One
reason for the delays was Hershey’s lack of adequate facilities. Despite healthy consumer
demand for Hershey’s confectionery products, sales of the corporation were still down
12% from the previous year (Wall Street Journal 10/26/99).

In addition, as US. confectionery leader, Hershey is facing intense competition
from many other multinational, national, regional and local firms (Packaged Facts 08/96).

The above performance-related problems indicate that Hershey has some strategic
problems to address. The following section analyzes Hershey’s strengths, weaknesses,
opportunities, and threats, and then presents Hershey’s important strategic issues.

3.1.2. Hershey Foods Corporation's External Environment

The US. confectionery industry enjoyed an overall annual grth rate of 4-6% in

the last five years (1993-1997) (Candy Industry 07/99). This was an incredible grth

24

number for a relatively mature market. "Competitive forces" and “change forces” are used
to identify the opportunities and threats that Hershey is facing in this market.

3.1 .2. l . Competitive Forces

Potential of entrants. The likelihood of potential entry into the confectionery
industry is very low. The manufacturing of chocolate is highly automated, and requires an
initial investment of at least several million dollars (Yip 1992). The capital-intensive
nature of the confectionery industry builds up a high entry barrier.

In addition, the confectionery industry is a highly concentrated industry, which
makes the profitability of new firms uncertain. The top four firms, Hershey, Mars, Nestle,
and R. Stover controlled 72% of the market share in 1998 (Figure 3-2). Confectionery
giants enjoy production and marketing cost advantages. According to Candy Industry
Report, when the costs in many ingredient categories escalated in 1998, small-sized
manufacturers reported an average 33 % ingredient cost increase, compared to a 9%
increase for mid-sized companies and a 6% increase for large companies.

Brand identity increases the barriers of entry as well. The candy industry is
characterized with high brand identity. The top ten brands keep occupying retailing space,

and retailers have less interest to market unknown brands (Candy Industry 07/99).

25

Figure 3-2: 1998 US. Total Confectionery Market Share

 

 

All Other
1 4%

Favorite Brand
3%

Tootsie Roll
3%

Nabisco _,
4% ‘

Brach & Brock
4%

R. Stover
7%

Hershey
35%

   

Nestle

8% Mars
22%

 

Source: Hershey Foods Corporation Annual Report 1999

Rivalry. The rivalry in the mature U.S. confectionery industry is intense.
Domestically, the major competitors, namely, Hershey, Mars and Nestle, keep expanding
their influence in the seasonal market and competing in both market share and packaging.
In 1996, Hershey filed a lawsuit against Mars claiming that the packaging for peanut
butter M&Ms is similar to that used for its Reese's products (Candy Industry 12/97).

Internationally, confectionery giants are expanding and competing worldwide.
According to a report in Planning Review (1991), each of the major chocolate producers
gained a large percentage of its chocolate revenues outside its “home” country: Nestle
98%, Jacobs Suchard 95%, Cadbury—Schweppes 50%, M&M Mars 50%, and, Hershey,
the least, with 10%.

Buyers' Power. There are two kinds of connected buyers for confectionery:

retailers and consumers.

26

 

Retailers' power. Consumers usually buy candies at supermarkets (19%), but the
mass merchandisers' slice of the confectionery pie has increased steadily over the past
five years. In 1999 they garnered 37% of the candy sales (Professional Candy Buyer 8,
n03 05/2000). This shows that consumers are changing their purchase decisions toward
the retailers that are more price-sensitive. The bulk volume purchased by mass-
merchandisers gave these retailers more power to bargain with confectioners.

Consumers' power. An individual consumer does not have great bargaining power
over confectionery giants. In 1997, when the input cost rose for confectioners, they passed
the cost increase to consumers. Consumers in the US. paid 30 cents more for a pound of
confectionery products than they did in 1987 (Candy Industry 01/99). However, aggregate
consumer demand had a significant influence on confectioners' profitability. Hershey’s
sales of chocolate candy bars less than 3.5 ounces were down 3% and bars more than 3.5
ounces are down 1.3% in 1997 because of the increase in bar prices (Candy Industry
01/99).

Suppliers' power. The major inputs for the confectionery industry are sugar,
cocoa, milk and Nutrneat. These agricultural commodities are less differentiated,
therefore suppliers have less power against confectioners. However, the price of sugar in
the US. is subject to price supports under the Federal Agriculture and Improvement
Reform Act of 1996. Due to import quotas and duties imposed to support the price of
sugar established by that legislation, US confectioners have to pay 22 cents per pound of
sugar versus 5 cents per pound paid by confectioners in the rest of the world (Candy

Industry 07/99).

27

Substitutes. In recent years, manufacturers in other snack categories have enticed
consumers with candy flavors or candy-filled products. Consumers are given alternatives
such as cookies, premium ice cream, bakery snacks, and fruit snacks to satisfy their sweet
tooth. Consumers are becoming more and more health conscious. Consequently, the
demand for healthier snacks has been growing. Consumers prefer snack cereal bars as
their breakfast instead of candy, and mothers usually consider ice cream and fresh fi'uit
cakes healthier than candy for their kids (Candy Industry 07/99). With the increase in the
demand for candy substitutes, the retailing space for candy is shrinking. Encroachment
from many competitive snack categories has reduced the amount of candy available at
checkouts.

In summary, the likelihood of new entrants and the final consumer buyers' power
in the confectionery industry are low, which explains in part the overall medium to high
profitability of the confectionery industry. Suppliers’ power, especially sugar suppliers'
power, is enforced by the US. government subsidy programs. Competitors in the highly
concentrated industry are a few but their capacities are in balance with each other, thus
intensifying competition. The emergence of substitutes for confectionery has brought a
real “headache” for confectioners in recent years. Overall, the industry’s profit potential
would appear to be declining, or at least, threatened.

3.1.2.2. Change Forces

Change in buyer demand. Changes in demographics, consumers’ life styles, and
incomes keep shaping the environment of the confectionery industry.

Although American consumers still enjoy sweet treats, an increasing number of

the aging population demand healthy foods. The chocolate portion of US confectionery

28

sales was flat in the past years. Furthermore, growth in the confectionery industry is
coming fiom non-chocolate and functional candy (Candy Industry 01/99).

Consumers are becoming more price-conscious than brand conscious. In 1997, the
increase in the prices of chocolate bars immediately led to a sales drop for confectioners'
chocolate bars. In addition, the polarity of income was witnessed by the faster growth rate
(10%) of gourmet boxed chocolate category in 1998 (Professional Candy Buyer 7, 01/99).

Long-term market growth. The US. confectionery market has grown steadily
since the early 19908. The non-chocolate category, however, grew much faster than the
chocolate category. In 1998, the candy industry saw its biggest gains in the non-chocolate
categories for the year ended 4/17/99, with dollar sales reaching $1,423.2 million, up
5.3% from the previous year. The second-largest gains were in sales of chewing gum,
which grew to $590.0 million in sales. Chocolate candy saw sales gains of 2.5% for the
period to $2,430.3 million (Candy Industry 07/99).

Product and market innovation. Confectioners are innovating new low-fat
products to meet consurners' changing taste. For example, Mars innovated Mars Lites,
which has almost the same taste as the regular chocolate bar (Retail World August 31-
September 13,1998).

Regulatory influences and government policy. Sugar prices are under government
support since the 1930's. This put domestic confectioners at a cost disadvantage. One of
the hopes that US confectioners have now is the Sugar Program Reform Act. The
approval of this act will reduce sugar prices and end price supports after 2002 (Candy

Industry 07/99).

29

Increasing globalization of the industry. The confectionery industry is becoming
more and more globalized in recent years. Emerging oversea markets are growing rapidly.
In 1997, domestic exporters of chocolate increased their global presence by 10%. The
most promising opportunities for the US lie in Central and South America, along with
East Asia (Candy Industry 01/99).

The analysis of Hershey's external environment can be summarized through the
description of the opportunities and threats suggested by the competitive forces and

change forces.

30

3.1.2.3. Opportunities and Threats
@mrtunities

US confectioners have three opportunities: innovation in the low-fat and
functional candy category; change of government sugar policy; and emergence of global
markets.

Innovation. The candy industry needs to innovate constantly to meet consumer
demand. Consumers increasingly View candies, foods and drinks as imparting functional
elements, rather than strictly refreshment. Confectionery giants have kept innovating and
extending product lines to meet this demand. For example, Mars extended its famous line
to deliver low-fat Mars Lite. In addition, time-starved consumers want convenience as
well. Mars spent $50 million to advertise a metabolized bag with resealable zipper
offering consumers freshness, convenience and portability.

Government Policy. The US. govemment’s sugar price support put domestic
confectioners at a cost disadvantage. Confectioners are making efforts to end the
government interference with their input prices. An industry-fiiendly provision of the
Sugar Program Reform Act was introduced in May of 1998. This provision was intended
to reduce support prices and eliminate the support after 2002 (Candy Industry 07/99).

Emergence of international markets. Opportunities for confectioners are present
internationally, ranging from the mature markets of Western Europe and the US. to the
emerging markets of Asia Pacific, Eastern Europe and South America. Between 1993 and
1997, Vietnam ( 10.5%), Brazil (9.1%), Ireland (5.8%), China (5.7%) and Czech Republic

(5.4%) were the leading confectionery consumption grth markets (Candy Industry

31

07/98). As a recent report from Confectionery Production indicates, the confectionery
trading pattern will expand further into regions such as Eastern Europe, Brazil and China.

M

The “competitive forces” and “change forces” analyses point out that the greatest
strategy threat for the confectionery industry is the change in consumers' life style toward
low-fat and healthy food. Candy products, especially chocolate, are known to be rich in
fat. Although sugar-free and functional products are becoming popular, these are not easy
markets for candy makers to break into. First, manufacturing difficulties for replacing
sugar have presented the biggest challenge for confectioners. Second, consumers want
their food to contain more attributes but with the same taste. Consumers would prefer to
eat sugarless versions of their favorite confections only if they taste the same as the
confection with sugar. Confectioners are struggling to invest in R&D in order to provide
tasty functional candy. Third, consumer understanding of the term "functional" is poorly
developed. The Health Focus survey conducted in 1998 indicates that 80% of consumers
never heard of the term “functional”. Finally the word Sugar-free is traditionally
associated with diabetics, which deters some consumers fi'om purchasing.

Secondly, the emergence of candy substitutes is taking away market share from
candy. Healthy snacks are competing with candy in taste, packaging, retailing space, and
healthy attributes. Consumers have been given a myriad of non-candy alternatives with
candy flavors to satisfy their desire. Competitive categories have hijacked candy-eating
occasions by offering perceived "healthier alternatives" for breakfast, lunch and dessert.
In addition, portability of other foods has grown at a faster pace than candy. Some

retailing space of candy was reduced by other snacks.

32

These non-candy products also offer consumers a broader choice and thus
increase their bargaining power against confectioners. Once the price for chocolate‘bars
increased, consumers could find candy substitutes with ease.

The most immediate threat to the confectionery industry 's future comes from the
US government. Governmental interference in sugar pricing has left a bitter taste in the
mouth of confectioners for years. " If something isn't done soon, our industry has to find
other ways to cope with this situation," says Sal Ferrara, chairman of National
Confectionery Association, " Our industry employees can compete against anyone, but
forcing us to buy raw sugar at 22 cents per pound puts us at a tremendous disadvantage.”

International competition is another critical threat. The domestic confectionery
industry's deficit in 1998 showed the competitive capacity of foreign confectioners. The
origin of confectionery is in Europe, and European giants are competing with US
confectioners in both the US. market and international markets. Furthermore, US
government subsidy of sugar prices puts US confectioners at a competitive disadvantage.
Confectioners from Canada and Mexico are able to purchase sugar at world prices, then
ship lower priced products into the US, and thereby undercut the price of US products
(Candy Industry 07/99).

Opportunities and Threats Synthesis

The above analysis showed that the confectionery markets have both great
opportunities and significant threats (Table 3-1). Change in consumer’s taste, income, life
style, government regulation, and globalization of the confectionery industry can all be
threats and opportunities for the industry. To which extent these factors are opportunities

or threats depend on how Hershey responds to the changes.

33

Table 3-1: Confectionery Industry Opportunities and Threats

 

 

 

 

 

Threats Opportunities
Change in consumers’ life style Innovation
High substitutes Cancellations of sugar price support
Government regulation Emergence of global markets
Global competition

 

 

As discussed above, consumer demand represents the key challenge for the
confectionery industry. Only when confectioners overcome difficulties to provide
consumers with appealing products can they fully exploit their biggest opportunities for a
successful future.

A change in sugar price regulation would have a great impact on the profitability
of US confectioners. Furthermore, in the heated international competition, only if
Hershey develops global competitive skills, will global markets become an opportunity to
the corporation. Otherwise, this is a great threat for the US domestic giants as foreign
competition expands.

3.1.3. Hershey's Internal Environment

After the evaluation of Hershey Foods Corporation’s external environment, we
need a closer examination of the corporation’s internal strengths and weakness. This will
reveal those factors most under the corporation’s control. The following sections provide

an outline of such strengths and weaknesses.

34

3.1.3.1. Strengths

Marketing Resources. Hershey is strongly associated with an image of high
quality and a broad and deep product line. Hershey manages more than fifty brand in the
domestic market and has built up a number of leading brand names. Among the top ten
brands ranked by dollar sales in 1998, five of them belong to Hershey (Snack Food
&Wholesale Bakery 06/99). These leading brand names also create Opportunities for
Hershey’s product line extension, and in some cases, royalties for its use on products
made by others. Hershey licensed its stable of well-know brand names, including
Hershey's and Reese's, to other companies for use on products ranging from cereals to ice
cream (Standard and Poor’s 1998).

Human Resource Management. Hershey has a strict standard to measure
performance and an improved compensation program. Hershey's management team
benchmarks are Earning Per Share, Free Cash Flow, and Economic Value Added
(Hershey Foods Corporation Annual Report 1997). Its managers’ compensations are tied
to these benchmarks. In addition, Hershey broadened its employee compensation program
in 1996. The program was changed from Key Employee Incentive Package to HSY
growth, under which Hershey granted its eligible employees one time 100 stock options
and made its employees become owners for the first time. This partly explained the
increase in Hershey’s sales. In their annual report of 1997, Hershey’s CEO attributed the
sales growth to employees' effort. Hershey’s employees have good morale in terms of
improving Hershey's product quality and lowering cost.

Innovation. Hershey dedicates itself to expanding market share in the mature

North American markets by introducing new brands. Hershey had one of the best

35

innovation records with three successful introductions in the United States and Canada
during the 19805: Skor (1883), BarNone (1987) , and Symphony (1989) (Yip, 1991).
Hershey's managers proudly assert that they have the industry’s largest inventory of new
products. In 1996, Hershey's successful launch of TasteTations brought a 65% retail sale
increase for this product (Chicago Tribune 02/98). In addition, Hershey also keeps
innovating in merchandising, which made its retail grow at 5.6% greater than the category
grth (Hershey Foods Corporation Annual Report 1998).

Hershey advertises its products by sponsoring entertainment activities, especially
movies and sports. In 1997, Hershey sponsored Jurassic Park and increased its seasonal
candy sales (Adweek 05/18/98).

Financial Resources.

Hershey Foods Corporation in general has strong financial performance. Its profit
margins ranged between 6.8% and 7.7% from 1996 to 1998, slightly above the industry
average of 7.0%. The corporation’s retum-on-assets ratios increased fiom 8.6% in 1996
to 10.0% in 1998. Its total asset turnover ratios also increased from 1.25 to 1.3 during the
same period, higher than the industry average 1.10. Its retum-on-equity ratios also
increased and stood well above the industry average of 13.0%. One major concern about
Hershey’s financial performance is the corporation’s use of debt. Hershey’s equity
multipliers in the period of 1996-1998 were 2.74, 3.86, and 3.26 respectively, which all
were higher than the industry average of 1.9. These multipliers indicate that Hershey used

a larger percentage of debt to finance its operations (Figure 3-3).

36

Figure 3-3: Hershey’s Du Pont formula

 

 

 

1996 1997 1998 Industry Averagg
NIAT (million) 273 336 341
Sales ($million) 3989 4302 4436
Assets ($million) 3185 3291 3404
Equity (million) 1161 853 1042
Profit Margin 6.8% 7.8% 7.7% 7%
TAT 1.25 1.31 1.30 1.1
ROA 8.6% 10.2% 10.0%
EM 2.74 3.86 3.27 1.9
ROE 23.5% 39.4% 32.7% ' 13%

 

 

Source: Hershey Foods Corporation Annual Report 1998

3.1.3.2. Weaknesses

Hershey's most serious weakness is its international expansion strategy.
Historically, most of Hershey's acquisitions occurred in the domestic market, while the
majority of its divestiture is in international markets. Mars beat Hershey almost in
everyone of Hershey's international markets. Hershey has tried to sell its products in
Mexico for decades; Mars's market share surpassed Hershey in the very first year it
entered the Mexican market. In Japan, Mars also surpassed Hershey. Although Hershey
exports to 90 countries, exports accounted for only less than 4% of its 1997 total sales. In
addition, Hershey is the only confectionery giant that has no manufacturing factories
outside the US (Brenner 1999).

Management Leadership. Hershey's management lacks an international mindset.
The company has little knowledge of world markets (Brenner, 1999). Its Vice President,
appointed in 1993 and in charge of its international operations, does not speak a second

language. “How can they really have hopes for global expansion when he can't even

37

communicate?” questioned Jeffery, a current consultant in the industry. In 1998,
Hershey's experienced big change in its management. Recently, eight top managers were
removed (Hershey Foods Corporation Annual Report 1999). It will take some time for the
corporation to adjust to changes and react to markets.

Production Efliciency. Hershey’s-packaging and handling distribution costs are
quite high. According to Hershey's Annual report of 1998, there are some higher
packaging, handling and distribution costs associated with their thematic merchandising
strategy. The higher distribution costs related to the diversity of Hershey's product line
continued to exert pressure on Hershey's gross margin.

In addition, Hershey's manufacturing capacity is falling behind market demand for
its new products. ReeseSticks, introduced in 1998, has been a very successful market for
Hershey. However, Hershey does not have enough manufacturing capacity to produce all
the usual package types (Product Alert 29, no. 11, June 14, 1999). Furthermore,
Hershey’s recently emerged technology-related problems delayed the corporation’s
shipments and caused its earning to drop by 19%. One major reason for this delay is
Hershey’s lack of adequate facilities (Wall Street Journal 10/26/99).

Simm_ary of Strengths and Weaknesses (Table 3-2)

Hershey has been successful in product innovation. Its efficient human resource
management gives employees incentives to improve product quality, lower cost and
provide satisfying customer services. The corporation enjoys leading brand names, which
enables it to reap profits from product line extension and royalties. Its strong financial

position has been evidence of its good performance in the above areas. Although Hershey

38

has these strengths, Hershey's weak performance in international markets reveals

concerns related to globalization and management leadership as discussed above.

Table 3-2: Strengths and Weakness of Hershey Foods Corporation

 

 

 

 

 

Strengths Weaknesses

Marketing Resources Globalization
Innovation Management Leadership
Human Resource Management Production

Financial Resources

 

 

3.1.4. Strategic Synthesis

This section provides a synthesis of both the internal and external analysis for
Hershey Foods Corporation and formulates strategic issues that the company must
address.

Core Competencies and Competitive Advantages

In the mature domestic confectionery market, Hershey's key competencies are its
ability to maintain dominant market share in both chocolate and non-chocolate
confectioneries and its capabilities in product innovation. These are also Hershey's key
competitive advantages over rivals.

Scenario analysis for Hershey's firture

To analyze where Hershey’s strengths and opportunities reinforce each other and

where its weaknesses and threats reinforce each other, a scenario analysis for Hershey’s

39

future is conducted. Each of the scenarios represents a possible future for Hershey (Table

3-3).

Table 3-3: Three Scenarios for the Confectionery Industry

 

 

 

Scenario 1 Scenario 2 Scenario 3

“Bitter Candy” “Mild Candy” “Sweet Candy ”

1. Consumers prefer candy 1. Consumers Show strong 1. Increased demand for
substitutes to candy interests in purchasing “firnctional cand)?’

2. Input prices are under fimctional candy. 2. Hershey enjoys
government support 2. Intensity of competition competitive advantage

3. Intense competition from remains. globally
global confectioners 3. Government sugar support 3. Government sugar

regulation remains. price support ends.

 

 

 

The first scenario is a “bitter candy” scenario, where Hershey’s external threats
and its internal weaknesses reinforce each other. This causes a significant decline in the
company’s performance. Under this scenario, health-conscious consumers prefer candy
substitutes to candy; government is still supporting sugar prices; competition fi'om global
confectionery giants is intense and takes market share fi'om Hershey worldwide. All the
above factors will cause the decline in both Hershey’s sales and market share.

The second scenario is a “mild candy” scenario. In this scenario, the combination
of positive and negative changes of external and internal environment leads to a gradual
extension or even enhancement of Hershey’s performance. Although sugar government
support and global competition are still present, innovation of firnctional products gains
consumer acceptance. Hershey is able to gain its profits by focusing on US domestic

markets.

40

 

The third scenario is a sweet candy scenario. The fundamental external and
internal changes are all toward Hershey’s advantage. Sugar price support legislation is
ended; Hershey not only holds the leading market share in US domestic market, but also
successfully expands globally. In this scenario, the sales of Hershey grow significantly
due to the rapid demand grth of emerging markets. Hershey is able to compete with
global giants and reap the benefit of technology developed abroad.

Nature of Change

The SWOT analysis suggests that Hershey’s external opportunities outweigh its
threats, and the corporation’s internal weaknesses outweigh its strengths (Figure 3-4)
Hershey should make internal changes, such as adopting a global focus, cost contrOl and
management team reform to overcome its weakness and assure a successful future.
However, currently Hershey is still focusing on mature domestic markets. It would appear
that some significant turnaround in internal strategy is needed to move Hershey into the
aggressive quadrant.

Figure 3-4: Hershey’s SWOT Analysis Diagram

 

opportunities

turnaround 3
strategy 1 "

 

 

aggress ve
strategy

 

 

weaknesses strengths

 

 

 

diversification
strategy

 

 

de ensive
strategy

threats

 

 

 

41

Key Strategic Issues

The following lists the crucial strategic issues faced by Hershey Foods
Corporation:

How can Hershey innovate its confectionery products to appeal to the health
concern of consumers? The increase in consumer demand is the key to Hershey’s future
success. Although functional candy markets are fuelling confectionery market growth,
there are still problems about manufacturing and consumer acceptance.

How can Hershey effectively expand globally to explore the growing
opportunities in the global confectionery markets? American confectionery markets,
although growing, are mature markets and are going to reach their saturation point.
Meanwhile overseas markets in East Europe and Asia present abundant opportunities for
established confectioners worldwide. Compared to being the market leader in the US
candy market, Hershey has experienced failure in its global expansion. Therefore,
identifying obstacles to its global expansion is a key to Hershey’s future development.

How can Hershey make effective internal management changes and cost
control improvements to take advantage of the opportunities present? Innovation
will be a competitive advantage only when the cost of innovation can be covered by its
benefits. Hershey should reinforce its cost control to enjoy sustainable advantage in its
product innovation in US confectionery markets. In addition, the company should
assemble a strong management team to assure the sustained development of the

corporation.

42

3.2 Core Strategy Analysis

3.2.1. Discussion of Desired Accomplishments

A company's desired accomplishments are formulated in its mission/vision and
objective statements.

1. Mission/vision statement

The mission/vision statement specifies a firm's ultimate aims, and provides a unity
of direction for managers. An effective mission statement shows the belief of an
organization, communicates its values effectively, and inspires employees of all levels.
Consequently, the evaluation of a company's mission/vision statement is the first step in a
strategic planning process. Hershey's mission/vision is stated as follows: "Our mission is
to be a focused food company in North America and selected international markets and a
leader in every aspect of our business. "

Hershey’s mission/vision statement clearly communicates the strategic scope and
industry role of Hershey's business: "to be a focused food company" and "a leader in
every aspect of our business". In addition, the statement inspires Hershey's employees in
terms of understanding shared expectation and stimulating employees at all levels to
achieve this goal. Hershey has been committed to expanding its US confectionery market
share and has become the US. market leader since 1988 (Brenner 1999).This indicates
that Hershey Foods Cooperation is truly willing to live up to the mission/vision statement.
However, the statement of "selected international markets" fails to give Hershey's
managers enough incentives to expand the corporation's business globally. Hershey
should state its ultimate aim as “to be a world confectionery leader,” which is more

inspiring to its management team.

43

Overall, Hershey's mission/vision statement is an effective statement of its
ultimate aims. After the ultimate aims are specified, a firm needs specific benchmarks for
evaluating its progress in achieving its aims. Providing such benchmarks is the function
of a company's objectives.

2. Strategic Objectives

Hershey's objective is stated as: "Our goal is to enhance our number one position
in the North American confectionery market, be the leader in US pasta and chocolate-
related grocery products, and to build leadership positions in selected international
markets. " This objective is doable, challenging, measurable and consistent with its
mission.

" To enhance our number one position in the North American confectionery
market" is doable. The SWOT analysis showed that Hershey's key strengths are its
leading brand names and its innovation capability in domestic market. These two
attributes help Hershey hold the leading position in US confectionery markets.

"To build leadership positions in selected international markets" is challenging.
Hershey's main weakness is its poor performance in international markets such as
Mexico, Canada, and Japan. While opportunities abound overseas, taking advantage of
these opportunities is challenging for Hershey. The objective is measurable. The
company’s market shares can measure “leading position” in both North American and
international markets. Clearly, Hershey’s objective statement is consistent with its
mission as a "leader in every aspect” of the confectionery business.

However, Hershey's relatively effective objective statement is outdated. In January

1999, Hershey completed the sale of its pasta business, thereby contradicting its objective

44

statement "be the leader in US. pasta" business. Hershey’s new objective should be “to
enhance our number one position in the North American confectionery market, and build
up our confectionery leadership worldwide. "

In general, Hershey has effectively communicated its mission and objectives, even
if changes in emphasis are warranted.

3.2.2. Hershey's Current Core Strategy

Hershey's mission and objectives have resulted in the company's current core

strategy. A detailed analysis of this core strategy is warranted (Table 3-4).

 

Table 3-4: Current Core Strategy

 

 

Customer Quality/Features
Value

Strategic Growth/Reposition
Initiative

 

Industry Role Leader

Strategic Scope Dominant Product
Vertical Open Market
Coordination

 

 

 

 

 

 

Customer value. Hershey is carrying out a quality/features or differentiation
strategy to create customer value. Under this strategy, a firm delivers superior quality
goods for a broad market. Profits come from premium prices charged for truly
differentiated products. Hershey holds the largest market share in US confectionery
industry. Among the top ten confectionery brands in retailing space, five of them belong
to Hershey Foods Cooperation. Hershey claims that its products "appeal to all ages."
These are all evidence of Hershey's superior quality products for a broad market. In

addition, Hershey effectively communicates the uniqueness of its products to customers.

45

Hershey's annual report indicates a retail growth rate of 5.6% in 1998, which was driven
by its creative selling, marketing and merchandising techniques.

Strategic initiative. One of Hershey's objectives is "to enhance our number one
position in North American market". In order to secure its leading position, Hershey has
to grow and outpace the grth of the overall US. confectionery markets. In fact,
according to SEC fillings, Hershey's ten-year compound growth rate is 7.42% comparing
with 4—6% growth rate of the confectionery industry in general. The other element of
Hershey's current strategic initiative is "reposition". In January 1999, the corporation
completed the sale of a 94% majority interest of its US pasta business to New World
Pasta, LLC.

Strategic Scope. After Hershey completed the sales of its pasta business, it
regained its dominant-product scope. In the process of becoming a confectionery-line
giant, Hershey acquired many confectionery firms to expand its US confectionery market
shares. For example, in the 1990’s, Hershey Foods Corporation acquired half a dozen

leading brands (Table 3-5).

46

Table 3-5 Hershey Foods Corporation’s Acquisitions in 1990’s

 

Date Acquisition Activities

 

Feb. 12, 1990 Acquired Ronzoni Foods Corp. from Kraft General Foods, Inc.

 

May 1991, Acquired Gubor Schokoladen GmbH and Gubor Sckokoladenfabrik
GmbH chocolate business from H. Bahlsens Keksfabrik KG

 

 

 

 

 

May 1992 OAcquired an 18.6% interest in Freia from Orkla

March 1993 Acquired H Pranzo D’oro Corporazoine, Inc.

Dec. 1995 Acquired Henry Heide, Incorporated a confectionery company which
manufactures a variety of non-chocolate confectionery products.

Dec. 1996 Acquired fiim an affiliate of Huntamaki, the international goods

company based in Finland, Huntamaki’s Leaf North America
confectionery operations

 

 

Source: Moody’s Annual Report 1998

Industry role. Hershey has been holding the largest market share in the US
confectionery industry since 1988. The Corporation consistently innovates to be the "first
mover" in every line of confectionery products. When the demand for low-fat candy
increased, Hershey launched Sweet Escape and benefited from the increased sales.
Although in recent years Hershey is facing difficulties with its stock, the leading position
still helped Hershey secure sales growth.

Vertical coordination. Hershey's coordination activities involve coordination with
suppliers and buyers. Hershey's products are sold primarily to supermarkets, mass
merchandisers, grocery wholesalers, drug stores, wholesale clubs, and convenience stores
throughout the United States, Canada and Mexico. The company’s products are sold in
over two million retail outlets in North America. In order to coordinate with these buyers,
Hershey uses a combination of open market and contract carriers to deliver its products

from distribution points to its customers (Packaged Facts 08/96).

47

 

Hershey's major inputs are cocoa, sugar, corn sweeteners and diary products.
Hershey usually attempts to minimize the effect of input price fluctuations by entering
futures, forward and options contracts (Packaged Facts 08/96).

The core strategies current implemented by Hershey present some significant
advantages and disadvantages. The pros and cons of Hershey’s current strategy are as
follows.

Pros:

1. The quality/ features strategy benefits Hershey with profits fi'om a broad market.
This strategy uses Hershey's strengths of innovation and marketing to appeal to changing
consumer tastes.

2. A growth strategic initiative enhances Hershey's leading position in the US.
confectionery industry and increases the corporation's profits and sales.

3. Focusing on dominant products can make Hershey rely on "what they do best,"
and reap the higher margin from their expertise in confectionery manufacturing.

Cons:

1. Targeting a broad market can divert Hershey from its focus. Due to resource
restrictions, Hershey may be able to appeal to all ages but it may not be able to be the best
choice for all ages.

2. Hershey's "broad" markets and "grow" initiative still leave the rapid growing
international markets uncovered. In recent years, overseas confectionery markets have
grown rapidly. Being absent fi'om these growing international markets suggests missing

the opportunities of reaping long-term profits overseas.

48

The above pros and cons analysis indicates that Hershey’s current core strategy
could benefit from some changes. The next section provides recommendations for a new
core strategy.

3.2.3. Recommendations for a new core strategy

Customer value. Hershey Foods Corporation should maintain its current
quality/ features strategy to operate its basic chocolate business. Meanwhile, the
corporation should also add a niche market strategy for its new domestic business
development, i.e., functional candy and high-end chocolate in the mature US market. In
1998, gourmet boxed chocolate grew at a rate of 10%. Functional candy, another niche,
also showed a persistent growth trend. Retail confectionery sales in the US. are estimated
at $23 billion, with firnctional confectionery sales comprising between $280 million and
1.7 billion of that. Furthermore, by 2003, total confectionery sales should reach $27
billion, with functional confections totaling about $1 .1-1 .3 billion (Candy Industry
03/ 1999). Successfully offering tailored value and serving the niche markets will
significantly enhance Hershey’s sales.

Opportunities are abundant overseas for US confectionery giants. The most
promising markets are Central and South America, along with East European and East
Asia. In order to seize these opportunities, Hershey should take a quality/ features strategy
to market its confectionery products to broader international markets.

Strategic initiatives. Hershey should reposition itself to become a niche player in
both high-end and functional candy categories. Meanwhile, Hershey should also

maintain/defend its traditional categories, which can be used as Hershey's cash cows to

49

finance its niches. In the growing international confectionery markets, the only way
Hershey's business can succeed is to adapt to these international markets.

Industry Role. In both domestic and international markets, Hershey still should
keep its role as leader of the confectionery industry. Another possibility Hershey may take
as its industry role in international markets is to be a “challenger.” Due to the existence of
established international giants, when Hershey enters a new international market, it starts
challenging the established competitors by offering unique tastes.

Strategic scope. Strategic scope remains the same as before. No matter in
international markets or in domestic markets, Hershey is still functioning in a dominant
product business-~confectionery. The reason that we do not recommend Hershey to
diversify its business is because the SWOT analysis indicate that the potential grth of
emerging international markets and niches in domestic markets make diversification
unnecessary at the current stage. In addition, trying to make too many changes at the same
time may be overwhelming for the corporation. The outcome could be that Hershey fails
to do any of them well.

Vertical coordination Hershey's position in the value chain favors spot markets
and specification contracts. The large number of scattered suppliers and buyers make both
of Hershey's asset specificity and errors of coordination relatively insignificant.
Therefore, Hershey should maintain its current vertical coordination strategy with its

suppliers and buyers.

50

The recommended new core strategy has its merits and demerits as well.

Pros:

1. Focus on the faster growing niches in the domestic mature markets will enable Hershey
to innovate effectively to appeal to the targeted high-income and health-conscious
consumers.

2. Global expansion will finally enable Hershey to exploit the growing potential of
international markets

Cons:

1. New core strategy requires large amounts of capital and human resource for product
innovation and global expansion.
2. Operating in global markets will bring more uncertainties to the corporation.

The proposed new core strategy provides an answer to Hershey’s strategic issues.
Focusing on the fastest growing functional candy and high-end chocolate categories is to
appeal to the health concerns of consumers and to appeal to the changes in consumer's
tastes. This focus strategy answers Hershey's first strategic question: "How can Hershey
innovate its confectionery products to appeal to the health concern of consumers? "
Quality/features strategy in international markets answers Hershey's second strategic
question: "How can Hershey efi’ectively expand globally to explore the growing
opportunities in the global confectionery markets? "

Focus on niches, quality reinforcement, cost control and global expansion provide
the answer for Hershey's third strategic issue, how to “make eflective internal
management changes and improve its production efliciency to take advantage of the

opportunities present. "

51

3.3. Conclusion

SWOT analysis showed that Hershey operates in an environment characterized by
both great opportunities and significant threats. The major opportunities include changes
in consumer's demand toward functional candy and the emergence of international
markets. The key threats present are intense competition from global competitors and
large varieties of candy substitutes. Hershey’s internal strengths such as leading brand
names, innovation, and eflective human resource management can help the corporation
seize its opportunities. However, its weaknesses such as high cost of production,
domestically focused management leadership, and low profit margins for operations in
international markets, will eventually force Hershey to change. In order to assure its
future development, Hershey has to provide answers for the strategic issues that this
analyses raises.

The core strategy analysis section discussed answers for Hershey’s strategic issues
by evaluating the corporation’s desired accomplishments and core strategies.

Hershey’ ultimate goal is "to be a leader in every aspect of our business." Thus,
Hershey is set up to "enhance our number one position in North American markets, and
build up a leading position in selected international markets." In general, Hershey
effectively stated its mission and objective, which is reflected in its current core strategy.

Hershey has carried out a quality/ features strategy to enhance its leadership. In
addition, the company used growth and reposition strategies because it decided to be a
dominant-product company. Hershey used spot markets and contracts as its coordination
institutions with its suppliers and buyers.

The current strategy is consistent with Hershey's mission/vision, but it has

52

advantages and disadvantages. Under the recommended new strategy, Hershey retains its
current strategic scope and vertical coordination strategies. Its customer value and
strategic initiative strategies differ in different markets. In the domestic market, Hershey
should target rapid growth high-end and functional candy niches in order to reposition
itself to grow niches while maintaining the historic quality/ features market. On the other
hand, in international markets, quality/features strategy is recommended to supply
superior quality products to broader and diversified markets worldwide.

The recommended strategy's pros outweigh its cons and answer Hershey’s
strategic issues raised in Section I.

”How can Hershey innovate its confectionery products to appeal to the health
concern of consumers? ” Focusing on the fastest growing niches, functional candy and
high-end chocolate categories, is to appeal to the health concerns of consumers and to
appeal to the changes in consumer's tastes. The niche strategy answers Hershey's first
strategic question.

"How can Hershey effectively expand globally to explore the growing
opportunities in the global confectionery markets? " Quality/ features strategy in
international markets answers Hershey's second strategic question.

“How can Hershey make eflective internal management changes and improve its
production efliciency to take advantage of the opportunities present? ” Focus on niches,
quality reinforcement, cost control and global expansion provides the answer for
Hershey's third strategic issue.

Overall, international expansion was identified as a significant weakness of the

corporation. Failing to overcome this weakness will force Hershey to face intense

53

competition from its global competitors at home and abroad.

54

Chapter 4 Assessment of Global Confectionery Industry Conditions

This chapter applies the “industry globalization drivers” component of Yip’s
framework (Figure 2-1, p.11) to analyze the industry globalization conditions of the
confectionery industry. Furthermore, regional market analysis is developed to build up the
foundation for market selection. The evaluation of globalization drivers indicates that the
confectionery industry is characterized by strong industry conditions for globalization
(e. g., common customer need, high product development cost). An analysis of the
international confectionery market situation further reveals that opportunities exist in

several different regional markets.

4.1 Diagnosis of Globalization Drivers of Confectionery Industry

The likelihood that a global strategy will be effective depends on four sets of
conditions: market, cost, government regulation, and competitive. These conditions are
also called industry globalization drivers (Yip 1992). Overall, the confectionery industry
is characterized as having strong globalization potential. The further examination of
individual drivers will suggest key sources of globalization.

4.1.1. Market Drivers

' Market globalization drivers mainly depend on the nature of customer behavior

and the structure of distribution channels (Yip 1991).

Common customer needs. Common customer needs allow product standardization
and make it easier to penetrate into different markets. This applies to the confectionery
industry in that candy appeals to people around the world. According to findings of

scientists at Massachusetts Institutes of Technology, sweet or fatty substances can

55

stimulate pleasure signals of certain cells of the hypothalamus portion of the brain. The

major confectionery product, chocolate, derives about 50 percent of calories from sugar
and about 50 percent from fat, a combination unequaled among food. This combination

makes chocolate accepted as readily in Malaysia and Mexico as' it is in America, despite
the nations’ divergent cuisines.

In addition, chemically speaking, the melting point of chocolate is slightly below
body temperature due to its content of cocoa butter. When chocolate is put into mouths,
cocoa butter dissolves first and distributes the rest of the chocolate ingredients over the
taste buds in quick succession, starting with the sugar. This makes chocolate 8 universal
delight for people.

Consumers worldwide purchase confectionery for a variety of uses. In the mature
markets of Western Europe and North America, candies are purchased on a regular basis
as snacks. In Asia-Pacific markets, candies have a strong gift association and are usually
purchased as gifts during certain festivals. As for Eastern European and Latin American
markets, chocolates‘are preferred as treats. Consumers, given the lower income level in
these markets versus mature markets, usually purchase candies as treats.

In the past decade, with rising incomes in a number of developing countries,
worldwide consumption of confectionery has been growing significantly. For Asian
countries, where the lactose intolerance seems to have a negative effect on candy
consumption, the grth number is still significant. In 1997, Vietnam, India and China
recorded the fastest grth rates in the Asia/Pacific region, with 21%, 11% and 10%
respectively (Figure 4-1). Common customer need has contributed to the success of many

globally standardized products, such as Mars' well-known brands, M&M and Snicker.

56

Figure 4-1: 1997 Growth Rates of Asia/Pacific Confectionery Markets

25%

22%

 

11%
10%

 

 

 

 

 

country

Source: Candy Indusz 11/98

Global customers and channels. Global customers often demand global products
and services, which create the need and potential for product standardization. The
confectionery industry has global customers in a sense that many consumers buy candy as
a gift for others or for themselves while traveling abroad. The ease of customizing
confectionery also encourages purchases by travelers. Such purchases help to establish
global standards in perceived quality and taste of confectionery (Yip 1992).

Global or regional channels of distribution give producers incentives toward
marketing uniformity. The main distribution channels for the US. confectionery industry
are almost all local or national, but not global. Supermarkets account for 20-25% of retail
sales, convenience stores 15-20%, mass merchandisers 15%, chain drugstores 12%, and

warehouse clubs 4% (Packaged Facts, 1996). But some international expansion and

57

globalization of channels has occurred. Wal-Mart, one of Hershey Food Corporation’s
major distributors, opened operations in China. Safeway, another U.S. chain, operates
stores in Canada, Britain, Germany, and Saudi Arabia (Yip, 1991). These global channels
may expand the international scope of confectionery manufacturers while reducing the
costs of distribution.

Transferable Marketing. Marketing elements such as advertising and brand names
are transferable when the nature of the buying decision requires little adaptation. The
nature of the buying decision of confectionery favors transferable marketing. Candy can
be advertised as either tasty food or as fim to eat for children around the world. The
satellite TV and other media influence consumers in different countries. For example, the
global success of the movie "ET." in which Reese's Pieces were the appealing extra-
terrestrial's favorite gave Hershey Foods the opportunities to promote that product
worldwide. Hershey’s archrival Mars sponsored the Olympics and World Soccer Cup to
increase its global exposure.

Confectioners also realized the benefits of global branding. Maj or confectioners
merchandise their leading brands around the world. M&M changed the name of a
chocolate bar it sells in the United Kingdom from Marathon to Snickers, the name it uses
in the US. Hershey started global branding strategy in 1997, marketing its six core
brands, Hershey's Kisses, Nuggets, Cookies 'n' Creme, Hershey Syrup, Pot of Gold and
Reese's, worldwide (Hershey Foods Corporation Annual Report 1999).

Overall, market drivers provide strong incentive for the confectionery industry

toward globalization. The common appeal of confectionery products to consumers

58

worldwide, the increasing globalization of distribution channels, and the similar nature of
buying decisions of confectionery products all favor the use of global product strategy.

4.1.2. Cost Drivers.

Among cost globalization drivers, global scale economies, high product
development costs, fast-changing technology, and differences in country costs have the
most effect on the need for global products and services (Yip 1992).

' Global scale economies. High manufacturing economies of scale in an industry
encourages global market expansion, globally standardized products, and globally
centralized production. The making of confectionery is highly automated, involving
heavy machinery and large containers that usually require an initial investment of at least
several million dollars (Yip 1991). Confectioners can lower their total costs significantly
by manufacturing on a large scale. Major confectioners are all consolidating their
production. In 1991, Nestle consolidated its US. manufacturing into one single entity to
enhance its US. marketing position and reduce costs. In July 1995, Cadbury, acquired
Allan Candy, and in July 1996 acquired Neilson Cadbury (a licensed manufacturer of
Cadbury brands) for UKPd108m. The parent merged the two acquisitions into one
company, integrating chocolate and sugar confectionery operations in pursuit of
economies of scale (Candy Industry 07/96).

Product development cost. In the confectionery industry, successful new products
are difficult to develop due to the finite number of available ingredients and narrow range
of consumer preferences. Confectioners in the US. on average introduce 150 new items
each year, and two-thirds of them are actually line extensions. Recipes that lead to widely

popular new products are rare (New Product News). In addition, consumer testing and

59

developing the total marketing package are very costly and characterized by high failure
rates (Yip 1991). This encourages confectioners to expand the markets for existing brands
rather than develop different products for different countries.

Diflerences in country costs. Differences in country costs can provide a strong
spur to globalization. Concentration of activities in low-cost or high skill countries can
increase productivity and reduce costs. Confectionery production does not require hard to
find skills (Yip 1991). So confectioners have options for plant locations to lower costs. In
recent years, the emergence of newly industrialized countries provides confectioners with
production capability and low labor costs. For example, confectionery giants M&M Mars,
Nestle, Cadbury Sweeper and Warner-Lambert all built operations in China to exploit the
low labor cost and market growth potentials.

In general, cost drivers in confectionery markets also favor the use of global
product strategy. The high initial investment makes it more profitable for confectioners to
manufacture on a global scale; high development costs make sense for confectioners to
develop or market global products rather than national ones; and, the emergence of
industrialized countries with low cost attracts confectioners to manage their value chain
activities globally.

4.1.3. Government Drivers.

The strength of government globalization drivers depends on the effect of rules set
by national governments regarding trade, activities by foreign firms and marketing
regulations (Yip 1991).

Trade Policies. Host governments can use a number of methods to affect

globalization potential: import tariffs and quotas, non-tariff barriers, export subsidies,

6O

local content requirements, currency and capital flow restrictions, ownership restrictions
and requirements on technology transfer.

Trade baniers present a significant issue for confectionery makers. As impulse-
purchasing products, consumers are price-sensitive to confectionery products around the
world. Five cents imposed by government duties may prohibit purchases by consumers.
Nevertheless, trade policies are changing to favor globalization. In 1987, Japan reduced
its tariff on imported chocolate from 20% to 10%. Korea and Taiwan followed suit. The
European Union in theory eliminated all remaining internal trade barriers on chocolate,
while retaining its 12% duty on imports from outside the European Community (Yip
1991)

Compatible Technical Standards. Differences in technical standards among
countries affect the extent to which products can be standardized. Government
restrictions in terms of technical standards can make or break efforts at product
standardization. U.S. confectionery producers can meet food regulations in most
countries. Japan, however, prohibits sale of chocolates containing U.S.-approved
additives BHT and TBHQ. The UK. and Ireland allow the substitution of 5 percent
vegetable oil in place of cocoa butter. Recently the European Union followed suit (Candy
Industry 03/2000). Such regulations have a significant effect on multinational
confectioners' design of global products.

Marketing Regulations. Different countries have different regulations regarding
marketing mix such as advertising and packaging. For example, comparative advertising
and lotteries are forbidden by a number of countries, such as, China. When creating

advertisements for or extending advertisement into these markets, confectioners have to

61

limit their uses of these themes. In addition, different countries also have different
requirements for packaging and labeling. For example, the latest industry standard for
confectionery in China issued in 1992 requires that, when both Chinese and English
descriptions are present, the Chinese characters should be larger than the English words.
Confectioners need to take into consideration these market regulations when making their
global moves.

Overall, government drivers are increasingly favoring world trade and the use of
global product strategy. Reduction or elimination of trade barriers and the compatibility
of US technical standards to most of the international markets both motivate
confectioners to use global product strategy and expand into broader international
markets. Further, following market regulations of different countries does not pose a
significant challenge for confectioners.

4.1.4. Competitive drivers.

Competitive globalization drivers (high exports and imports, competitors from
different countries, interdependence of countries and globalized competitors) raise the
globalization potential of an industry and spur the need for a response on the global
strategy levers (Yip 1992).

Exports and Imports. The most basic competitive driver is the level of exports
and imports (Yip 1992). The increases of exports and imports in the confectionery V
industry make companies from different countries interact with each other, and therefore
make the use of global strategy more necessary. In 1995, US. candy imports jumped to
23% in value to US $618 millions and exports fell almost 8% to US $405 millions.

Canada is the most important foreign market for the US, receiving over 40% of

62

American exports. Mexico comes second with a 14% share (Packaged Facts 08/96). East
European counties, Asia/Pacific countries and the nations of South America are all
promising grth markets for US. confectioners (Figure 4.1.4, 4.1.5 in the appendix).
Major Multinationals are fighting for market share in these markets by using global
strategies to different extents, which will be illustrated in the following sections.

Globalized Competitors. Competitors pursuing global strategy pressure the
industry as a whole to globalize, and force particular companies to match competitors’
strategy. Almost all of Hershey's key competitors have significant sales fi'om international
markets. Mars and Nestle are global market leaders followed by Belgium-based Ferrero,
maker of Tic Tao and the Roche bar. As US. confectionery market leader, Hershey only
ranks fifth in terms of global market sales in 1997 (Travel Retailers International 11/98).
In order to promote strong long-term growth, the company needs to match its
competitors’ use of global strategy and develop new international markets.

Competitors use global strategy. The more competitors use different dimensions
of global strategy (global market participation, global product development, marketing,
location of value-added activities, and integrated competitive moves), the more necessary
it becomes for a company to match them.

Major competitors of Hershey Foods Corporation all use global product strategies
to a certain degree. Nestle probably makes the most use of global product strategy. The
company follows world confectionery market trends closely and develops products to
meet customer need worldwide. For instance, in the 1980’s, Nestle realized there was a

worldwide demand for consumer specialty chocolate. The company developed “N oir,” a

63

dark chocolate with “specially selected cocoa” in Europe in 1988, and successfully
introduced this product into the United States in 1990 (Yip, 1991).

Mars also makes considerable use of global products. The company has grown
through global expansion by marketing about the same range of products around the
world. Mars’ management expects every product to earn much higher sales than its
competitors do. For most candy companies, if a product can generate annual sales of $20
to $30 millions, it is considered a blockbuster, whereas Mars measured every newly
introduced products against the success of Snickers, which sold $400 million annually
(Brenner 1999).

In addition, as major players in the confectionery industry concentrate production
in medium to large-sized plants to capture economies of scale, production is concentrated
in fewer countries, and thus interdependence among countries and the need for a global
strategy to manage it will increase (Yip 1991).

In summary, competitive drivers strongly support the use of global product
strategy. High imports and exports to US markets make it necessary for companies to
pursue global strategies to compete and interact with each other; globalized competitors
push the industry as a whole to globalize; and, major competitors’ use of global product
strategy further require others to match them.

4.1.5. Conclusions

In summary, market and competitive conditions provide the strongest drivers for
the confectionery industry to use global strategy. Government drivers are changing
toward favoring world trade, and cost drivers do not pose significant barriers for

confectioners to globalize their production. As a result, the confectionery industry is

characterized with a strong potential for globalization, and leading firms in the industry
all use global strategy to a certain degree.
4.2 Overview of International Confectionery Markets

Given that the industry has strong globalization drivers and potential, gathering
information on specific international markets becomes the imperative first step for
multinational confectioners’ use of global strategy. This section examines the changing
patterns in major international confectionery markets and discusses multinational
companies’ strategies in penetrating these markets.

In recent years, the growth picture in international confectionery markets has
shifted significantly, revealing new and different trends. Economic changes have affected
consumer confidence and expenditure in some Asian markets. As western European
markets mature in growth terms, companies are looking for new ways to capitalize on
growth niches. Eastern Europe as a whole has shown the highest regional growth in per
capita consumption of confectionery between 1993 and 1997 with nearly a 3% compound
annual growth rate. Brazil offers one of the greatest opportunities in South America with
per capita consumption grth at a category annual grth rate (CAGR) of 9.1 percent
between 1993 and 1997 (Candy Industry). Vietnam (10.5%), Brazil (9.1%), Ireland
(5.8%), China (5.7%) and Czech Republic (5.4%) have been the leading confectionery
consumption grth markets between 1993 and 1997 (Candy Industry 07/98).

Although some of the grth rates can be explained by external factors, such as
rising populations and disposable income, effective marketing by leading companies has
been the principal driver in stimulating consumption in most of the countries. Chupa

Chupa, Ferrero, Ricola and Warner-Lambert have seen the positive results of adopting

65

global brand strategies with multi-country tactics. Smint, Tic Tac, Ricola and Certs have
managed to penetrate a wide diversity of country markets in the sugar confectionery
category by exploiting core marketing capabilities and the synergies associated with
global branding (Candy Industry 07/98).

Major international markets are grouped into the following regions: Asia-Pacific,
the mature markets of Western Europe, the emerging markets of Eastern Europe, and
Latin America. Each of the following subsection discusses the market conditions in each
of these regions.

4.2.1 Asian/Pacific Markets.

Home to more than half of the world’s population, Asia has the largest growing
consumer markets. The growth in these markets has been influenced by the following
factors.

Increases in incomes: More working women and extended family living
arrangements contribute to the increase of family disposable incomes. In addition, Asia's
newly created middle class has proven to be both a catalyst for, and a by-product of, the
region’s growth of the last decade. The increase in middle-class income has been a
contributor to the increase in overall consumption, and that in turn has promoted further
economic growth. In 1996, the Asia/Pacific confectionery market reported an increase in
consumption to an all time high of US $16.5 billion (Candy Industry 97/11).

Dominance of sugar confectionery: In most Asian markets, the consumption of
sugar-based products, such as, boiled sweets and chewing gum, far exceeds consumption

of chocolate confectionery. According to official estimates, sugar-based confections

66

account for 50 percent or more of total confectionery consumption in five major Asian

countries (Table 4-1).

Table 4-1: Asia/Pacific Markets Sugar Confectionery Consumption as % of Total
Confectionery

 

Country Sugar Confectionery
Consumption as % of Total
Confectionery

Thailand 90%

Philippines 70%

South Korea 60%

Japan 50%+

China 50%

 

Source: Candy Industry 97/1 1

This phenomenon can be explained by two factors, climatic condition and dietary
traditions. With temperature averaging 27-33C in the Pacific Rim, climatic conditions
result in the shelf life of products with high chocolate content to be much shorter than
hard sugar candies. This is further reinforced by the fact that a large number of point-of-
purchase sites for confectionery in Asian countries are not air-conditioned. Therefore
wholesalers and retailers prefer merchandising sugar confectionery to chocolates. In
addition, chocolate consumption has not traditionally been part of the Asian diet.
Chocolate has a strong gift association in most Asian markets, a factor that also causes
the seasonality of chocolate consumption, for instance, weddings and the New Year are
the peak seasons of chocolate consumption (Candy industry 11/97).

Variations of markets: Across the Asia/Pacific region, there are significant
variations in confectionery consumption. Japan and South Korea are sophisticated,

mature and largely self-contained markets. These two markets have high per capita

67

consumption relative to the regional average. Singapore and Hong Kong are small,
import-served, developed markets that may be microcosms of the regional confectionery
potential. Taiwan, a considerably large market, can be considered within the same
category as the above two countries due to similar consumption levels and the heavy
dependence on multinational suppliers. Malaysia, Indonesia, the Philippines, and
Thailand are underdeveloped with no strong tradition of confectionery consumption but
with large populations and significant potential. The last four markets, together with
China, India, and Vietnam are perceived to have the greatest grth potential in the
region.

Reduction of import duties: The establishment of the Association of Southeast
Asian Nations (ASEAN) has facilitated trade in Southeast Asian countries. The
association members have approved implementation of the ASEAN Free Trade
Agreement (AFT A) to liberalize and increase regional trade. Most import duties will be
lowered to zero to five percent by 2003 (Richmond 1997). The reduction of trade barriers
will reduce the prices of imported confectionery products. As a result, multinationals
could increase both manufacturing and marketing activities in this region

Instability of financial markets: Emerging markets often carry a higher level of
risk than mature markets. The Asian financial market crisis decreased consumers’
expenditure and confidence, which is likely to shift marketing focus towards more stable
grth markets. Nevertheless, regional confectioners believe that these issues will be
short-lived, although the extent of long-term changes in unemployment is as yet
unknown. In addition, not all-regional markets have been damaged by the economic

impacts. China, for instance, appears to have escaped regional effects. China’s economic

68

fundamentals, combined with high marketing expenditure from competing companies,
have led to impressive growth. Targeting the southern and eastern higher income areas,
companies have been building share in this vast market (Candy Industry 07/98).

Multinationals have been taking different strategies to cope with different market
situations in the Asia/Pacific region. Due to the volatile financial markets in some Asian
countries, Cadbury, Nestle, Lotte, and Warner-Lambert are likely to shift their strategic
focus from more aggressive market penetration to more defensive share retention in the
short-term.

In contrast, the financial crisis has not seriously affected the Chinese market.
Chinese consumers have the desire and ability to buy a variety of brands, local and
foreign, mass market and premium. Therefore, many companies have gained a foothold in
the Chinese chocolate market. Cadbury gained 38 percent value share of the countlines
segment in 1997 and Nestle 20 percent. Ferrero had 55 percent of value share of boxed
and Guylian 10 percent, Lindt & Sprungli 25% of novelties, and Mars 65 percent of
straightlines (Candy Industry 07/98)

4.2.2. Mature Western Europe

Western Europe markets have a different set of dynamics and opportunities from
less developed markets. Companies usually take defensive strategies, while looking for
new niches.

The aging and health-conscious consumers in mature markets demand more
sugar-free confectionery and low fat chocolate. Sugar-flee gum appears to be at the peak

of its growth at around 95% penetration levels. Following developments in gum, other

69

sugar-free products are also increasing their share of the sugar confectionery category
(Candy Industry 07/98).

North European markets have higher levels of sugar-flee penetration compared to
the south due to successful positioning and product innovation. Nevertheless, the extent
of penetration is likely to be limited by one key factor. At present, children consume the
majority of regular sugar confectionery, whereas adults consume more sugar-free
confectionery. Although European adult populations are larger with more disposable
income, they consume fewer confections than do children. This should be kept in mind by
multinational confectioners that target the regional markets (Candy Industry 07/98).

Another pattern that confectioners should be aware of is that competition in these
mature markets has intensified. A few important players, such as, Nestle, Phillip Morris,
and Mars, dominate mature European chocolate confectionery markets. Future
acquisition opportunities may be much more limited. Nevertheless, a growing number of
joint venture and networking operations will develop between companies that operate in
diverse sectors. The sugar confectionery sector, on the other hand, is seen as still highly
segmented and fragmented, with numerous independent firms strong in their domestic
markets but weak elsewhere. A certain degree of consolidation in the sugar confectionery
marketplace is therefore viewed as inevitable (Candy Industry 07/98).

4.2.3. Eastern Europe

Eastern Europe has attracted many confectionery companies since the
implementation of market economies. The market for chocolate and confectionery

products in Central and Eastern Europe, including Russia, the Ukraine and the Baltic

7O

States, was estimated at $9.1 billion in 1995. Steady growth has been projected for the
next several years as economic conditions improve and personal incomes increase.

Traditions of Chocolate Consumption. Chocolate confectionery has a long history
in Eastern European countries. Several Eastern European countries were home to firms
with long traditions and experience in the manufacture of chocolate and confectionery
items. These firms, such as, E. Wedel in Poland, Krasny Oktyabr and Red October in
Russia, and Cokoladovny in Czechoslovakia, had well-established products and high
name recognition and appeal within their particular home markets, and in some cases,
well beyond.

86% of people in Poland regularly buy chocolate and related products despite the
per capita consumption still being low at 3.4 kg per capita compared to 5.3 kg in the USA
and about 8 kg in Germany and the UK (International Food Ingredients 05/99). Russians
are renown for their preference for chocolate products. With annual chocolate sales of
500,000 tons a year, Russia is already the third largest market in Europe after Germany
and Belgium (Financial Times London Edition 05/95).

Liberal Political Environment. The restructure of centrally-planned economies in
Eastern European countries provide favorable political conditions for multinational
confectioners to target this region of 400 million under-served consumers.

Before privatization, state—owned confectionery firms produced goods people
actually desired, and with secured markets and no competition, these firms typically
generated healthy revenues for their government. Like most other state-owned firms,
however, confectioners could rarely produce enough of what people wanted. Demand

exceeded what the enterprises could supply given the resources allocated to them by

71

inflexible state plans. As a result, the chocolate and confectionery markets in this region
were considered under-supplied.

With the fall of the communist regimes beginning in 1989, the privatization of
state-owned enterprises was a central element of the economic transformation efforts
undertaken in this region. Food and confectionery producers were among the better
performing firms in these economies and were among the first enterprises to be
privatized. Most of the governments actively sought out strategic western investors.
Privatization by partial sale to a foreign multinational was the dominant method of
privatization for chocolate and confectionery firms across the region. One study estimated
that 95% of changes in ownership of enterprises in the confectionery sector in Eastern
European between 1990 and 1995 involved foreign investment (Euro Food 12/95).

Emergence of Russian Middle Class. Russia has a large and well-educated
population of 150 million. Russian domestic savings have increased in 1994 from Rbs
5,000 billion in January to Rbs 20,000 billion by November. According to a study by
Mckinsey, the management consultants, at least 30 percent of the population earns more
than $200 a month. What really attracts the western consumer products company is the
emergence of a prosperous middle class. Typical of Russia’s new and growing middle
class are machine operators at Coca-Cola’s Moscow bottling plant earning $600 per
month. Because the costs of housing, public transport and other essential services are still
subsidized by the governments and are relatively low, a high proportion of middle-class’s
incomes is available for discretionary spending, such as, expenditure on confectionery. In
addition, the middle class is chiefly clustered in the big cities, which makes it easier to

target potential customers. The Moscow region contains 11 million consumers,

72

representing a bigger concentration of people than in the Czech Republic (Financial
Times London Edition 05/95).

Consumers ’ preferences for western food. The Eastern European consumer
market is taking on a recognizable western flavor, although average incomes are still
much lower than in Western Europe. Consumers in this region are very price-conscious
and consumer tastes are less sophisticated. Among the middle classes, however, there is
far more awareness of the health risks and benefits of certain types of food.

Russia’s demand for imported consumer-ready products is strong after decades of
centralized procurement practices and non-convertible currencies. In 1996, US. exporters
held about 12% of the Russian consumer-ready products market (Reid 1997). Russian
consumers overwhelmingly prefer western goods, imported or locally made, to products
made by Russian companies. Russians seemingly prefer the sugary chocolate of
manufacturers, such as, Mars and Cadbury, to the more bitter chocolates from Germany
and Belgium (Financial Times London Edition 05/95).

Growth of the Markets. According to Data-monitor, confectionery per capita
consumption has grown by a CAGR of 5.4 percent in the Czech Republic, 3.4 percent in
Poland, 2.8 percent in Hungary and 2.6 percent in Russia between 1993 and 1997.
Romania and Slovakia struggle to produce growth in confectionery categories. Across the
region, per capita consumption of gum has grown by a CAGR of 6.4 percent, sugar
confectionery by 3.3 percent, and chocolate by 2.1 percent over the same period (Candy
Industry 07/98).

Many companies have taken international brands into these markets; others have

acquired local companies and brands. During the last five years, Philip Morris has made

73

seven acquisitions, Nestle three, Cadbury and PepsiCo one each. Market penetration has
favored grth through acquisition rather than through internal development (Candy
Industry 07/98).

In Eastern Europe’s largest market, Russia, the comparative cheapness of
advertising, the low levels of consumption and the lack of strong domestic manufactures
have been the chief reasons attracting multinational confectionery giants. Nestle, now
owns a 49% stake in Russia Chocolate Co., one of the country's top chocolate
manufacturers and marketers. In 1995, Mars built an immense production facility near
Moscow to produce Snickers and Mars candy bars. Hershey is aggressively challenging
Mars' domination of Russia's chocolate bar market through TV ads for its Hershey
Peppermint Patties, Twin Wafer, and other brands. Cadbury launched its dark chocolate
countline brand extension. Additionally, Cadbury has specifically developed two new
products to appeal to local tastes and identity.

95 percent of Russian chocolate market volume, however, comes from traditional
box chocolate sold through specialty outlets, which is dominated by local companies
owned by local banks. Multinationals will be hard pressed to reshape segment preferences
within the chocolate category (Candy Industry 07/98).

4.2.4. Latin America

Latin America is the most developed and industrialized part of the third world and
has been a traditional target of American confectioners. Nevertheless, political-economic
crises and currency devaluation have made foreign investors cautious. With economic
reforms, South American governments have made progress towards a more favorable

economic climate to confectioners. Regional inflation rates have become more stable,

74

except for Argentina. The largest volume growth opportunities in the region lie in
Brazilian chocolate, Colombian gum, and Chilean sugar confectionery (Market Latin
America 11/97).

Instability of Economic Conditions. The conditions of the confectionery industry
in Latin American nations vary considerably, partly as a reflection of prevailing economic
conditions in each country. Although the majority of Latin American nations have
instituted economic stabilization initiatives, many of them are still experiencing
difficulties in transitional times. Mexico has been struggling through economic problems
caused by massive currency devaluation and inflation in the mid-19908. Among Latin
American countries, confectionery consumption of Mexico decreased the most in market
value terms at a CAGR of -9% from 1994 to 1998. Venezuela and Columbia, feeling the
pressure from economic and political instability as well, also registered negative growth
rates in the period. This pattern of progress accompanied by periodic setbacks is likely to
continue well into the next century. The most important story in the region was Brazil, a
nation with a massive population backed by immense natural resources. Although Brazil
has experienced some economic growing pains in the past year, the 1994 economic
reforms (the Real Plan) continue to bolster the Brazilian economy.

Stable economic conditions are particularly important in consumer goods markets,
many of which are highly sensitive to prevailing economic conditions.

Reduction of Trade Barriers and Integration of Economies. South American
countries want to reduce trade barriers and integrate their economies closely together.
Previous attempts, for example, the Latin America Free Trade Association, have failed in

the past, but Latin American countries are making more efforts toward integrating their

75

economies. Governments have agreed to a tariff-cutting program in order to boost
exports. Brazil and Argentina have been gradually reducing tariffs since 1987 and in the
meantime their trade has risen from $1.35 billion to $2 billion (Euro-monitor 1992).

Mexico joined NAFTA in 1992. The NAFTA integration created demand for
confectionery within the bloc which in turn created higher sales for those companies
positioned within the NAFTA arena. Additionally, consolidation of North American
operatiOns occurred in the confectionery industry owning to the free flow of products and
capital across borders (Candy Industry 01/99).

The potential of South America’s markets are brighter than in decades and
foreigners will have better access than ever before. Traders will be able to choose from a
normal range of options in their dealings with the region’s economies, including direct
investment, joint ventures or other collaborative arrangements or exports (Euro-monitor

1992)

76

Distribution of Incomes. One characteristic of Latin American markets that
distinguishes them from those in Asia results fiom the pattern of income distribution. The
middle and upper income classes account for only a small portion of the total population
but a very large portion of total income and wealth. These groups are also heavily
concentrated in the large cities. Thus a large amount of a country’s total purchasing power
is found in markets that are small geographically. These conditions are ideal for selling
high-priced products aimed at the affluent. F inns can often focus on only three or four
cities and account for 70-80% of a national market (Euro-monitor 1992). In addition, the
affluent classes have a strong preference for imported products, which create a potential
for westem-branded consumer goods, such as, confectionery.

Variation of Product Preferences According to a market report released by Data-
monitor, substantial growth exists for the confectionery industries of Brazil, Chile and
Colombia. Nevertheless, although growth will occur in each of these countries, different
consumer tastes will drive sales in different categories. In Brazil, for example, strongest
growth is expected in sales of chocolate. In Chile sugar candy is expected to grow most,
whereas gum will be the leader in Colombia (Market Latin America 11/97).

During the past decade, the Brazilian market has evolved from having the lowest
per capita confectionery spending to the South American leader. Annual per capita
spending on confectionery products has risen tenfold since 1992, from US $2.1 to US
$24.3, and total annual expenditures on confectionery products in Brazil now outweigh
the consumption in Colombia, Mexico, Peru, and Venezuela combined. Consumption of
chocolate has increased 12% annually since 1993, partly because lower inflation and

stable prices have made chocolate confectionery more affordable in recent years.

77

Increases in consumption of chocolate products in Brazil have been led by the grth in
sales of assorted box candies. Sales in this sub-segment total over US$800 million per
annum. Brazilian manufacturer Garoto holds a 37% retail value share in this niche.
Multinational confectioners, Nestle, Phillip Morris, and Ferrero are also fighting for
shares in this significant market of South America (Market Latin America 11/97).

Chileans have demonstrated a preference for sugar candy. They consume about
2.86 kgs (6.3 lb) of this product per capita each year. Consumption in this segment has
increased 4.9% annually since 1992. Local companies Ambrosoli and Dos en Uno each
have about 40% market share. Other producers include Fruma and Calef with market
share of 8.5% and 3.5%, respectively. The only multinationals to penetrate Chile’s
confectionery market have been those which were already established in another market
sector and they holds a 6.8% retail market value share for sugar confectionery as well
(Market Latin America 1997).

Growth of the Markets The standard of living in many of Latin American markets
has been improving, which has significantly spurred candy consumption. According to
Data-monitor, the global market research consultant agency, Brazilians consume 5.18 kg
of confectionery each year, with growth of chocolate volume higher than other
confectionery sectors. Chile follows, with annual per capita consumption per capita at

3.71 kg, then Argentina with 2.47 kg (Table 4-2).

Table 4-2: Latin American Markets 1997 Confectionery Consumption

78

 

Country 1997 per capita consumption CAGR (1993-1997)

Argentina 2.5 -2.8°/o
Brazil 5.2 9.1_‘V_o
Chile 3.7 4.3%
Colombia 1.3 -O.5°/o
Peru 0.8 -0.9%
Venezuela 1 .2 -4.7%

 

Source: Candy Industry July 1998

Brazil's large population and growth in consumption of confectionery makes it an
exciting market in the region. From an economic perspective, reforms have been designed
to create dynamic and sustainable economic development. The value of all sectors of
Brazil's confectionery market has increased by over 9.1% annually since 1993. Euro-
monitor expects Brazil to experience the strongest growth in both value and volume of
chocolate confectionery sales by 2001, when sales will be valued at US$66 million, with
a total of 692,000 tons consumed (Market Latin America 06/98).

I Chile and Argentina recorded the second-and third-highest per capita consumption
levels, with 3.7 kg and 2.5kg, respectively. At the bottom of the rankings were Peru and
Venezuela, two countries in which the hot climate complicates storage of chocolates. In
these hot regions, ice cream poses strong competition for the confectionery industry
(Market Latin America 06/98).

The South American confectionery market is dominated by a handful of
multinationals such as Wrigley, Nestle, and Warner Lambert. When combined with North
America, it becomes the world's largest confectionery market, enjoying the highest
amount of commodity and mass pricing in the world. Although Brazil's chocolate per
capita consumption grth is high, three companies, Nestle, Garoto, and Lacta had a
combined 93 percent share in 1997, creating a huge barrier to new entrants. In sugar

confectionery, the category is highly fragmented. Apart from Nestle, with a value market

79

share of 46 percent in 1997, the remaining companies had a maximum share of 7 percent.
The structure of competition allows easier access to the market, and many firms have
developed niche positions within this huge country. Chupa Chups confections launched
its portfolio of sugar confections, and Mars launched Starburst F ruspiral, both in mid-
1997 (Candy Industry 07/98).

Nestle has invested considerably in the expansion of its interests in the markets of
Latin America in the last few year. While Mexico remains the most important of these,
the company has also acquired smaller companies or set up subsidiaries in several of the
smaller countries in the region. One of the main reasons for the regional interests is that
Nestle wants to use alternative suppliers of coffee beans and to reduce its dependence on
major suppliers such as Brazil. In Mexico, Nestle has expanded its chocolate market
value share from 6.8 percent in 1994 to 26.9 percent in 1996 through acquisition. U.S.
confectionery leader, Hershey entered Mexico in 1969 with the acquisition of 50 percent
of National de Dulces. The company's products are marketed under the US. company's
names, in line with the international branding philosophy of the company (Candy Industry
07/98).

4.2.5. Summary of Regional Market Analyses

The Asia/Pacific market, although characterized by unstable financial conditions
and market variations, provides confectioners with significant opportunities as a result of
increased incomes, reduced import duties, and high market growth rates. The western
European market is a mature market with intense competition from entrenched
competitors. Confectioners are targeting growing niches, such as, sugar-free and

functional confections, to exploit the market with high income and stable economic

80

conditions. East European consumers prefer western sweets and have a long history of
chocolate consumption. Emergence of a Russian middle class suggests increased
purchasing power of consumers, and the liberal political environment firrther facilitates
consumers’ access to foreign confections. These factors resulted in the high confectionery
consumption grth in this regional market. Although preferences of Latin American
consumers and growth segments of the market vary across countries, the concentration of
incomes, reduction of trade barriers, integration of economies, and high grth rates
attract multinational confectioners to participate in these significant markets.

In summary, different emerging markets have similar characteristics: liberal trade
environment, increase in incomes, the emergence of middle class income groups,
customer preference for western consumer goods, and high growth rate of confectionery
consumption. Also there are variations among emerging markets and between emerging
markets and the mature western European market (Table 4-3). This implies that
multinational confectioners should select international markets according to their

strategic significance to their businesses.

81

Table 4-3: Characteristics of International Confectionery Markets

 

 

 

 

 

 

Characteristics Asia/Pacific West Europe East Europe Latin America
Consumer Increases in High income Emergence of Concentration of
Incomes Russian middle incomes
class
Confectionery Dominance of Preferences of 1. Consumers’ Variations of
Preferences sugar-free preferences for product
confectionery products western sweets preferences
2. Strong across countries
traditions of
chocolate
consumption
Product Life Variations across Mature markets Growth markets Growth markets
Cycle
Microeconomic Reduction of Strength of Liberal political Reduction of
Environment import duties European Union environment trade barriers and
integration of
economies
Business Risk Instability of Instability of Instability of
financial markets Competition economic economic
conditions conditions

 

82

Chapter 5 Global Product Strategy for Hershey Foods

This chapter focuses on the analysis of global strategy levers (global market
participation and global products) based on Yip’s global strategy framework. Drawing
upon the chapter 4 results concerning the results of industry globalization drivers and the
regional confectionery markets, globally strategic markets are analyzed and selected for
Hershey. Keegan’s global product strategic alternatives method is then used to formulate
ideal product strategies for these strategic markets. Moreover, Hershey’s experience with
internationalization and current product strategies are critiqued and recommendations for
change are proposed. Finally, benefits and costs of a global strategy and Hershey’s ability

to implement such a strategy are evaluated.

5.1 Approach to Analysis
As shown in Chapter 4, the confectionery industry globalization drivers indicate
that global strategy makes sense for firms in the confectionery industry. Furthermore, the
Chapter 4 overview of the international confectionery market situation built a foundation
for selection of international markets and successful selection of global product strategy.
Specific market opportunities and specific strategies must now be selected for
Hershey. Yip argues that international markets should be selected based on their global
' strategic significance (large sources of profits and revenues, significant markets of global
customers, significant markets of global competitors, home markets of global
competitors, and major sources of industry innovation). Once these markets have been
identified for Hershey, Hershey then needs to formulate global product strategies

appropriate for these selected markets in order to achieve the benefits of globalization. As

83

mentioned earlier, Keegan’s global product strategy alternatives (Table 2-1, p19) are
applied in this study to identify product strategies for Hershey, evaluate the company’s
current international product strategy, and formulate recommendations for its future.

The rationale behind Keegan’s global product strategy alternative is to match
products and markets. The product is defined in terms of the function or need it serves,
and the market is defined in terms of the condition under which the product is used,
including the preferences of potential customers and the purchasing power relative to the
products in question (Keegan 1969). In addition, ability to buy was included in the model
to introduce the case of a product need in a country at an early stage of development
where there is a limited ability to purchase (Keegan 1995). Furthermore, costs of
adaptation and manufacturing should also be considered. Companies should take into
consideration all of these factors to find the optimal global product strategy.

5.2 Selection of International Markets

Participating in the right countries at the right level provides the foundation for a
successful product strategy. In a global strategy view of market participation, country-
markets are not selected by their stand-alone attractiveness. Instead, they are selected on
the basis of their potential contribution to globalization benefits and to the global
competitiveness of the business (Yip, 1992).

To have a global level of market participation requires a significant global market
share, a reasonable balance between the business’s geographic spread and the market’s
spread, and presence in globally strategic country-markets. Such country-markets are
important beyond their stand-alone attractiveness. Criteria for selecting a globally

strategic market are: 1) large resource of revenues or profits, 2) home market of global

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competitors, 3) home market of global customers, 4) significant market of global
competitors, and 5) major source of industry innovation. To be qualified as a globally
strategic market, a country has to meet at least one of the above criteria (Yip 1992).

Asia-Pacific markets are qualified as strategically significant markets because they
are large sources of revenues and profits, and significant markets of competitors. As
mentioned in Chapter 4, large populations, increased incomes, and the increasing appeal
of western quality products to Asian customers boosted consumption of confectionery
products, and provided large revenues for multinational companies. Although the
financial crises negatively affected multinational confectioner’s confidence in this
regional market, major confectioners, such as, Cadbury, Nestle, Lotte and Wamer-
Lambert, still treat this regional market as a priority to explore in the long run. The
Chinese market, which seemed to escape the regional financial crises, has become a
significant battleground for multinational confectionery giants.

Western Europe, although highly concentrated with high barriers for potential
entrants, is the home market for Hershey’s competitors and the major source of industry
innovation. These factors qualify the mature western European markets as globally
strategic markets for Hershey. Most of Hershey’s key competitors originated from Europe
and have significant market share in western European markets. For example, Nestle is a
Switzerland confectionery company, Cadbury originated in the UK, and even Mars,
know as a US. confectionery giant, first expanded its business successfully into European
markets. Nestle and Freia Maribou are entrenched in European markets just as Hershey is

in the US.

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In addition, most of the confectionery industry innovations are originating from
Europe, and major competitors learned their major technologies of product development
by competing with each other. “When I think about chocolate, I think about Mars and
Phillip Morris,” said Helrnut Maucher, the CEO of Nestle. Although Nestle is competing
with Hershey in North American markets, Hershey’s lack of success in European markets
keeps it from being on Nestle’s top competitor list.

Eastern European markets are strategically important for Hershey because they
have large sources of revenues and profits and are significant markets for Hershey’s
global competitors. Consumers’ preference for western confectionery products and the
emergence of a middle class in this region indicate that consumers have both willingness
and ability to purchase western confectionery products. Meanwhile, the privatization of
state-owned firms creates a liberal environment for foreign investors. Multinationals’
participation and investment, in turn, boosted the production, marketing and consumption
of the potential growth markets. For example, huge foreign investment has been infused
into Poland in building both production plants and developing sophisticated marketing
due to the lower costs of production and advertising in Poland versus countries to the
west. As a result, Poland domestic production increased six-fold between 1990 and 1998
and continued to grow at about 20% per year (International Food Ingredients 05/99).
Overall, Eastern Europe recorded the fastest regional grth rate of per capita
consumption of confectionery between 1993 and 1997, with a 3% compound annual
growth rate (Candy Industry 07/98), which makes this regime large source of revenues

and profits for confectionery manufacturers.

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Hershey’s major competitors all treat this region as their significant markets for
expansion. Mars is one of the first multinationals to move into Russia on a large scale and
is producing chocolate from a $150 million plant in Stupino, outside Moscow. Despite
some setbacks, it still plans to invest $500 million at the site to start manufacturing pet
foods, ice cream and sauces. Cadbury Schweppes is also committed to building a
chocolate plant near St Petersburg while Nestle has bought a 49% stake in a
manufacturing enterprise in Samara (Financial Times London Edition 05/95). In addition
to the Russian market, many multinationals also saw Poland as an export base for the rest
of Europe, including both Central and Eastern Europe, and the European Union to the
west. In Poland, Cadbury, Mars and Nestle compete in the mid-price range. There is also
a small market for higher quality products by companies such as F errero, Lindt and
Sprungli (International Food Ingredients 05/99).

The Latin American market is qualified as strategically significant market for
Hershey because it is a large source of revenues and profits and has significant markets
for Hershey’s competitors.

As mentioned in Chapter 4, Latin American governments are making efforts to
control inflation and reduce tariffs, which play important roles in consumers’ purchase of
price-sensitive confectionery products. For instance, in Brazil, the 12% increase of
chocolate consumption partly results from the Brazilian govemment’s effective control
over inflation. In addition, concentration of high-income population in this region further
makes it easy for multinational confectioners to target the markets. The above factors
facilitate the growth of Latin American confectionery markets and make the region a

potentially large resource for revenue and profits for confectioners.

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Multinational confectionery giants, such as, Mars, Nestle, all established their
presence in markets with strategic importance to their operations and expansion. For
instance, Mars, Nestle and Hershey are fighting for market share in Mexican markets
because of its integration into NAFTA and its great grth potential. In addition, some of
the Latin American countries, such as, Brazil and Mexico, are input suppliers for
multinational confectioners, and thus participating in these markets is particularly
important to multinational confectioners’ global integration of value chain activities.

The above analysis indicated each region is qualified as a globally strategic
market for Hershey but for different reasons. It is important for the corporation to select
globally strategic country markets in each region to achieve the benefits of global market
participation.

Improving its performance in Asian/Pacific markets can enable Hershey to exploit
economies of scale, lower its worldwide cost, and generate cash flow to subsidies other
markets. Furthermore, the presence in significant markets of competitors can help
Hershey to learn the skills of confectionery product development and innovation from its
competitors.

By participating in western European markets, the home/significant markets of
competitors and primary source of innovation, Hershey can catch up with its competitors’
skills in technology and product development and facilitate its firrther participation in
international markets.

Exploiting the grth potential of Eastern European markets can enable Hershey
to supplement flat sales and low grth rates of the domestic market over the long run.

By participating in this regional market, Hershey Foods Corporation can further learn

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from its global competitors, such as Mars, Cadbury, and Nestle, how to operate in a
growing and risky environment, and monitor competitors’ product development. In
addition, the geographic proximity of Eastern European markets to western Europe also
can contribute to Hershey’s process of learning good practice and tracing its competitors’
global moves.

Hershey Foods Corporation has realized the significance of Latin American
market and set this region as its priority. Recently, Hershey has been busy buying and
developing candy that can stand the heat, e. g., the hard candies Jolly Rancher and

Tastetations, for Latin American market.

5.3 Discussion of Ideal Global Product Strategies for Hershey

An ideal global product has maximum worldwide acceptance with minimum local
adaptation. A fully standardized product that is identical all over the world, however, is
very rare and hard to attain. Standardization occurs along a continuum. The benefits of
global products can be achieved by standardizing the core product or large parts of it
while customizing peripheral or other parts of the product (Yip 1992).

In the methodology chapter (Chapter 2), three global product strategic alternatives
(extension, adaptation, and creation) were identified based on product function or need
satisfied, conditions of product use and ability to buy (Keegan, 1969,1995). Packaged
food companies are often addressing the same product need, but must adapt to different
preferences in taste. For example, a company marketing ketchup must adapt the
sweetness of its product to conform to tastes in different countries. Soft-drink companies

must also adapt to different preferences for sweetness (Keegan 1995). The identified

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globally strategic markets for Hershey have the same product function or need satisfied,
but different conditions of product use @references of potential customers and the
purchase power for products in question). From Asia to South America, people buy
confections as snacks, treats and gifts to satisfy their taste needs and psychological needs.
Nevertheless, consumers in different regions prefer different types of confections and
different tastes of the same confections. Furthermore, income levels and product
distribution conditions vary considerably from mature markets to developing markets.
These differences in the conditions of product uses require that Hershey employ different

global product strategy alternatives for different markets.

5.3. 1. Asia/Pacific Markets

Tastes and preferences of Asia/Pacific consumers are different from those of
American consumers, and thus product adaptation is required. Asian/Pacific consumers
prefer sugar-based confections to chocolates due to the diet traditions and the conditions
of distribution. Hershey, however, is stronger in its chocolate products than sugar-
confections. Non-chocolate candy comprised only about 10% of volume for Hershey in
1996 (Snack Food, 1996). In order to quickly establish market share into the Asia/Pacific
area, Hershey needs to develop and market more popular sugar-based confections for
local markets rather than assuming chocolate appeals to consumers in the same way all
over the world.

Furthermore, Asian/pacific consumers in general prefer a less sweet version of
US. confections. Salty food is dominant in their diet and when consuming sweets, and

consumers prefer confections with less sugar and fewer calories (Candy Industry 11/96).

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Confections of Hershey satisfy the tastes of American consumers, but they are too sweet
for consumers of the Asia/Pacific region. This makes Asian/Pacific consumers reach their
saturation points with only a small amount of intake, which in turn can significantly
reduce confectionery sales in this region. Therefore, adapting the tastes of confectionery
products to local needs is necessary for Hershey's expansion into Asia/Pacific markets.

The conditions of distribution channels in the Asia/Pacific region also require
product adaptation. Most confectionery retailers in these markets are not equipped with
refrigerators, which causes serious problems for the storage of confectionery, especially
for chocolate products. Therefore, to solve the problems of inferior distribution to that of
the US, Hershey has to market more heat-enduring products in order to maximize both its
product available seasons and spaces.

Also, lower income levels in the Asian/Pacific area and the gift association nature
of confectionery also call for Hershey Foods Corporation to adapt both its product sizes
and packaging in this regional market. Although increasing, average income is still much
lower in this regional market than that of the US. For example, in China, Asia’s largest
market, annual average incomes in urban areas are only US$622 (China Business
Review). Therefore, in order to make its products affordable to a broader consumer base,
Hershey needs to either lower its prices or change sizes of its product packaging.
Moreover, the gift and treat-oriented nature of confectionery products in most of the
Asia/Pacific countries indicates that product packaging should be appropriate to give as
gifts. For example, in the Chinese tradition, candies are gifts and treats for guests at
weddings. These gift candies are also called “xi tang” or “happy candy”. These candies

are usually wrapped in either red or gold with the Chinese character for double happiness

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as its central design element (Moustakerski 1999). If Hershey wants to target this niche,
the corporation hasto change its product packaging design correspondingly to events
such as weddings and New Year.

Hershey needs to adapt both its product mix and content to local customers. More
specifically, marketing more non-chocolate than chocolate products in the region and
adapting its products to local taste may generate more favorable outcomes. Meanwhile,
Hershey also needs to bear in rrrind that there is a common need in the fragmented
Asia/Pacific markets: consumers want confectionery to satisfy their desire for sweets. The
corporation should identify the basic needs of the most important markets and adapt
accordingly rather than trying to develop and market new products for each country-
market.

Communication strategy is similar to that of the US. market. Confectioners
should advertise the products as gift or fun food to eat. In addition, they also should
emphasize the nutritional and psychological attributes of confectionery products to
educate Asian consumers on the tastes of chocolates, the benefits of its milk content and
when the products should be eaten. Combining product adaptation and communication

extension strategy is what Keegan referred to as his product strategy 3 (Table 5-1).

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Table 5-1: Lists of product strategies for international markets

 

Keegan
Strategy
Number

Product need
or use
satisfied

Conditions of
product use

Product
strategy

Communic
ation
strategy

 

Asia/Pacific

3

Same

Different tastes and
preferences

 

Inferior
distribution
channels

 

Lower income
level

Adaptation

Extension

 

Eastern
Europe

Same

Lower income
level

 

Inferior
distribution
channels

Adaptation

Extension

 

Latin
America

Same

Fragmented
preferences and
tastes

 

Inferior
distribution
channels

 

Lower income
level

Adaptation

Extension

 

 

Western
Europe

 

 

Same

 

Same

 

Extension

 

Extension

 

5.3.2. Western Europe

The consumer tastes for chocolate in Western Europe are quite different fi'om the

US, although the ability of purchasing and conditions of distribution channels seem to

be similar to US. markets. Hershey, which is synonymous with chocolate in the US,

does not seem to successfully appeal to the tastes of western European consumers. To

European consumers, Hershey chocolate tastes stale and does not have the melting tastes

of European chocolate (Joel G. Brenner, 1999).

The different preference for chocolate products, however, does not seem to have a

direct effect on Hershey’s selection of product strategy. Western European chocolate

segments are highly concentrated with Hershey’s competitors, whereas the sugar

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confectionery category is relatively fragmented. Hershey should avoid the intense
competition in the chocolate segments and target the fragmented sugar-confectionery
segments. Similar to US. consumers, the aging and health-conscious consumers in
western European markets also prefer sugar-free and functional candy products. So the
conditions of product use are the same as that of the US. The commonalties between
western Europe and US markets would allow Hershey to leverage its successfully
developed sugar-free products such as SweetEscape into mature western European
markets with little adaptation and exploit the benefits of cost saving fiom the use of
global product strategy.

In addition, due to the same demand for sugar-free and functional candies between
Western Europe and the US, the communication strategy should be an extension of that in
the US. Therefore, the suggested product strategy is Keegan’s product strategy 1, product-
communication duel extension (Table 5-1).

5.3.3. Eastern Europe

In contrast to Asian/Pacific markets, the emerging Eastern European market has a
long history of chocolate consumption, as evidenced by well-established local brands.
Consumers in this region have had strong demand for western confections alter
privatization. In particular, Russians seem to favor the sweet confections from US.
confectioner Mars rather than the bitter confections from German and British
confectioners.

Although middle-class consumer groups are emerging in this region, average
income levels are still much lower than those of the US. For example, only one third of

Russians eam a monthly income of more than $200. Consumers are very price-sensitive

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and their tastes are less sophisticated than those of consumers in mature markets.
Consumers frequently buy small quantities of confectionery products, which directly
contributed to the significant differences between the purchasing practices of wholesalers
and retailers in this area and those in the US. The quantities of confections that
wholesalers/retailers want to purchase are smaller than those U.S. confectioners are
accustomed to selling (Susan Reid 1998). In order to build a presence in the fastest
growing regional markets, Hershey needs to adapt its product packaging sizes, similar to
the strategy for Asia/Pacific markets to make its product available to a broader consumer
base.

More importantly, lack of distribution control in Russia has facilitated the growth
of counterfeit goods (Reid 1997). This makes western branded confectioners suffer dearly
because counterfeit goods destroy the credibility of branded confectionery. Therefore it is
crucial for Hershey Foods Corporation to develop unique, hard-to-copy packaging
designs to signal its products properly.

Another problem faced by the confectionery industry is that many wholesalers and
retailers do not have cold storage facilities and can handle only dry goods (Reid 1997),
which causes problems for the storage of chocolate products and again raises the issue
that Hershey should market more heat-enduring products in this region.

The above adaptations needed on product packaging and mix are peripheral
compared to the commonalties of tastes and preferences between eastern Europe and US
markets. Hershey should market its power brands into this region while making necessary

adaptations on product packaging for local markets.

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Because of the product function or need satisfied by confectionery products in
Eastern European markets are similar to those of the US, a communication-extension
strategy is recommended. Hershey can use universal advertising and promotion themes to
market its confectionery products as snacks as it has done in the US. market. Keegan’s
product strategy 3, product-adaptation and communication-extension, is recommended
(Table 5-1).

5.3.4. Latin America

Latin American consumers also have a long tradition of confectionery
manufacturing, reflected by decades-old histories of such companies as Garato of Brazil,
Arcor of Argentina, and Dos En Uno, Ambrosoli, and Hueck of Chile.

Preferences and tastes of Latin American countries, however, are fragmented.
Different countries in Latin American region prefer different confectionery products. For
example, Brazilians seem to prefer chocolate products to other sugar confections;
Chileans want sugar confectionery products to satisfy their sweet teeth; whereas gums
spur the most confectionery consumption in Colombia. This theoretically requires a mix
of product portfolios to target this regional market. Nevertheless, although chocolate per
capita consumption in Brazil is high, three companies, Garoto, Lacta and Nestle had a
combined 93% share in 1997 (Candy Industry 07/98), creating huge barriers to new
entrants, such as, Hershey. Therefore, as in western European markets, Hershey may be
better off by targeting the fragmented sugar confectionery segments in Brazil. Thus sugar
confectionery rather than chocolate products, including non-chocolate products and gums,

should be Hershey’s primary product category to penetrate in Latin American markets.

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Furthermore, successfirl stories of local confectionery companies indicate that
consumers in this region prefer low fat and less sweet confections. Garato, a family
owned Brazilian chocolate company, competes with global confectionery marketers
Nestle and Philip Morris Corporation in Latin America. One of the unusual advantages
Garato has over its more worldly rivals is that its chocolate products are deliberately more
resistant to melting in a hot climate due to low fat content and less sweetness. Now ’
Garato controls 45% of Brazil’s fastest growth chocolate markets (Advertising Age
09/97).

In Latin American countries, the real income level is still lower than that of the
US. This also creates difference in the conditions of product use, and thus requires
product adaptation. Also, in Latin America’s significant Mexican market, national
manufacturers control 96% of the gum market and 70% of the chocolate market in 1996
because of the high prices of imports, and the greater availability and lower prices of
domestic goods (Candy Industry 01/99). In many Latin American countries, sugar
confectionery’s popularity is due to its low-cost and its appeal to the very young, who
have not yet fully developed a taste for chocolate. Moreover, low to moderately priced
sugar confectionery were also least affected by the economic crises in Venezuela and
Mexico.

Finally, non-refiigerated distribution channels, which are rampant in this region,
require product adaptation as well. For example, In Mexico’s confectionery segment,
particularly in sugar confectionery, street vendors, kiosks, and small shops are the
dominant channels. Although supermarket retail share continues to rise in value as

Mexico's retail structure becomes more advanced, traditional Mexican street vendors are

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still immensely popular. They generally sell cheap, low-quality products and own non-
refiigerated shops (Candy Industry 01/99). This causes similar distribution and storage
problems to Asia/Pacific markets for multinational confectioners.

The above analysis indicates that product adaptation is necessary for Hershey
Foods Corporation to penetrate Latin American markets. Hershey needs to market more
sugar-confectionery categories in this region, adjust the degree of sweetness and fat
content in its chocolate products and develop heat—enduring confections with local tastes.
More importantly, changes of product sizes are necessary to make products available to a
broader consumer base. Despite their differences on tastes, income and distribution,
however, common customer needs between Latin American consumers and American
consumers are dominant, which indicates Hershey should use global product strategy
while customizing to local needs.

Communication strategy should be extension from US. markets because sugar
confectionery will still be advertised in this region as snack-oriented food similar to the
US. The suggested product strategy is then the same as in East European markets,
Keegan’s strategy 3, product-adaptation and communication-extension.

In summary, the differences of conditions of product use in the emerging markets
of Asian/Pacific, Eastern Europe and Latin America favor Keegan’s product strategy 3:
product adaptation and communication extension. The similarity of product need or use
satisfied and conditions of product use between Western European markets and US.
markets suggests that Keegan’s product strategy 1, product and communication duel

extension, is appropriate to this regional market (Table 5-1).

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5.4.1 Review of Actual Hershey Product Strategies

5.4.1. History of Intemationalization

Hershey Foods Corporation has not gained much success in its international
market expansion. The corporation’s sales outside North American markets only
accounted for 4% of 1997 sales (Patriot-News, 1998). Historically, Hershey missed two
significant opportunities to expand its business worldwide. The first opportunity occurred
after World War H. The war made Hershey famous from Japan to North America, to Paris
and London. In addition, Europe's candy business was seriously destroyed by the war and
Hershey had one of the only fully operational chocolate factories in the world in 1945. All
these provided perfect timing for Hershey's international expansion. Nevertheless,
Hershey's management failed to recognize the tremendous opportunities present and
decided to focus on meeting domestic market needs.

Hershey was given a second great opportunity to develop its international markets
in 1969, when the executives of the European confectionery giant, Cadbury, came to the
United States to look for a merger partner. Hershey's management was very optimistic
about this merger. However, the cocoa price fluctuation in the early seventies finally
forced Hershey to retreat from this merger and thus Hershey lost its second chance to
expand its business globally (Brenner 1999).

Hershey later attempted to expand its business into international markets several
times, but ended up with a series of failures. Foreigners simply rejected Hershey's
chocolate flavor. For example, in Canada, after Hershey invested millions of dollars to
improve the Hershey flavor at its Smith Falls plant, the company learned that Canadian

consumers did not share the tastes of US. consumers. In addition, in Mexico, although

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Hershey had been selling its products for decades, Mars' market share surpassed
Hershey's the first year it entered the market. In 1979, Hershey entered an agreement with
a Japanese company, Fujita, to import, make and sell Hershey products. But the
confectionery company never had much success and Mars again surpassed Hershey in the
Japanese market (Brenner 1999).

In the early 1990s, the company ventured with high hopes into Western Europe,
where people eat more candy than anywhere else in the world. Hershey bought a German
firm and an Italian candy company, but lost to Philip Morris in a bid to acquire a bigger
market player, Freia Maribou of Norway. After years of disappointing results, Hershey
found itself unable to compete in the European markets and in 1996, sold its European
facilities for a loss of $35 million. Hershey has since exited from Europe. Europe proved
to be a tough market for a newcomer due to the intense competition from entrenched
candy giants, such as, Freia Maribou and Nestle. Currently, Hershey is focusing on Latin
American markets, where standards of living are increasing and competition is less
entrenched. Hershey recently has been busy buying candy that can stand the heat. Hard
candies, e.g., Jolly Rancher and TasteTations, are examples of this.

As pointed out by Brenner (1999), failing to find the right match between markets
and products explained Hershey’s failure in international market expansion. The flavor of
Hershey’s chocolate appealed to US. consumers, but not to most of Hershey’s
international markets, including its neighbor Canada. A Hershey Bar is stiff and it doesn't
melt like a European chocolate. Instead of expecting consumers to adopt the corporation’s
products, Hershey should first take into consideration different tastes and use product

adaptation and communication extension strategies.

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Another reason, as pointed by Brenner, that may cause Hershey's international
market failure is the corporation's management mindset. The management team does not
have a good understanding of the world market, and Hershey had no market research
division until thel970's.

5.4.2. Review of Product Strategies of Hershey Foods Corporation

Historically Hershey has not been aware of the significance of achieving a global
market share and global balance and of the importance of globally strategic markets.
Although its foreign market penetration is increasing, its market participation is relatively
unbalanced. As the North America confectionery leader, Hershey only ranked fifth in
global market sales in 1997 (Travel Retailer International 1998), and the company
continues to focus primarily on the North American market through acquisitions and new
product development.

Since the 19808, Hershey has gained a dozen successful products in the US
markets through acquisitions. Among them are Mounds, Almond Joy, Reese's Peanut
Butter Cups and Jolly Rancher. In the 908, Hershey has introduced a series of successfirl
products in domestic market such as bite-sized Hershey’s Kisses with almonds and the
Jolly Rancher Lollipop. Nevertheless, most of the products are simply line extensions and
changes in packaging.

Although Hershey Foods Corporation exports to about 90 countries in the world,
its sales outside North American markets are very modest at about $150 million a year,
accounting for less than 4% of the company’s total 1997 sales (Brenner 1999).

In terms of the use of global product strategy, as mentioned in Chapter 4,

Hershey’s major competitors in the confectionery industry all use global product strategy

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to a certain degree. Nestle closely follows world consumption trends and develops
products to meet consumer needs, and Mars markets about the same range of core
products worldwide with a certain adaptation to local needs. Until 1993, Hershey had not
started using global product strategy. Ignoring high product development cost and market
share gain, Hershey still works hard to capture market share in the mature North
American markets by introducing new brands. Hershey's management strongly believes

’ that only new varieties can stimulate consumption and tries to get as many new products
on the shelf as possible.

In contrast to the other major players, Hershey does not rely on a few hard core,
global products to build market share in new markets. In Mexico, particularly, Hershey
abandoned a standardization strategy. The joint venture between Hershey and a local firm
in 1966 produced 12 Hershey products and Hershey International exported an additional
14 products for the national market. Nevertheless, Mar’s approach of direct control of
manufacturing and reliance on a few standardized products has been more successful in
markets worldwide (Yip 1991).

Since 1993, Hershey has reengineered the way it makes chocolate. The
corporation reorganized its North American operations into one single entity (Hershey
Chocolate North America), rolled out four major new product lines, and partnered
internally and externally to extend its world famous confectionery brands. In 1996,
Hershey acquired Henry Heide, Inc., a non-chocolate candy manufacturer and ventured
into the hard candy market for the first time with the introduction 'of TasteTations.

In 1997, Hershey started taking the strategy of building six global brands in its

most promising markets, Latin America, Asia, and the Middle East. These brands are

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Hershey's Kisses, Nuggets, Cookies 'n' Creme, Hershey Syrup, Pot of Gold and Reese's.
Hershey, whose domestic stars are its Reese’s candies, does best internationally with
Kisses, particularly made with the creamier chocolate that European candy makers
developed. The Corporation is dedicating most of their marketing and sales efforts toward
these global brands.

Today Hershey International is active in approximately 50 countries among the 90
countries to which they export, with its primary focus in Latin America, Asia, and the
Middle East. Over the past year, it especially has concentrated on building its business in
Japan, the Philippines, South Korea, Greater China, Brazil, Venezuela, Israel, Peru and
Australia. Despite the corporation’s interest in boosting its international candy business,
Hershey Foods Corporation nevertheless decided against buying or building plants in
Russia for the time being, given the difficulties other US business are encountering there.
As part of Hershey’s initiative to expand into Latin American market, though, the
company signed a distribution agreement in Brazil in 1998.

5.5 Recommendations for Changes

The above analysis indicates that Hershey should undertake the following actions

to assure its future success in international expansion.

Selection of globally strategic markets is the first step Hershey Foods Corporation
should take when considering global expansion. Instead of focusing on gaining market
share in North American markets, Hershey Foods Corporation should aim to achieve both
global market share and global balance by selecting globally strategic markets. As
mentioned in the suggestions for market selection, the emerging markets of Asia/Pacific,

Eastern Europe, and Latin America, and the mature markets of western Europe are all

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qualified as globally significant markets for Hershey Foods Corporation. The key for the
corporation is to identify significant country-markets in each region to target and achieve
global balance.

In the emerging markets of Asia-Pacific, Eastern Europe and Latin America,

China, Russia, and Brazil are singled out for their large market size relative to the
regional markets and their significance fOr Hershey’s competitors. The mature western
European markets are entrenched with Hershey’s competitors and have high barriers for
new entrants. Nevertheless, the most strategic countries are often the most expensive ones
(Yip 1992). Due to their significance as globally strategic markets, Hershey still should
take actions in these markets. Louis Smith, who oversaw Hershey Foods Corporation’s
research and development in the 19608, always argued for Hershey to have an office in
Switzerland in order to keep abreast of the latest innovation.

The second step for Hershey is to match its product strategies with selected
significant markets. The overview of international markets suggested sugar-based
confectionery has been growing at a faster rate than chocolate products, and they appeal
to a broader consumer base in Hershey’s globally significant markets. Nevertheless,
Hershey Foods Corporation seems to consistently view itself as in chocolate business.
The six global brands Hershey Foods Corporation is currently focusing on, Hershey's
Kisses, Nuggets, Cookies 'n' Creme, Hershey Syrup, Pot of Gold and Reese's, are all
chocolate products. This indicated that the corporation is emphasizing the wrong
products for its international penetration. Clearly, the alternative for Hershey is to
include its newly acquired or developed sugar-based confections into its global brands

portfolios.

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In 1995, Hershey acquired Leaf North America, which brought Jolly Rancher into
the Hershey’s product portfolio. Hershey researchers had worked hard for a long time on
a jelly candy, but needed a brand name to put the product on top. The acquisition
provided a key opportunity for Hershey, and now the corporation is marketing Jolly
Rancher Jolly Jellies. Hershey should take advantage of these “power brands” and focus
more on marketing its leading sugar-based confectionery products worldwide rather than
on chocolate products only.

Furthermore, marketing the existing branded sugar-based confectionery products
in Asia/Pacific, Eastern Europe, western Europe and Latin American can also reduce
Hershey’s costs of adaptation and best leverage its global brands.

Finally, Hershey Foods Corporation needs to adapt both its chocolate and non-
chocolate products to local consumer needs while bearing in mind the basic need of the

most significant markets.

5.6 Benefits and Costs of a Global Product Strategy for Hershey Foods Corporation

The benefits of participating in globally strategic markets and using global
product strategy can be achieved through: 1) cost reduction, 2) improved quality, 3)
enhanced customer preference, and 4) competitive leverage (Yip 1992).

Cost reduction. Using global product strategy can reduce duplication of
development efforts. As mentioned earlier, the development of successful new products
in the confectionery industry is very difficult. It involves high Costs of R&D, such as
combining the basic ingredients in a creative way, costs of mass production, and costs of

developing total market packages. Globalizing existing brands rather than starting new

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ones in each targeted international market can help Hershey significantly reduce these
costs and leverage successful core products around the world.

Improved Quality. Reducing products marketed for international markets to
several global brands, including both chocolate and non-chocolate products, can help
Hershey concentrate its development and management resources on improving product
quality and making the products more appealing to consumers worldwide.

Enhanced Preference. Candy is bought very often when consumers travel abroad.
Standardization makes the same candy products available everywhere consumers visit,
and therefore enhances consumers' preference. In addition, consuming western food
products is becoming fashionable in some developing countries. Marketing western
famous confectionery products into emerging markets can then enhance consumers’
preference by increasing global availability. Hershey should focus on customizing its
leading brand products to local tastes in order to achieve the benefits of enhanced
customer preference.

Competitive Leverage. As the US. confectionery market leader, Hershey’s world
market share falls far behind its major competitors Mars and Nestle, as mentioned earlier.
One of the reasons is that Hershey's product innovation incurs high costs, which
decreases its competitiveness in world confectionery markets. By focusing on a few
global brands, Hershey can significantly reduce its product development costs, and
therefore increase its competitiveness in targeted emerging markets, where consumers are
very price-sensitive. In addition, participating in globally strategic markets also provides

Hershey Foods Corporation more sites for it to attack and counter-attack its competitors.

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Just like any other strategy, global product strategy is not perfect. The major
drawback of global product strategy is the sacrifice of national need. This is especially
important for the food industry, where national preferences are quite distinct. For
example, consumers in Asian countries, in general, prefer less sweet confectionery
products than those in Europe or United States. In addition, targeting a globally
strategically significant market requires earlier and/ or greater commitment than targeting
a market warranted on its own merits. Furthermore, co-ordination costs are also incurred
in order to operate in a wide spread of country markets.

Thus, the key of global product strategy for Hershey is to find the balance between
benefits and drawbacks of standardization. The corporation should design its products to
satisfy the most important common need of the most important markets while
customizing to different tastes. By doing this, Hershey should maximize its chances for

global success.

5.7 Organization Ability of Hershey to Implement a Global Product Strategy

In order to achieve the benefits of the proposed global product strategies, Hershey
Foods Corporation needs to have the capabilities to implement a global strategy.
Organization provides the vehicle by which strategy can be formulated and implemented.
Organization factors (organizational structure, people, management process and culture)
affect the kind of strategy that can be developed (Figure 2-2, p21). This is especially true
for global strategy where substantial changes may be needed to formulate and implement
the strategy (Yip 1992). Hershey has realized the need to change its organization factors

to improve efficiency.

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5.7. 1. Examination of Hershey Foods Corporation’s Organization Ability

The examination of the organizational factors for Hershey indicates that although
the corporation has made efforts to integrate its business and organization, organizational
baniers to implementing a global product strategy still exist.

Hershey has realized the importance of restructuring its organization and business
since 1994. In 1995, the company reorganized its three separate North American
divisions, Hershey Chocolate USA, Hershey Mexico, and Hershey Canada, under a single
entity: Hershey Chocolate North America. Within the three divisions, five business units
(Hershey Canada, Hershey Mexico, and US Chocolate Confectionery, Non-Chocolate
Confectionery and Special Markets) report to the president of Hershey Chocolate North
America, Pasquale. The reorganization centralized the corporation's authority to a general
sector head and has begun to yield benefits. For example, according to Pasquale, as a
single North American unit, the company is able to make sourcing decisions quicker than
in the past.

Nevertheless, Hershey's organization structure still works in one major way
against a global strategy: the corporation has a strong domestic and international division
split. Out of Hershey's total 14,500 employees, only 50 of them work for Hershey
Intemational (Patriot-news 02/98). A recent interview with Hershey's employee
development manager Steven Wagner indicates that employees of the domestic division
are poorly informed about the situation of the corporation's international division.

The imbalanced allocation of resources and restricted information flow between
the two divisions hinder the implementation of a global strategy. In particular, when

HerShey is competing with global competitors such as Nestle, Mars and Cadbury, it is

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necessary for the corporation to use its US resources to subsidize international efforts, but
the current structure does not favor that. In order to facilitate the implementation of a
global strategy, Hershey has to make further efforts to integrate its domestic and
international divisions and balance the resource allocations of these divisions.

Hershey's management process does not contribute to the use of a global strategy.
While having information about the world is a minimum requirement for being able to
formulate and implement a global strategy, Hershey historically did not build up a global
information system. Instead the corporation primarily focused on domestic markets by
introducing new products. The first moves of Patrice Le Maire, president of Hershey
International appointed in 1997, was to spend five months researching Hershey’s
international market situation and then recommend a relocation of Hershey International
to Miami, Florida, which is close to Hershey’s Latin American markets and make it easy
for the corporation to recruit talented Spanish speaking people (Patriot-news 02/15/98).

The limited amount of information flow between the corporation’s domeStic and
international divisions also indicates that Hershey is weak at both cross-country
coordination and global performance review and compensation, which creates barriers
for US managers to think globally, to share information and to support the corporation’s
international expansion. Therefore, Hershey Foods Corporation needs to reform its
management process before attempting a global strategy.

Hershey's historical management of people did not favor the use of a global
strategy, either. Hershey did not seem to have a recruitment plan for foreign nationals
until 1997. One major incentive for the relocation of Hershey International to Miami in

1997 was to seek "international entrepreneur types" needed for the corporation's long-

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term growth. In the words of Kenneth Wolfe, Hershey CEO, to expand into foreign
markets, it is important for Hershey to operate through "someone who is comfortable with
living there, who is not looking to come back home, who doesn't miss sauerkraut and
pork on New Year's Day" (Patriot-news 02/98). Among Hershey's current employee and
management teams, however, there are few foreign nationals. In contrast, Mars' foreign
national employees outnumber its domestic employees two to one. Therefore, Hershey
still needs to make long-run commitments to build up its " global mind set" needed for a
successful international expansion.

Hershey's mission statement emphasizes that the corporation aims to achieve a
leading position in "selected international markets" versus Mars' statement of being a
"world confectionery leader," In a recent interview, Hershey's Wolfe said, " we want to
grow our business everywhere in the world, but the first step in the process would be '
let's do what we can in the Western Hemisphere.” This indicates that Hershey's top
executives do not have a firm commitment to international expansion, which also causes
another barrier for the corporation's implementation of a global strategy.

Lastly, Hershey Foods Corporation's corporate culture worked against a global
approach. Rather than building a global identity, the corporation has a domestic-oriented
and adaptation-oriented culture. Hershey is consistently focusing on US markets by
introducing new products to meet domestic customer needs. As the North American
confectionery leader, Hershey Foods Corporation is not known in Australia (Australian
06/98). This strong national identity culture hinders the corporation's willingness and

ability to design global products and programs and creates a clear split among employees.

110 j

Hershey Foods Corporation seems to be much more committed to preserving
domestic employment than to developing employment regardless of location, which is in
contrast to the requirement of a global strategy for commitment to worldwide employment.
This often leads them to decide to keep manufacturing operations in the home country
rather than relocate them in lower cost countries. For example, during the reorganization
process, Hershey made a decision to source all its chocolate from its United States plants
despite the cost, to ensure that quality standards are met. Furthermore, the corporation has
no manufacturing overseas and no offices outside the US (Brenner 1999). This canput
them at a competitive cost disadvantage and threatens their overall competitive position.

All four factors, culture, organization structure, management process and people,
cause significant barriers for Hershey’s implementation of a global product strategy.

5.7.2. Recommendations

The evaluation of Hershey's organizational factors indicated that there are some
barriers for the corporation's implementation of a global product strategy. Therefore,
changes of organizational factors are needed for Hershey to assure long-tenn growth.

Determined commitment from top executives. Hershey's top executives’ statements
indicate that the company does not have a firm commitment to a global product strategy
and does not view the world as one integrated market. In order to successfully implement
a global strategy, Hershey's management needs to constantly present the intention of
globalizing its business and to act accordingly with this intention. Senior managers
should spend a large amount of time in foreign countries to demonstrate the importance

and commitment of Hershey to its international operations. More importantly, senior

lll

managers should spend more of their time in the selected strategically important
countries.

Building up global mind set. Assembling a capable management team is one of
the first cornerstones of the organization-building task. It was necessary for Hershey to
fill its international position from the outside because the cOrporation did not have
insiders with the requisite experience and management know-how about global
expansion. Hershey appointed Patrice Le Maire, former employee of Procter & Gambler's
export operations, as president of Hershey International in the June of 1997. He had been
successfully restructuring P&G's export operation. Under this president, a compatible
group of managers who possess the full set of skills about international market
penetration should be assembled to form the needed "global mind set".

Employee training. Taking a global strategy requires a different set of skills,
managerial approaches and operating methods. Instead of focusing on how to adapt
domestic consumer need by innovating new products, Hershey needs to train its
employees to understand the needs of world markets and focus on the commonalties of
these markets. In addition, language training is also very important in the process. For
example, managers of Mars on average can speak two to three languages, which makes it
easy for the company to communicate with local customers and learn their needs. In order
to match its competitor’s position worldwide, Hershey also needs to develop its
employees' knowledge of world markets and cross-culture communication skills.

Restructuring of divisions. To support a global strategy, Hershey needs to go
through a further restructuring process. Rather than having a split between international

and domestic divisions, Hershey should organize its divisions on a worldwide product

112

line basis. For instance, the company may create a Chocolate Products division, Sugar-
based Products division and Gum division. Each division can further be divided into
several regions such as Latin America, Asia-Pacific and North America.

Furthermore, activities should be coordinated across Hershey's firnctions and
divisions to foster resource sharing and to use the power of global brands. For example,
Reese's Peanut Butter Cup division can share Hershey’s Kisses division's local
distribution channels as another global brand of the same company. Global synergies can
be achieved through sharing of local resources.

Information System. Hershey Foods Corporation also needs a corresponding
information system to foster the exchange of ideas and knowledge across divisions and
functions. In 1999, Hershey installed an enterprise-resource-planning (ERP) system,
which attempted to integrate all departments and functions across the company into a
single computer system that can serve all those different departrnents' particular needs.
Although the ERP system delayed Hershey's order fulfillment in the beginning, the
potential benefits of sharing information across functions and divisions are significant to
the corporation's global integration activities.

Motivational and incentive system. Effective motivational and incentive systems
inspire and challenge employees to do their best. The organization factors required by a
global strategy are quite different from Hershey’s current organization. This has lead to
conflicts within the corporation's culture. There is a need for effective incentives to
motivate Hershey's employees to learn other languages, to share information, and to carry

out a global product strategy.

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After specifying the roles of each employee in implementing a global strategy,
Hershey should set up corresponding monitoring and reward systems. For example, the
corporation should assign one person in each division to supervise the information
sharing and evaluate the information shared. Those employees who shared valuable
information should be awarded.

In summary, in order to achieve the benefits of a global strategy, Hershey Foods
Corporation needs to make significant changes in its organizational structure, people,
management process and culture. But as with global strategy levers, companies need not
adopt every global organization factor. Managers should select those global organization

elements that seem the most helpful in achieving their global strategy objectives.

5.8. Conclusions

This chapter analyzed the two globalization levers (global market participation
and global products) for Hershey Foods Corporation. The international markets of
Asia/Pacific, Eastern Europe, Latin America and Western Europe were selected according
to their global significance to Hershey. The global product strategic alternatives model
(Keegan 1969, 1995) was applied to formulate appropriate product strategies for
Hershey’s selected international markets. The corporation’s historical and current product
strategies were critiqued and recommendations for changes were formulated.

The same product need or use satisfied and the differences between three
emerging confectionery markets, Asia/Pacific, Eastern Europe and Latin America,
suggested that Keegan’s product strategy 3 (product adaptation and communication

extension) is appropriate to these markets. Consumers all over the world prefer

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confectionery products to satisfy their desires for something sweet, which created the
same product need. Nevertheless, due to different preferences and purchasing power
between emerging markets and the US, conditions of product uses vary significantly
across the different markets. Asia/Pacific consumers prefer sugar confections to chocolate
products and prefer less sweet versions of US confections, which together with their
inferior distribution channels, lower income level, and gift-oriented nature of
confectionery purchasing created difference in the conditions of product use. Eastern
Europe has a long history of confectionery consumption and consumers there enjoy US
confections, but the inferior distribution channels and the lower income level in these
areas again vote for product adaptation. Latin American markets also have a strong
tradition of confectionery consumption and strong local players. Preferences in these
markets, however, are fragmented and different from that of the US. In addition,
distribution problems and lower purchasing power also exist in this region, which again
requires product adaptation. Therefore, in the emerging markets Hershey Foods
Corporation needs to adapt its product mix, content, and product packaging in order to
expand into these markets.

In mature western European markets, however, the similarity of product use or
need satisfied and conditions of product use favor Keegan’s product strategy 1, product
and communication duel extension. Hershey should target fragmented sugar-based
categories and extend its leading products into this region.

The review of Hershey’s historical and current use of product strategy, however,
suggested that Hershey has not been pursuing ideal product strategies in its international

penetration. Instead of using product adaptation for the emerging markets, Hershey

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attempted to either extend its products in the US markets to others, or completely
abandon global product strategy by developing products only for national markets, such
as, the case of Mexico. Furthermore, Hershey lacks of global mindset needed to formulate
and implement global product strategies. The corporation’s activities primarily focus on
North American markets by introducing new products for the national markets rather than
developing and marketing global products for international markets to achieve global
balance of market participation. In addition, Hershey’s recent initiative of building up six
global brands primarily focus on chocolate products, which may cause barriers for its
penetration into Asia/Pacific, western European, and fragmented Latin American markets.
The corporation’s current strategies for both markets and products do not match the
suggested strategies, and they have thus caused failures in Hershey’s international
expansion.

In order to assure long-term growth, Hershey has to first increase both its global
market share and global balance by selecting and targeting globally strategic markets.
Secondly, it is necessary for Hershey to change or modify both its global brands portfolio
and packaging to adapt to local customer needs. Hershey needs to add leading sugar-
based confectionery products into its global brands and market less sweet and smaller
individually wrapped products for its emerging international markets.

Following the recommended product strategies, Hershey can achieve the benefits
of reduced costs, improved quality, enhanced customer preference, and increased
competitive leverage.

In order to formulate and implement a global product strategy, however,

appropriate organization needs to be established. The evaluation of Hershey’s

116

organizational factors revealed several baniers for implementing a global strategy and
indicated that changes are needed.

Since 1994, Hershey has realized the need of restructuring. Operations of North
American markets have been integrated under a single entity: Hershey Chocolate North
America. However, a strong split between its North America and international division
still exists, which is the major barrier to its organization structure. The corporation’s lack
Of global information system and the weaknesses at cross-country coordination and in
global performance review and compensation system within its management process
work in major ways against a global strategy. Hershey’s historical management of people
does not favor a global strategy either. Although the corporation has realized the
importance of recruiting talented foreign nationals to form a global mindset, a lot of effort
still needs to be made in the future. Finally, Hershey’s corporate culture emphasized
national identity build-up and domestic employment rather than global identity and
worldwide employment. This has resulted in significant barriers for the corporation’s
implementation of a global strategy.

The above analysis indicates that although improving, Hershey Foods Corporation
does not have all the organization ability needed to implement a global strategy at the
current stage. Changes are needed first in organization before the company attempts a
global strategy. Top executiVes need to communicate clearly to their employees of the
global expansion intention and act accordingly; employee or management teams globally
oriented should be assembled to form the needed global mindset; employee training of
both international market knowledge and language should be provided and information

systems should be build up to facilitate information flow; and, further integration of

117

North American and international divisions are necessary to form the appropriate

organizational structure for the implementation of a global strategy.

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Chapter 6 Conclusion

This study used Hershey Foods Corporation as a case to demonstrate how to
formulate global product strategy to penetrate growing international markets. In recent
years, confectionery markets have been growing around the world. Hershey Foods
Corporation, the North American confectionery leader, however, has been experiencing
some setbacks in international expansion. This study used the global strategy framework
(Yip, 1992) to analyze the strategic position and resources of Hershey Foods Corporation,
and to diagnose confectionery industry globalization potential. This study focused on the
formulation of global product strategies for Hershey’s firture expansion into strategically
important markets. Benefits and costs of a global product strategy and the organizational
ability of Hershey Foods Corporation to implement a global product strategy were also

evaluated.

6.1. Summary of Specific Findings and Recommendations

This study provided a comprehensive case study for the analysis of a company’s
global strategy using existing frameworks: a global strategy framework (Yip, 1992),
SWOT analysis and core strategy analysis (Peterson 1998) and a global product strategic
alternatives framework (Keegan, 1995).

The result from the SWOT and core strategy analyses indicate that Hershey Foods
Corporation has great strengths and opportunities, but also has significant weaknesses and
faces potential threats. Changes in consumers’ demand toward more healthy and
firnctional candy and the emergence of international markets provide Hershey Foods

Corporation with significant opportunities. Large varieties of candy substitutes and

119

intense competition from global competitors, however, constitute potential threats.
Hershey’s strengths, such as, leading brand names, innovation and human resource
management, can help the corporation seize opportunities. However, its weaknesses in.
international market operations, management’s domestic mindset, and global cost of
production may finally force the corporation to face the threats mentioned above. In order
to take advantage of opportunities present in international markets and cope with
competition, Hershey Foods Corporation needs to formulate effective strategies for its
future international expansion.

' The diagnosis of the confectionery industry globalization potential indicates that
the confectionery industry has strong potential for globalization. In addition, an overview
of the international confectionery market situation revealed that opportunities for
globalization existed in emerging markets (Asia/Pacific, Eastern Europe and Latin
America) and in a major mature market (Western Europe). The emerging markets shared
significant similarities: high growth rate of confectionery consumption, emergence of
middle class consumer groups, preferences for western consumer goods and a liberal
trade and political environment. Mature western markets have more similarity with US
markets, where growth potential is primarily in firnctional and sugar-flee categories.
Nevertheless, these markets with different characteristics all qualify as Hershey’s globally
strategic markets. Hershey needs to target country markets in each region to achieve both
global market share and global balance, which is important for a global strategy.

Using Keegan’s global product strategic matrix, ideal product strategies were
suggested for Hershey Foods Corporation’s significant international markets. Product-

adaptation and communication-extension strategy is recommended for Hershey’s three

120

strategically important developing markets due to the same product function or need
satisfied, the different conditions of product use and the same ability to buy from that of
the US markets. Hershey needs to adapt both its product mix and content. In addition,
packaging of products also needs to be tailored to local customer needs. Although
adaptations are necessary, common customer needs are dominant and are reflected in the
same product function or need satisfied. Therefore, Hershey’s management needs to bear
in mind the basic need of customers worldwide when allowing product adaptation in
different markets. This reflects the basic principle of a global product strategy versus a
multi-local product strategy, which primarily focuses on developing products for different
country markets.

Product strategies are firm specific and leading confectioners take different
strategies in their international expansion. Nevertheless, the strategies similar to these
proposed ideal product strategies that seek fit between country and product result in better
performance. The two top global market players, Mars and Nestle, were able to find a
good match between products and markets by using global product strategy. Hershey
Foods Corporation, however, has been mainly focusing on the North American market
through innovation and abandoned global product strategy in its international market
expansion. The divergence of Hershey’s product strategy from that of the suggested
strategy helps to explain the corporation’s failures in its international market penetration.
In order to reap the benefits of a global product strategy (cost reduction, improved quality,
enhanced customer preference and increased competitive leverage), the proposed changes
are needed in Hershey Foods Corporation’s future product strategy formulation and

implementation.

121

The examination of organization factors further indicates efforts need to be made
to eliminate Hershey Foods Corporation’s organizational barriers to implementing a
global product strategy. It is imperative for Hershey Foods Corporation to make changes
to eliminate the strong split between the corporation’s domestic and international
divisions, to make commitment to worldwide employment and global identity, and to
establish cross-culture coordination and global information systems and global review
and compensation systems.

In general, changes are needed both for Hershey Foods Corporation's product
strategy and its organizational factors. The corporation has to make a long-term
commitment in order to ensure success in international market expansion. Product
strategies are dynamic, and what applies today may not apply in the future. The key for
Hershey Foods Corporation is to keep in mind that the bottom line for a profitable

product strategy is to match its product strategies with markets and its own capabilities.

6.2. Critique of the Global Strategy Framework

The global strategy framework (Yip 1992) was used in this case study to guide the
overall analysis of Hershey Foods Corporation’s international penetration. SWOT
analysis and core strategy analysis (Peterson) were included to analyze the positions and
resources of business and parent company component of the global strategy framework.
The global product strategic alternatives fi'amework (Keegan 1995) was further
incorporated to guide the analysis of the key global strategy lever of global products.
Based on the global product strategic alternative, ideal global product strategies for

Hershey Foods Corporation’s selected international markets were formulated, the

122

corporation’s current use of product strategies was critiqued, and recommendations for
change were provided.

Yip’s model has a number of significant strengths in guiding the formulatiOn of
global strategy. First, global strategy is only a part of a company’s overall strategy;
therefore, analysis of overall position and resources of business and parent company is
the first step when a company attempts a global strategy. Second, a large number of
external sources of globalization identified by previous researchers were grouped by Yip
into four major industrial globalization drivers: market, cost, competitive and
government. Third, globalization strategy is analyzed through five comprehensive
dimensions: global market participation, global products, global location of activities,
global marketing and global competitive moves. Fourth, benefits of globalization are
argued to be achieved when managers set their global strategy levers appropriate to
industrial globalization drivers and to the positions and resources of business and parent
company. Fifth, organization, the means of strategy formulation and implementation, is
also analyzed through several different factors. In total, the different components of the
framework are systematically interconnected and form a comprehensive guidance for the
analysis of a company’s global strategy.

Hershey Foods Corporation’s case, in turn, put this framework in use and tested
its effectiveness in guiding a specific firm’s analysis and strategy formulation. This
framework did help to systematically evaluate whether Hershey Foods Corporation
should adopt a global strategy for its confectionery business and what its product strategy

should be along the global and multi-domestic continuum. The fiamework helped to

123

explain past problems with Hershey’s international strategy and provided useful
recommendations for altering strategy for the future.

In general, the global strategy framework is appropriate for the analysis of
Hershey’s situation, however, this framework also has some limitations. First, the global
strategy framework is too general to guide the case study in detail. Yip did not provide a
detailed discussion on how to analyze position and resources of business and parent
company, which is the foundation of the further analysis of a global strategy. Therefore,
SWOT and core strategy analyses were applied to provide detailed guidance for analyzing
Hershey’s overall strengths, weaknesses, opportunities and threats and its core strategy. In
addition, in the discussion of the global strategy lever of global products, the global
strategy fiamework did not provide detailed rationale for strategy formulation and
implementation. Keegan’s global product strategic alternative is therefore used to guide
the formulation of ideal product strategies for Hershey’s strategically important markets.

Secondly, this framework has very little emphasis on the process of strategy
implementation, such as, resource allocation for a global strategy. Further guidance for
the implementation of strategy should be added to make it more applicable. Furthermore,
the global strategy framework does not include measurements of success or failure.
Lastly, information systems have become increasingly important in the formulation and
implementation of a global strategy and additional attention should be given to this topic

in the discussion of a global strategy.

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6.3 Recommendations for Future Research

As a contribution to international marketing literature, this study combined the
global strategy framework (Yip 1992) with SWOT/Core strategy analyses (Peterson) and
the global product strategic alternatives medel (Keegan 1995) to guide the analysis of
globalization issues and the formulation of ideal product strategies and recommendations.
In general, this case study approach is supportive of prior theoretical studies in
international marketing literature. There is, however, a great need for future research in
several areas.

First, this paper primarily focused on analyzing only one of the five global
strategy levers, global product strategy, found in Yip’s global strategy framework.
According to the framework, there are five such levers: global market participation,
global products, and global location of activities, global marketing and global competitive
moves. The analysis of other four levers is also important for global integration activities
and therefore worth further research and discussion.

Second, the discussion of global product strategy in this study stays at a corporate
strategy level and is still general in guiding Hershey Foods Corporation’s product
strategies in diverse international markets. There is a great need for fiirther research on
issues related to product strategy, such as product branding, pricing, positioning,
distribution channels, and information system.

Third, this study categorizes international markets into several broader regions:
Asia/Pacific, Eastern Europe, Latin America, and Western Europe. Despite similarities
among countries in each region, there is still significant heterogeneity. For example, the

market situation in China is quite different from that in Japan. Furthermore, even within

125

the same country, customer needs vary among regions. Therefore, it is necessary to
conduct fiirther market research at the country level and at the market segment level
within a country.

Overall, the case study contributed in building a comprehensive framework that
guides the formulation of a global strategy. SWOT analysis, core strategy analysis and
global product strategic alternatives analysis were included in the framework and
provided effective guidance to the analysis of Hershey Foods Corporation’s global
strategy formulation. The factors that reduced Hershey’s competitiveness in global
markets were identified and recommendations were proposed for its future international

expansion.

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Appendix 4.1.4. CHOCOLATE AND PRODUCTS IMPORTS IN MILLION U.S. DOLLARS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1993 1994 1995 1996 1997
World 5466.4 5914.7 6989.9 7344.9 7323.4
Africa 37.6 50.4 53.3 53 56.7
Americas 724.9 800.4 974.8 1057 1 139
North America 539.5 546.8 628 710.4 818.8
LAIA 140.6 206.5 280.2 276.9 245.3
CACM 7.7 9.1 10.9 13 15.1
Caribbean 26 27.1 28.4 21.6 22.7
Rest of America 11 10.8 27.3 35.2 37.1
Asia excl fmr USSR 645.5 756.7 904.6 1012.4 1028.8
Middle East 125.8 137.8 190.7 213.6 277.7
Asia former USSR 9.2 31.8 73.3 106.4 77
Etsrrsope excl fmr 3275.6 3939.6 4490.6 4602.3 4445.3
U R -
European Union 3057.4 3675.7 4151.9 4243.4 4067.6
Eastern Europe 160.3 176.5 212.2 226.4 228.6
Rest of Europe 58 87.4 126.6 132.5 149.1
Europe former USSR 245.8 389.5 393.5 441.9
Oceania 81.1 90 103.8 120.3 134.6
France 568.6 770.8 980.3 961.5 903.5
Germany 627.5 838.2 815.3 842.3 874.2
United Kingdom 444 514.7 544.8 567.2 545.1
USA 321 .4 332.5 403 460.3 548.2
Japan 230.6 257.3 319.3 357.9 317.7
Netherlands 241.8 269.5 303.6 302.3 262.8
Canada 214.9 212.9 223.9 248.2 269.6
Belgium 188.9 169.1 232.3 268.4 248.9
Russian Federation '176 '212.7 190.4 152.6
Italy 151 181.9 191.3 187.2 160.7
Spain 141.1 155.1 170 166.2 *165.6
Austria 117.5 126.1 151.6 195.5 '188.6
Denmark 137.5 139.7 172.3 147.4 132.9
Ireland 95.4 114.8 119.6 120.7 128.5
Sweden 85.9 110.7 111.5 114.4 104.6
China. HK SAR 82.7 96.8 100.9 112 101.3
Ukraine ’130.1 *152.6 '177.8
Brazil 1.9 23.5 134.9 120 87.9
Norway 60.3 74.7 78.9 87 77.2
Portugal 67.1 65.9 ‘ 88 85.4 87.2
Mexico 72.4 90.4 54.7 59.6 58.2
Australia 48 57.4 64.3 80.3 96.3
Korea, Republic of 56.5 56.6 60.9 78.1 *752

1993 1994 1995 1996 1997
Switzerland 55.3 57.9 65.3 66.7 63.9
Greece 39 44.7 70.2 74.5 65.4
Poland 29.6 35.6 51.2 70.1 *80.2

 

 

127

Appendix 4.1.4. CHOCOLATE AND PRODUCTS IMPORTS IN MILLION U.S. DOLLARS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1993 1994 1995 1996 1997
Czech Republic 28.7 40.1 54.1 62.5 54.4
Singapore 37.4 48.3 47.4 55.5 58.3
Finland 31.2 36.4 50.8 50.4 50.6
Argentina 42.3 54.9 38 35 30
Kuwait 37.8 33.4 40.6 50.1 95
United Arab Emirates '26.4 ‘32.8 '43.9 *46.9 ’48.?
Slovenia 28.9 31.3 37.2 34.4 31.9
Slovakia ’30.1 28.4 36.2 35.1 , 34
Saudi Arabic 11.5 13.1 38.3 41.4 *40.3
Hungary 27.5 30.1 27 34.9 39.8
Israel 14.6 24.8 30.3 35.5 38
Philippines 21.1 29 31.3 26.2 *30.2
New Zealand 23.2 23.4 29.3 31.1 '30.?
Uzbekistan

 

 

128

Appendix 4.1.5. SUGAR CANDY NON-CHOCOLATE IMPORTS IN MILLION U.S. DOLLARS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1993 1994 1995 1996 1997
World 2887.6 3492.6 4429.1 4106.3 3892.7
Africa 48.8 56.2 72.4 63.6 70.9
Americas 621.2 708.9 869.6 917.9 1024.9
North Amerim 447.2 490.5 609.6 640.4 721.5
LAIA 123.3 163.9 191.3 208 231.3
CACM 21.6 25.1 29.3 31 34.3
Caribbean 23.2 24 31.5 31.1 29.6
Rest of America 5.7 5.4 7.9 7.4 8.2
Asia excl fmr USSR 548.3 863.2 1109.5 642.1 630.1
Middle East 89 92.3 110.1 118.7 133.7
Asia former USSR 11 26.8 115.8 115.8 49.1
Europe excl frnr USSR 1362.7 1601.8 1855.3 1871.9 1760.8
European Union 1248.7 1409.5 1625 1677.2 1569.8
Eastern Europe 86.7 139.9 167 145.1 136.2
Rest of Europe 27.3 52.4 63.4 49.6 54.8
Europe former USSR 233.2 165.3 327 410.4 272.7
Oceania 62.5 70.4 79.5 84.8 84.2
France 149.8 165.5 216.7 210.9 188.8
Germany 209.2 277.4 330.5 324.5 263.2
United Kingdom 153.9 153.5 150.5 152.3 180.5
USA 335.4 368.8 474.8 505.3 555.4
Japan 67 67.8 69.7 53.3 56.5
Netheriands 117.9 135.5 158.5 143.5 112.1
Canada 109 117.3 130 130.7 161.9
Belgium 83.9 89.6 117.5 119.4 100.4
Russian Rederation ’188.3 '124.5 *150.4 134.6 139
Italy 89 91.9 105.6 114.2 122
Spain 59.6 72.5 72.2 69.7 '69.5
Austria 51.6 50.2 30.7 69.2 ‘66.8
Denmark 45.2 50.5 68.1 72.8 85.1
Ireland 52.6 57.7 56.8 67.2 71
Sweden 79.4 87.5 98.1 108.4 103.2
China. HK SAR 121.9 158 245.5 223.1 202.5
Ukraine *25.5 '54.7 '59.8
Brazil 3.5 7.9 38.3 58.4 68.5
Norway 51.1 56.9 64.2 67.1 61
Portugal 19.3 21.4 32.6 33.4 33.2
Mexico 58.2 65.7 25.4 25.2 24.3
Australia 36.5 41 49.1 52.3 53
Korea, Republic of 24 27.1 34.3 35.6 34.3
Switzerland 39.3 42.2 45.2 45.2 40.2
Greece 15.4 26.3 30.6 31 26.5
Poland 37.3 41.5 44.8 49.6 '56]
Czech Republic 13.8 17.8 27.6 29.6 27.4
Singapore 25.8 30.1 31.9 34.5 ’34.3

 

 

129

Appendix 4.1.5. SUGAR CANDY NON-CHOCOLATE IMPORTS IN MILLION U.S. DOLLARS

 

 

 

 

 

 

 

 

 

 

 

 

1993 1994 1995 1996 1997
Finland 28.5 27.5 43.6 44.2 42.8
China 18.1 34.9 28.1 28 15.7
Belanis '92.8 *69.5 '39.6
United Arab Emirates ‘26.4 ‘30.5 '32 '33.3 '32.8
Peru 6.7 20.8 26.8 25.7 22.1
Azerbaijan
Saudi Arabic 12.1 14.3 28.6 25.7 22.1
Bulgaria *47.9 '54.8 *33.6 ‘21.8
Vietnam 21.5 30.6 34.5 39.9 26.5
New Zealand 16.6 19.9 21.6 24.1 “23.8
Uzbekistan

 

 

130

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