High school science class taught us entropy and that all systems are in decline. Entropy causes disorder and change and those who can successfully evolve in these systems are the ones who will survive; whether a species, a person, or a company.
Through gapUniversity, gap intelligence offers a Masters of Business Administration program that is ingeniously called “The gapMBA." In addition to coursework on management best practices, field trips, and leadership workshops, the gapMBA program adds case studies from the pages of Businessweek.
This month’s gapMBA case study focuses on Kellogg and Coca-Cola, two companies whose industries have experienced rapid entropy in recent years. Moreover, the case study stresses the importance of two characteristics of strong leadership when faced with a quickly changing market: 1) acknowledgement of reality and 2) experimenting with small tweaks to the company’s strategy rather than dramatic shifts.
Kellogg and Coca-Cola are facing the same problem; the dietary habits of Americans have changed. For Coca-Cola, the challenge is two-pronged as aging Coke drinkers are more health conscious and are consuming far less sugar. Concurrently, millennials are turning to Red Bull and other energy drinks rather than Coke to get their caffeine boost. As a result, Coca-Cola’s soda businesses declined 2 percent last year, the ninth consecutive year of decline. Collectively, Americans are drinking the same amount of soda as they did 30 years ago.
The changing dynamics of the American family have had the biggest impact on 119-year old Kellogg. The modern family is too busy to even spend the time to prepare and eat a bowl of cereal, opting instead for energy bars and yogurt. For those families who do cook breakfast, they more often turn to hot meals such as eggs and oatmeal. Kellogg brand cereals have also been hurt by changing attitudes towards packaged foods, starches, carbohydrates, and genetically modified organisms (GMOs). As a result, Kellogg reported that the company’s US morning food sales declined by 8 percent in Q4 2014, its seventh consecutive declining quarter.
With the background painted, we see the CEOs of each company take very different approaches to their eroding markets and our first lesson: acknowledgement.
Both Businessweek articles open with a description of each company’s CEO. Kellogg CEO, John Bryant, is described as eating a bowl of All-Bran
every morning and snacks on Honey Smacks (56% sugar by weight) at night. Mr. Bryant feeds his cereals to his six children. “I can assure you that we go through an enormous amount of cereal," Mr. Bryant insisted. Coca-Cola CEO, Sandy Douglas, still drinks a Coca-Cola every day, before noon and around the same time as his coffee – then he cuts himself off. Some days Mr. Douglas might have a Coke Zero in the afternoon, but he limits himself for health reasons.
As described by Businessweek, Coca-Cola may have a better grip on the realities of its marketplace.
The second lesson learned from this case study is how the company reacts in the face of a changing market. Strong companies tend to stick with a plan and when they do alter course, they do so with small taps of the steering wheel. Struggling companies often change course in rapid and varied directions, taking big turns of the steering wheel.
As the breakfast cereal market shrank, Kellogg initiated a massive $1 billion, three-year company-wide cost cutting campaign called “K-Lean." The cost cutting proved to be too steep and too fast for the company to adjust effectively (big turn of the wheel). A flood at the company’s Eggo factory led to an inventory shortfall that hurt earnings. In 2010, Kellogg recalled 28 million boxes of cereal due to an “odd stench” that the company traced back to cheaply produced plastic box linings. Though Kellogg attempted to reverse course from “K-Lean”, the company started an identical campaign in 2013, called “Project K," to cut 7 percent of Kellogg’s workforce (big turn of the wheel). In 2013, Kellogg moved its Kashi brand (acquired in 2000) from its original La Jolla, California offices to Kellogg’s Battlecreek, Michigan headquarters. With the move came changes to Kashi’s product line that introduced sugary alternatives to the brand’s health conscious origins that resulted in sales declines of over 30 percent in 2014.
Businessweek mocked Sandy Douglas’ statement that Coca-Cola’s job is to “refresh the world” by saying it was PR jingoism. In reality, “refresh the world” is Coca-Cola’s hedgehog (What is a hedgehog?) and has been the company’s strategic foundation for over one hundred years. Coca-Cola’s approach to its declining marketplace is to focus even more on what it does best: sell bottles of Coke. The company recognized that it needed to make people feel less guilty about drinking Coke and to see the beverage as a treat. With that, Coca-Cola has experimented on offering its drinks in different sizes of cans and bottles (small turn of the wheel). The company introduced less-guilt inducing 7.5 ounce mini-cans, which have sold very well. As a result, Coca-Cola will likely make more money selling Americans less soda. In 2009, the company introduced a new touchscreen Freestyle fountain machine in Five Guys and Burger King locations (small turn of the wheel). The machine allows customers to choose between 100 different drinks including Orange Coke and has raised drink sales by double digits for five straight years. Finally, Coca-Cola recently printed 250 of the most common names of teens around the world on Coke bottles hoping to inspire new millennial consumers (small turn of the wheel). The move seems to be working as sales of Coca-Cola increased by 1 percent during the last three months.
While there are a host of other variables and initiatives that have led to each company’s trajectory, acknowledging reality and taking small turns of the steering wheel are a company’s best chances for long term success.
High school science teaches us entropy and sips of Coca-Cola, rather than Kashi branded Chocolate Almond Butter cookies teaches our gapMBAs how to best deal with it.