The External Factor Evaluation (EFE) Matrix

Key External Factors Opportunities 1. U.S. sales of organic food and beverage have increased from $1 billion (1990) to $26.7 billion (2009) 2. Food manufacturers have experienced an increase in sales due to a higher number of people dining out 3. Women are becoming more common in upper management (11.2% in 1995 to 16.4% in 2005) 4. Baked goods prices increased 10.7% compared to 2008 5. Increased trends of flavor enhancer for bottled water 6. Growing environmental consensus 7. Increased demand for packaged and processed foods around the world due to change in lifestyles Threats 1. Increasing obesity rates in North America 2. Due to a weak economy and increased competition, the food processing industry saw a work force reduction on average of 7.5% in 2009 3. Rising costs of petroleum cause an increase in cost for food companies 4. Difficult to differentiate product pricing between competitors in the food processing industry 5. Customers switching to generic brands 6. Increased intensity between competitors in European as well as other markets 7. North American competition is now primarily focused on the food industry 8. Declining value of the dollar with an increasing value of the Euro Total Weig ht Rati ng Weighted Score

0.08 0.10 0.06 0.03 0.13 0.06 0.07

3 4 4 1 4 3 3

0.24 0.4 0.24 0.03 0.52 0.18 0.21

0.03

0.06

0.04 0.05 0.04 0.09 0.07 0.13 0.02 1.00

1 2 2 3 3 4 2

0.04 0.1 0.08 0.27 0.21 0.52 0.04 3.14

Our team conducted the External Factor Evaluation Matrix in order to evaluate the opportunities and threats affecting Kraft and the food processing industry. We gathered economic, social, cultural, demographic, environmental,

political, governmental, legal, technological, and competitive information to develop our key external factors. These factors include 7 key external opportunities and 8 key external threats, all of which were assigned a weight and rating in order to develop a weighted score which are accumulated to determine Krafts external position in the industry. A weight is given to indicate the relative importance of each factor to being successful in the food processing industry. A rate is assigned to each factor to indicate how effectively Krafts current strategies respond to the factor. The rates are evaluated on scale of 1 through 4, where 4 = their response is superior, 3 = their response is above average, 2 = their response is average, 1 = their response is poor. The rates are based by the company whereas the weights are based on the industry. Starting with our key external opportunities, U.S sales of organic foods and beverages have increased from $1 billion in 1990 to $26.7 billion in 2009. This key external factor was given a weight of 0.08 to show that this is an important factor that the food processing industries can potentially take advantage of because organic food is a rapidly growing trend with areas to be capitalized. We rated this external factor a 3 because Kraft has developed organic product lines that target a more health conscious consumer group. However we feel that their response was superior because there are many more products within all of their business segments that have the potential to be redesigned to fit the organic label. Another key external factor is the increasing trend of dining out resulting in food manufacturers experiencing increase sales from the restaurant industry. We weighted this factor a 0.10 to show that this is a major factor to being successful in the food processing industry. Companies in the food processing industry wouldnt have to make any major changes to product packaging or manufacturing to change

suppliers from wholesalers to restaurants. We rated this external factor a 4 because Kraft has developed and redesigned some of their product lines to be sold to either consumers or distributors. We felt that Krafts response was superior due to the fact that they have created a new segment in their North American division called Canada & N.A. Foodservice which has a primary focus on distributing to restaurants. A key external opportunity in the food processing industry is the fact that women are becoming more common in upper management increasing by 5.2% from 1995 to 2005. Kraft had a superior response to this factor when they appoint Irene Rosenfeld in 2006. We weighted this factor a 0.06 because we felt that with an increasing trend for women in upper management in many industries. One particular factor that we rated as a poor response by Kraft was the opportunities of baked goods prices increasing 10.7% compared to 2008. However this is not a particularly crucial success factor resulting in a weight of 0.03. The opportunity that we considered to be the highest importance to being successful within the food processing industry is the increasing trend of flavor enhancer for bottled water. There is a huge market for bottled water which Kraft saw an opportunity in when they designed their new innovative bottle water flavor enhancer Mio. We weighted and rated this opportunity 0.13 and 4, respectively. Another important external factor is the growing environmental awareness in the U.S and Europe. We weighted this factor a 0.06 because we feel that for food processing companies to go green they would have to allocate many resources in developing new ways to reduce waste. These changes would be expensive and long running so companies would find them overvalued and not profitable. We rated this a 3 because Kraft has reduced the waste in 6 out 9 of their major manufacturing plants in the U.S. by 80% with plans to reduce waste disposal to zero by 2015. Our

final key external factor under opportunities was the increased demand for packaged and processed foods around the world as a result of a change in lifestyles. These days it is more common to have double income families who are found to have less time to cook and having extra cash for quicker meals. We felt that this was a fairly important success factor for the food processing industry because of the high demand for convenience food. We rated Krafts response to this as above average because they focus on developing quick meals that are easy to prepare. Under our threats section of the external factor evaluation displays our key external threats which start with increasing obesity rates in North America. We weighted this threat low because most of the products within the food processing industry are labeled junk food and cannot be the primary source of nutrition for kids and adults. We rated this factor a 2 because even thought Kraft has developed healthy choice product lines many of their best selling products still contain trans fats and have high levels of sodium. Kraft has responded to this by not advertising to children under 6, only promotes their Better-For-You products for children the ages between 6-11 and no school advertising. Another key threats we observed was a workforce reduction in the food processing industry on average of 7.5% in 2009. This was due to a weak economy and increase competition which is affecting most companies within the industry evenly which is why we weighted this factor 0.04. Prior to 2008 companies where experiencing the peaks of a booming economy resulting in a bloated work force. These peaks were quickly diminished when the recession took effect resulting in many companies reducing their work force in order to remain operational. We rated this factor 1 because Kraft reduced its work force by 19,000 employees in 2009, which is way above the industry average. Petroleum is used many operations within the food processing industry, from agricultural

costs, to shipping and distributing. This is why we weighted the threat of rising petroleum cost a 0.05 because of the industries lack of control on the topic but also its importance. Kraft has long-term objectives to reduce their petroleum consumption by 15% by 2015. We feel this is a great start but that much more can be done which is why we rated this threat a 2. One external threat we determined is the difficulty in differentiating product pricing between competitors in the food processing industry. We weighted this factor 0.04 because we felt that this is the result of free trade and as long as they have competitors in their industry then this threat will not change. We rated this threat a 2 because we feel that Krafts pricing policies are developed in order to receive the greatest profit margin. These prices are based on their competitors and therefore cannot be changed due to decreased profit margin. One of our most important key factors is the threat of customers switching to generic brands. Especially during a recession consumers for looking for more lower priced products rather than name brand products. As a result we weighted this threat a 0.09 to show it has high importance in the industry. We rated Krafts response to this threat a 3 because of their above average marketing efforts to show consumers their products have high value and to maintain their long lasting reputation of good food for lower prices. The intensity of competition in the food processing industry has been an increasing external threat that Kraft responded well to with the acquisition of Cadbury in England. This factor was weighted a 0.07 because of the need to globalize and expand into European and other markets. In the world today youre either growing or dying and the food processing industry is no exception, companies within the food processing industry know they must expand into new

markets to retain market share and remain profitable. Another factor regarding competition in the food processing industry is the increased intensity of competition in North America. Kraft foods is the number one food processor in North America which is why we regard this threat to be the most important to the success in the industry. ConAgra which is Krafts main competitor within the U.S. has recently sold off its beauty and health care divisions in order to focus primarily on food processing. Kraft has responded heavily to this threat with increased advertising in the U.S. to $50 million in 2009. The last external threat is also the least important to the success of the food processing industry. The declining value of the dollar and the increasing value of the euro has been an increasing threat over the past few years. We weighted this factor low at 0.02 because we feel the food processing industry have no control over inflation rate. We rated this factor a 2 because we feel that because Kraft operates in both the U.S. and Europe they will experience changes in monetary values no matter where they choose to operate.