Washington IV

SWOT BULLET

Strengths
*The Hershey tradition
*The chocolate manufacturing renaissance
*Strong name and brand image
*Diversified Products
*Powerful partnerships
*Strong customer relationships
*Making a difference
*The Hershey family

Opportunities
Socio-cultural/Demographic
*Desire for richer products/changing tastes
*Joint ventures (i.e. coffee)
*Dark chocolate health benefits
*Increased importance of holidays

Political/Legal
*Child labor laws for African countries
*Sales tax reduction on food items

Technological
*Technological improvements to milking machines
*Efficiency improvements for distribution (i.e. RFID, etc.)
*Telecommunications

Economic
*Production of cocoa in new areas (i.e. Jamaica)
*Price decline of sugar
*Bio-fuel production from chocolate by-product

Global
*Increase in global trade
*New countries becoming industrialized
*Outsourcing of labor to cheaper areas

Weaknesses
*Borrowing
*Poor international performance
*Decision making
*Company control

Threats

Socio-cultural/Demographic
*Peanut allergies
*Increasing obesity
*Greater environmental concern

Political/Legal
*FDA requirement to post nutritional *information
*Price floor legislation for chocolate *ingredients

Technological
*Lack of government support to developing countries (poor education of new technologies)
*Increased cost to “keep up” with manufacturing technological progress

Economic
*Steady increase of minimum wage for future years
*Steady price increase of milk
*Steady price increase of gasoline

Global
*Farming areas being used for residential, commercial, industrial developments
*Natural disasters (i.e. hurricanes) disrupting growth of chocolate ingredients
*Fluctuation of exchange rates

INDUSTRY ANALYSIS

Introduction

Porter’s “five forces” model of industry competition is used to inspect a competitive environment and establish a firm’s possible profits. The model uses five competitive forces that determine a particular firm’s capability to compete. The chocolate and cocoa industry can use the “five forces” model as an analytical tool to determine the competitive market. The five competitive forces used in the model are threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products, and intensity of rivalry among competitors (Dess, 56).
Threat of New Entrants

The threat of new entrants is a competitive force that determines how easily a firm’s profits can be lowered because of new competitors in the industry. There are six barriers that determine the risk of new entrants. These include economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels and cost disadvantages independent of scale (Dess, 57).
Economies of scale reduce the per-unit cost of a product as the number of units being produced increases. The chocolate and cocoa industry does have a significant economy of scale entry barrier because large companies exist in the industry that has high production output, which reduces the cost to produce chocolate and cocoa. If a new competitor wanted to enter the market, the
company would have to enter the market producing a large quantity at the same low price as competitors or the company would have to compete with a cost disadvantage. Because economies of scale exist in the industry, it deters smaller competitors from entering into the market and reduces the threat of entrants.

In addition to economy of scale, product differentiation is another entry barrier in the chocolate and cocoa industry. There are many competitors in the industry that have remarkably identifiable brand names and customer loyalty. Some of the strongest competitors in the industry are Hershey Foods Corporation, Farley Candy Company, World’s Finest Chocolate, Inc., Merckens Chocolate Company, and Ghirardelli Chocolate Company (www.answers.com). All of the companies have established brand names and customer loyalty, which creates a considerable entry barrier for new companies. Thus, the new company must increase spending to overcome the reputation and large customer base of the existing companies.

Another entry barrier is the presence of large capital requirements that are required in the chocolate and cocoa industry. Large capital requirements create an entry barrier for new entrants because it requires the company to have a significant source of capital to get started. The large capital investment entails costs for items such as production equipment, labor, raw materials, and research and development. In addition to these costs, a new company would need to spend a large amount of money on advertising and marketing to overcome product differentiation. An example of the large capital requirement needed for production is Grace Cocoa’s new production plant that cost $95 million dollars (www.answers.com). It would be difficult for a new company to enter the market because of this significant need for capital.

Furthermore, switching cost create a barrier to entry for new companies entering the chocolate and cocoa industry. Switching the supplier of chocolate’s raw materials such as cocoa beans, sugar, and milk create additional testing and research that must be completed by the company to ensure correct quality, safety and taste.

Additionally, the expense and network that must be present to obtain access to distribution channels is an entry barrier for new companies. A new company must acquire distribution channels for their chocolate and cocoa products. This requires the company to create a network of buyers, which is time and money intensive. Further, the new companies have to compete for shelf space in stores with the larger players in the industry that have existing distribution channels already established.

Cost disadvantages independent of scale such as patents, favorable access to raw materials, government subsidies and polices create barriers of entry for new companies. Because the industry produces food for the end consumer, companies in the industry must meet several government standards. For these companies, the Food and Drug Administration is the government agency that sets the guidelines and regulations. These regulations increase barrier to entry for new companies in the chocolate and cocoa industry.

There is a low threat of new entrants in the chocolate and cocoa product industry because the existence of economy of scale, the differences in products, the need for large capital requirements, the existence of switching costs, the lack of access to distribution channels, and the regulations that are in place for food manufacturers.

Bargaining Power of Buyers

The bargaining power of buyers is a competitive force that can result in lower prices for a product and increase the quality of service, which decreases profits and increases costs for the industry. Buyer’s power increases if large volumes of the product are purchased, the product is undifferentiated, few switching costs exist, low profits are earned, backward integration is possible, and the quality of the buyer’s product is not affected by the supplier’s product (Dess, 59).

If a buyer represents a large percentage of the supplier’s sales, the buyer has more bargaining power over the supplier. The chocolate and cocoa industry has several large volume retailers, like Wal-Mart, that have significant bargaining power. These large volume retailers can bargain for lower prices and reduce the industry’s profits.

Another condition that affects the power of buyers is product differentiation. If the product is undifferentiated, the buyer has the power to play competitors against each other and reduce the cost. The chocolate and cocoa industry has a differentiated product, which reduces the power of buyers. The industry has several large players that have brand identification and customer loyalty, which makes it hard for buyers not to use a particular supplier.

The lack of switching costs also increases the power of buyers in a particular industry because the buyer can threaten to change suppliers if they are not getting an adequate price or service from the supplier. The buyer’s switching costs in the chocolate and cocoa industry is moderate to high.
Specifically, the industry’s industrial-use buyers have significant switching costs because the supplier’s product can change the flavor or texture of the buyers’ product. If the buyer wanted to play competitors against each other, the buyer would have to extensively taste test different recipes for different products. In addition, the buyer’s customers may react poorly to new flavors, forcing the buyer to switch back to the original supplier. The high switching costs decrease the power of buyers in the chocolate and cocoa industry.

Furthermore, if the buyer earns low profits on products they sell, they are more price-sensitive. This causes buyers to shop around the industry and create more bargaining power. The chocolate and cocoa industry’s buyers usually make low profits on the products they sell, forcing the buyer to lower purchasing costs. This gives the buyer more power in the industry. However, the buyer must be willing to accept taste changes in the product, which restricts their bargaining power.

The buyer can gain power if they pose a threat of backward integration. If a buyer can successfully become his or her own supplier, the bargaining power of the buyer increases. Both retail buyers and industrial-use buyers are limited when posing a threat of backward integration because the ability to produce chocolate and cocoa products requires significant capital investment and other barriers to entry. This lack of threat reduces the buyer’s bargaining power.

Buyers are able to increase bargaining power if the quality of their product is not affected by the industry’s product. When it is unimportant to the buyer’s product, the buyer is able to be more price-conscious. The industrial-use buyer of the chocolate and cocoa industry relies heavily on the industry’s input product. The input product directly affects the quality and taste of the buyer’s end product. This dependency decreases the buyer’s bargaining power.

The bargaining power of buyers is increased by two factors: a number of large volume buyers and the buyers’ relatively low profits from the product. However, the bargaining power of buyers is low to moderate because of the industry’s differentiated products, the presence of switching costs, the lack of threat of backward integration and the reliance on the industry’s product.

Bargaining Power of Suppliers

The bargaining power of suppliers is a competitive force that can diminish a firm’s profitability by raising prices or reducing the quality of the supplier’s product. In many instances, the profitability is reduced such that the firm cannot recover from raw material expenses. The six conditions that increase a supplier’s power are a concentrated supplier group, no substitute products available, industry is an unimportant customer to the supplier, supplier’s product is essential to the industry’s business, supplier’s product is differentiated, and justifiable threat of forward integration (Dess, 60).

If the industry’s suppliers are concentrated, then the supplier has more bargaining power over the industry. The suppliers of the chocolate and cocoa industry have significant bargaining power over the industry because of the limited number of these suppliers. Because the cacao tree is grown in areas that have a tropical climate, many players in the industry are forced to import the product. Tropical climates are often at risk for natural disasters, such as hurricanes, which can dramatically reduce the number of suppliers (www.bpi.cam.ac.uk). In addition, civil unrest in areas that grow the cacao tree can have an adverse affect on the amount of suppliers to the industry. The bargaining power of the industry’s suppliers is increased because of the limited number of these suppliers.

In addition to concentrated suppliers, the supplier groups’ bargaining power is increased if there are no substitute products that they must contend with in the market. Because the cocoa bean is a required ingredient in chocolate and cocoa industry, the suppliers do not have any substitute products for which they must compete. This lack of substitutes increases the bargaining power of the chocolate and cocoa industry’s suppliers.

The bargaining power of a supplier is increased if the industry is not an important customer of that supplier. The chocolate and cocoa industry is an extremely important customer of its supplier group. The cocoa bean is an important export of the countries that produce the cocoa bean. The bargaining power of the suppliers is reduced because of the importance of the chocolate and cocoa industry as a customer.

Another condition that enhances the bargaining power of the supplier group is the dependency of the industry’s product on the suppliers’ product. The chocolate and cocoa industry relies on suppliers to deliver high quality products that meet food regulations and consumer taste tests. If the suppliers’ product is not available or does not meet the quality expected, the industry will suffer greatly. This dependency on the suppliers’ product increases the suppliers’ bargaining power.

The bargaining power of a supplier group is increased if the product they supply is differentiated or has switching costs. If differentiation or switching costs exist, then the industry has limited ability to increase the competition among the suppliers. The chocolate and cocoa industry has moderate differentiation among their suppliers. It is important for the suppliers’ product to be a certain quality or grade; however, if the product meets grade guidelines, it is relatively undifferentiated. This is true of all suppliers of the industry including cocoa bean, milk, and sugar suppliers.

Additionally, the bargaining power of a supplier is increased if the supplier can threaten to forward integrate. If the supplier can become a producer of chocolate and cocoa products, then it can increase its bargaining power. Suppliers to the chocolate and cocoa industry do not pose a reasonable threat of forward integration. As previously stated, the threat of entrants into the industry is low. The suppliers would have to spend a significant amount of money in research and development, capital requirements, and obtaining customer contacts. They would also have to overcome strong industry leaders who have significant brand identification and customer loyalty. The lack of threat of forward integration decreases the bargaining power of suppliers.

The bargaining power of suppliers is decreased because the industry is an important customer of the supplier group and the supplier does not pose a threat of forward integration. But the bargaining power of suppliers is moderate to high because the supplier group is concentrated; there are no substitute products, and the importance of the supplier’s product to the industry.

Threat of Substitute Products and Services

The threat of substitute products is a competitive force that can set a ceiling on the price the industry can charge for their product. If there are substitutes available to the consumer, an industry’s potential returns are limited. One ratio that can be used to measure the threat of substitute products is the price-performance ratio (Dess, 60).

The chocolate and cocoa industry must compete with numerous substitute products that can threaten the industry’s profitability. Alternate cooking flavors are a substitute product to chocolate and cocoa. These flavors include vanilla, lemon, butter, or mint flavoring. These flavors can be used by the industry’s customers that use chocolate and cocoa products for industrial and cooking use.
Another significant category of substitutes is snacks. Many non-chocolate snacks are available, such as peanut butter, fruits, potato chips, ice cream, etc. There is no need to stick with a specific snack other than personal preference. Further, many consumers consider chocolate unhealthy and are willing to substitute it readily.

In addition to flavor and snack substitute products, the chocolate and cocoa industry must compete with substitute products in the retail arena. Specialty chocolate and cocoa products are used as gifts during numerous seasons and celebrations including Christmas, Easter, Halloween, Valentine’s Day, anniversaries and birthdays. Other types of gifts during these seasons are viewed as substitute products. These products are flowers, fruit, jewelry and stuffed animals. All of these products can be purchased instead of chocolate and cocoa products. Many different cooking flavors, a hugely diverse selection of alternate snacks, and a wide variety of seasonal gifts make the threat of substitute products high in the chocolate and cocoa industry.

Intensity of Rivalry among Competitors in an Industry

The final competitive force of Porter’s “five forces” model is the intensity of rivalry among competitors in an industry. This competitive force can create price wars, advertising battles, new product lines, and higher quality of customer service. There are six circumstances that intensify rivalry: many balanced competitors, a slow growing industry, high fixed or storage costs, undifferentiated products or no switching costs, large increments of capacity, and high exit barriers (Dess, 61).

An industry’s competitor rivalry is increased if there are numerous competitors or if the competitors are equally balanced. This condition can create a strain on raw materials and consumer groups. The chocolate and cocoa industry has numerous industry leaders that are similar in size and product offerings. Many of the leaders create new product lines and actively participate in advertising wars. Because there are numerous competitors that are equally balanced, competitor rivalry is increased.

In addition to numerous competitors, slow industry growth increases the intensity of rivalry among competitors. Because the market is growing slowly, companies in a slow industry must compete for market share in order to increase sales. The chocolate and cocoa industry is a mature market that is growing slowly. This slow growth increases the rivalry among competitors in the chocolate and cocoa industry.

Another condition that increases the intensity of rivalry among competitors is if the industry has high fixed or storage costs. If fixed costs are high, firms in an industry are under pressure to increase capacity. The chocolate and cocoa industry has both high fixed costs and high storage costs. The industry’s fixed costs consist of large amounts of equipment and huge facilities to house manufacturing operations. Although the industry consists of perishable foods and ingredients, which typically have a short shelf-life, the storage costs are high due to the precise storage environment needed. For example, both milk and chocolate must be kept at a proper temperature and humidity.

Lack of differentiation or switching costs is a circumstance that increases the intensity of competitor rivalry in an industry. If the industry’s product is not differentiated, buyer’s base their purchasing decision purely on price or quality of service. Likewise, if no switching costs are involved, buyers can play competitors against each other and obtain a lower price. The chocolate and cocoa industry does have many companies that offer iconic brands which are differentiated. The
industry’s buyers must sacrifice specific taste to switch products. In addition, the industry’s industrial-use customers rely heavily on a certain brand of the industry’s product to produce the customer’s product which increases switching costs. The differentiated product and moderate switching costs reduce the intensity of rivalry among competitors in the chocolate and cocoa industry.

The high exit barriers factor also determines the degree of rivalry among competitors in an industry. If an industry has particular assets, high fixed costs associated with exit, strategic relationships among the particular business unit and others within the same firm, emotional barriers, and other pressures from a social point or government aspect; then the firms in the industry may compete, despite low earnings. The chocolate and cocoa industry has high exit barriers that increase the intensity of rivalry among the industry’s competitors. The industry requires specialized assets that would be difficult to recover upon exit. In addition to specialized assets, the chocolate and cocoa industry has several companies that may have social pressures not to exit the industry. These high exit barriers increase competitor rivalry.

Although the chocolate and cocoa industry has partially differentiated products, the industry’s intensity of rivalry among competitors is high. The industry has numerous, equally balanced competitors, is slow growing, has high storage and fixed costs, and has high exit barriers. All of these conditions create price wars, advertising battles, new product lines and higher quality of customer service in the chocolate and cocoa industry.

STRATEGY

The Hershey Company is America’s largest chocolate company and has established itself as a cultural icon for brand innovation. Over the past century, Hershey’s has designed and produced an ambiance that exudes quality and value for its customers. This ambiance is part of a strategy that has propelled Hershey’s as an industry leader and has successfully ingrained the Hershey brand in the public’s collective consciousness as America’s premiere choice chocolate bar.

CORPORATE LEVEL STRATEGY

Hershey’s corporate level strategy is focused intently on growth and capitalizing on the diversification of its brand in the global market. The Hershey Company may take pleasure in the branding of its headquarters as “The sweetest place on earth,” however over the past year, investors and management confidence has had a more bitter taste residing in their palate. Beginning over five years ago when The Hershey Company was on the verge of accepting a “$12.5 billion cash-and-stock offer from the Wm. Wrigley Jr. Co.”, Hershey’s has had a continuous problem with management and possible sale of the company to bigger industry rivals (www.nytimes.com). So far for the 2007 fiscal year, Hershey’s profits have been on a downward spiral with a 66 percent plunge delivered in the third-quarter earnings report. Hershey’s share of the candy market fell 1.1 percentage points in the third quarter as its big competitors Nestlé S.A. and Mars Inc. gained ground on it. The Hershey Company is loosing market share in a marketplace and be a competitive industry player, The Hershey Company has set forth a strategy that streamlines their operations, closing six North American plants, and relying heavily on strategic alliances in emerging markets to grow and capitalize on future market opportunities.

INTERNAL GROWTH

To reduce production costs and improve efficiency, the company has launched a major restructuring effort with plans to close plants, eliminate jobs, build a factory in Mexico, and outsource some chocolate production to Barry Callebaut AG, a Swiss company that recently agreed to buy a plant in Delaware County. This restructuring effort will reduce the number of production lines by more than one-third.

The company also hopes to reduce operating costs through their new global supply chain transformation. The supply chain transformation program will take three years to complete and upon completion will enhance their manufacturing, sourcing and customer service capabilities, and generate resources to invest in the company’s growth initiatives. Announced in February 2007, the supply chain transformation will eliminate about 1,500 suppliers, Hershey president Richard Lenny said. “This effort remains on track and is scheduled to deliver savings of about $15m by the end of the year with a significant step-up in 2008,” he added. The $500 million-plus restructuring is designed to cut costs and excess production capacity (www.confectionerynews.com).

Hershey had a massive failure with their investment in the restructuring of their supply chain technology this decade beginning in 1998. Hershey spent more than $100 million on a new order management, supply chain planning, and CRM system to transform the company’s IT infrastructure and supply chain (www.scdigest.com). The Hershey Company had the products ready to be shipped; however, glitches in the new technology prevented the products from being shipped to their designated customers. In the end over $150 million in order were lost and Hershey’s quarterly profit dropped 19% in the third quarter of the year and took another financial blow in the proceeding 4th quarter (www.scdigest.com). Although The Hershey Company’s strategy is solid internally, past experience may potentially nullify any benefits that will be gained upon implementation of their new supply chain technology.

EXTERNAL GROWTH

“Throughout 2007, our top priority has been to restore momentum within the
U.S.,” Hershey president Richard Lenny stated. “Product focus will be shifted more on Hershey’s “iconic” brands, as well as expanding the range of premium and dark chocolate products, such as the Cacao Reserve, Scharffen Berger and Starbucks bars, with its new Hershey’s Bliss bar” (www.thehersheycompany.com). To achieve success, The Hershey Company will double ad spending and continue to utilize Wal-Mart TV. The company is now focused on improving margins in the long term, which they hope to achieve by investing in consumer marketing, greater retail coverage, and broadening its range of premium brands.

The Hershey Company has intently focused on being a major competitor in the global market and recent strategic alliances and joint ventures may be the first step. This year alone, Hershey has announced deals with Swiss chocolate company Barry Callebaut, Korean confectioner Lotte, and Godrej Beverages & Foods in India. These three recent alliances will help propel The Hershey Company in their pursuit for global market share. The deal with Barry Callebaut, announced in May 2007, calls for the company to provide Hershey with 80,000 tones of chocolate per year. “We look forward to working with to expand our growth in the global chocolate market,” said Richard Lenny, chairman and president of Hershey (www.smartbrief.com). “Barry Callebaut is a worldwide leader in premium chocolate and innovation, and this alliance provides Hershey with immediate access to these capabilities” (www.smartbrief.com).The Hershey alliance with Barry Callebaut follows the strategy of outsourcing to promote efficiency and profitability.

In order to target the lucrative potential of the burgeoning Chinese market, Hershey formed a partnership with Korean confectioners Lotte. Lotte will own a 51 percent stake in the joint venture, to be operated in Shanghai but headquartered in Hong Kong, according to the joint statement released by Lotte(www.iht.com). This brings Hershey’s total investment in this venture to approximately $38 million (www.seekingalpha.com). The manufacturing joint venture in China is on track and producing products, specifically Hershey is manufacturing Kisses, Nuggets, and chocolate bars in anticipation of demand related to the holiday season. The Hershey Company has also begun discussions with Lotte about distribution and selling of Hershey products in South Korea and Japan.

Hershey continued its push into Asia with a deal to buy 51 percent of Godrej Beverages & Foods in India (www.iht.com). Hershey is leveraging their R&D expertise and go-to-market capabilities as they focus on business growth and profitability. The Godrej-Hershey joint venture in India is progressing as planned. The Hershey Company’s investment in manufacturing is on schedule and more than adequate to support the upcoming launch of the Hershey branded products in India. The Godrej-Hershey venture will give Hershey access to India’s fast-growing market for imported candies and snacks. Hershey’s chairman, chief executive and president, Richard Lenny, said in a statement that the deal was a “significant step in Hershey’s global growth strategy” (www.thehersheycompany.com). Hershey paid about $60 million for the controlling stake, which brings access to Godrej’s two factories and to 1.6 million retail outlets (www.iht.com). These joint ventures with Lotte and Godrej may speed up the access and acceptance among the people in the emerging countries that these companies reside and operate in. These regional players could also help alleviate potential problems that arise with government policy and negotiations that would aid in Hershey establishing their brand. However, the local partner could, once he has absorbed the international know-how from the foreign associates, decide to break the venture and apply the acquired knowledge in its own set-up.

BUSINESS LEVEL STRATEGY

The business level strategy for The Hershey Company focuses on a combined strategy integrating overall low cost and differentiation. Hershey is in the midst of an overhaul of their supply chain, reducing the number of production lines, outsourcing production of some of their products, and building a manufacturing plant in Mexico to offset the rising costs of production and inevitably pass the savings on to the consumer. Although it has required an enormous amount of upfront capital, the successful implementation of the revolutionary supply chain technology should streamline operations on a global scale and cut costs in production through efficiency. The company’s strategy is a bid to cut costs by making its supply chain more efficient, further increase the company’s global footprint, and allow them to outsource production of their low value-added products (www.foodproductiondaily-usa.com). To achieve that aim, Hershey said it will outsource operations and reduce its number of production lines by over a third (www.foodproductiondaily-usa.com). Production will be focused on a small number of factories rather than scattering manufacturing across North America. Hershey expects margins to swell significantly as a result of the restructuring, predicting savings of between $170 million to $190 million by 2010 (www.foodproductiondaily-usa.com). The plan aims to boost use of the company’s production capacity to 85 percent by 2010 from the current 65 percent (www.foodproductiondaily-usa.com).

With recent strategic alliances with Barry Callebaut, Hershey is starting to effectively manage relationships throughout the value chain and is intently focused on lowering costs in the entire chain. Hershey, which has been advancing into more trend-driven niches such as premium, dark and ethically-sourced chocolate, is set to benefit from Barry Callebaut’s reputation as a responsible producer as well as their experience in the manufacture of luxury chocolate items (www.dairyreporter.com). Hershey president Richard H Lenny said: “This partnership provides Hershey with immediate access to broad expertise in premium chocolate and builds on our strong research and development capabilities. We will work together on research involving unique cocoa flavors and formats to enable superior new product innovation (www.dairyreporter.com). This alliance will push for further reform in West Africa to monitor cocoa production and ensure efficiency standards and labor regulations are adhered to. Along with the recent Barry Callebaut alliance, Hershey has been strategic in the acquisitions of Scharffen Berger, Joseph Schmidt and Dagoba Chocolate in July of 2005, which helped establish the company as a significant player in the high growth premium chocolate segment. These alliances and acquisitions have helped differentiate Hershey in the prestigious gourmet chocolate market.

Hershey is positioned for phenomenal success for years down the road. By integrating low-cost and differentiation strategies they have made it harder for competitors to duplicate their successful model. The goal of focusing on this integrated strategy is to provide two types of premium value to customers, differentiated attributes and lower prices. The Hershey Company’s main goal becomes one of providing unique value to customers in an efficient manner.

FUNCTIONAL-LEVEL STRATEGIES

Hershey’s functional level strategy focuses on five main components: production, marketing, finance, information systems, and R&D.

PRODUCTION

The past few years for Hershey have been tumultuous. They have yet to recover from their stumble in the fall of 2006 while shifting from one product platform to the next. In February of 2007, Hershey announced a major restructuring designed to cut costs and excess production capacity in the United States and Canada, while expanding in Mexico, China and India, where labor is cheaper and Hershey hopes to sell more candy (www.christopherspenn.com). Since then, Hershey has announced they will close six U.S. and Canadian plants and cut more than 3,000 workers in the two countries, including up to 900 at their hometown plants as well as reduce the number of production lines it operates by more than a third as they spend up to $575 million to overhaul manufacturing (www.reuters.com) . The largest U.S. chocolate maker also said they would outsource production of some products and would build a cost-efficient manufacturing plant in Monterrey, Mexico. “From the union standpoint, we’ll do whatever we think we can do to keep our union plants,” said Dennis Bomberger, business manager for Chocolate Workers Local 464, which represents about 2,500 Hershey employees. But he said there might be little the union could do to protect the jobs (www.reuters.com).

MARKETING

Increased marketplace competition has significantly impacted Hershey’s business and as a result, The Hershey Company has been required to increase expenditures for promotions and advertising and continue to introduce and establish new products. The foundation of the Hershey marketing strategy is their strong brand equities, product innovation, superior quality of the products, manufacturing expertise, and mass distribution capabilities. Hershey stimulates sales of certain products with promotional programs at various times throughout the year. As of recent, Hershey’s advertising has flopped, leaving stores backed up with their older products. The new product focus will be on Hershey’s iconic brands, as well as expanding the range of premium and dark chocolate products, such as the Cacao Reserve, Scharffen Berger and Starbucks bars, with their new Hershey’s Bliss bar (www.confectionerynews.com). Hershey will increase marketing and promotional spending on these products, compared to the third quarter 2007 as well as the same period in 2006. As The Hershey Company plans to reinvigorate sales in core products such as Kisses and Reese’s, the company plans to double ad spending and continue using Wal-Mart TV (publications.mediapost.com). After a 10 percent drop in net income during the holiday-heavy fourth quarter, executives said the company will double spending this year behind those products and with the flagship Hershey brand. CEO Richard Lenny said Hershey believes in the effectiveness of the Wal-Mart in-store network, which is in some 3,000 stores and operated by Premier Retail Networks (PRI) (publications.mediapost.com). A campaign last year for Hershey’s Kisses produced a greater ROI than network TV, Lenny said. For 2007, executives said the greater marketing outlay is part of their plan to increase net sales by 3 percent to 4 percent (publications.mediapost.com).

INFORMATION SYSTEMS

The Hershey Company has implemented a three-year plan for the development and execution of a revolutionary global supply chain technology. This supply chain transformation will utilize a number of data gathering centers and implement a core realignment that will create a more efficient and flexible global supply chain network. The transformation program will result in a flexible, global supply chain capable of delivering Hershey’s iconic brands, in a wide range of affordable items and assortments, across retail channels in the company’s priority markets. Finished products will be sourced from fewer facilities, each one a center of excellence specializing in Hershey’s proprietary product technologies. Increased access to borderless sourcing will further leverage the company’s manufacturing scale within a lower overall cost structure. The program will result in a total net reduction of approximately 1,500 positions across Hershey’s supply chain over the next three years (www.thehersheycompany.com). The supply chain will create stronger margin structure, increase manufacturing utilization through consolidation, and improve asset utilization. When completed, manufacturing of approximately 80 percent of the company’s production volume will take place in the U.S. and Canada. The company estimates the program will incur pre-tax charges and non-recurring project implementation costs of $525 million to $575 million over the next three years (www.thehersheycompany.com). This estimate includes $475 million to $525 million in pre-tax business realignment charges and approximately $50 million in project implementation costs (www.thehersheycompany.com). These charges will be incurred primarily in 2007 and 2008, with approximately $300 million expected in 2007. The cash portion of the total charge is estimated to be $275 million to $300 million (www.thehersheycompany.com).

RESEARCH AND DEVELOPMENT

The Hershey Company has a strong tradition of creating quality products and successfully extending these products into new lines and new ventures. “Our goal is to redefine the future of snacking by offering consumers products that provide proven health benefits and the superior taste they expect from Hershey,” said Tom Hernquist, senior vice president, chief global growth officer (www. thehersheycompany.com). In May of 2006,as part of their increasing efforts in the area of healthier snacking, the Hershey Company announced the establishment of the Hershey Center for Health and Nutrition in Hershey, Pennsylvania. The center will direct cutting-edge scientific research to develop products and technologies that provide consumers with health benefits in the areas of heart health, weight management and mental and physical energy, as well as build upon the science, clinical studies and research work already underway at the company (www.thehersheycompany.com). The Hershey Center for Health and Nutrition is designed to be a significant source of new-product innovation as it draws upon clinical studies and scientific analysis of the health benefits of cocoa, nuts and other natural ingredients ( www.thehersheycompany.com.) . The center will utilize the company’s internal scientific capabilities as well as partnerships formed with internationally known researchers and institutions. The Hershey Center for Health and Nutrition is designed to be a significant source of new-product innovation as it draws upon clinical studies and scientific analysis of the health benefits of cocoa, nuts and other natural ingredients. The center will utilize the company’s internal scientific capabilities as well as partnerships formed with internationally known researchers and institutions. In addition to The Hershey Center for Health and Nutrition, The Hershey Company and Barry Callebaut are partnering to accelerate long-term growth in the global chocolate market. The companies said they will partner on a wide range of research and development activities with a focus on driving innovation in new chocolate taste experiences, premium chocolate, health and wellness, ingredient research and optimization (www.foodprocessing.com). Hershey has also recently introduced Hershey’s Wellness. The Hershey’s Wellness line is an attempt to capitalize on the health benefits of chocolate.

GLOBAL-LEVEL STRATEGY

Hershey’s emphasis is on accelerated growth and on lowering costs, which both are main tenets that follow a global strategy. The Hershey Company strives to offer standardized products and services with centralization in a few locations. With the implementation of their new global supply chain technology, Hershey is prepared to create a standard level of quality throughout the world. Hershey’s has steadily acquired strategic alliances and joint venture partnerships with Barry Callebaut, Lotte, and Godrej Beverages and Foods. These three strategic alliances that were formed in the past year are part of Hershey’s global level strategy to exploit the existing relations these companies possess and help brand Hershey’s in these new emerging economies. The Hershey Company has five operating segments comprised in geographic regions including the United States, Canada, Mexico, Brazil and other international locations, such as Japan, Korea, the Philippines and China (www.investor.reuters.com). The Hershey Company has spent nearly $100 million alone in investing their global strategy with joint ventures associated with Lotte and Godrej and near $500 million for their global supply chain technology. Hershey’s strategy is increasingly cost prohibitive with profits not being projected for years to come and the possibility of rejection in new foreign markets might be more than Hershey’s can chew in one sitting.

SOCIAL RESPONSIBILITY

The ethical theory relating the responsibility of a society to a company, corporation, or business can be referred to as a company’s social responsibility. A company may express a responsibility by pledging to act in a certain way. A company can also refrain from an action or activity to participate in social responsibility. A company who helps society is viewed in a positive light. However, a company who harms society will have a negative reputation. “At The Hershey Company, we’re committed to making a difference in the communities where we live, work and do business,” (www.hersheys.com). This statement taken from Hershey’s company website expresses their attitude toward social responsibility. Their efforts show that Hershey is a company who believes in helping people and the environment.

The Milton Hershey School

The Milton Hershey School was founded almost a century ago and the founding principles and ideals are still apparent today. The school focuses on the development of productive young lives filled with social and financial education. “At Milton Hershey School, activities are more than an extra. Students here enjoy a variety of activities that help them explore their talents and interests, build leadership and character, and make friends.” (www.mhs-pa.org). The school starts at pre-K and goes to the twelfth grade. This institution provides free education, housing, clothing, meals, career training, healthcare, and counseling (www.hersheys.com). These amenities are provided to nearly 1,400 boys and girls of the Commonwealth of Pennsylvania and across the United States. Catherine and Milton’s vision still continues today.

Giving Back to the Community

Hershey is involved with various organizations within the community. Hershey not only gives financial assistance but also employees’ time and talents. Hershey gives direct financial assistance to the following organizations: American Red Cross, YMCA, and the Partnership for a Drug-free America (www.hersheys.com). Hershey’s annual involvement with the United Way Campaigns exemplifies their community work. For the past ten years, Hershey employees have raised money and devoted many hours with the Children’s Miracle Network. This non-profit organization provides assistance to Children’s Hospitals across the U.S. Hershey believes furthering education. “The company has made a five year, $500,000 commitment to the , providing scholarships that help minority students in Central Pennsylvania achieve their career and educational goals” (www.hersheys.com).

Commitment to Children’s Fitness

The Hershey Company has sponsored Hershey’s Track and Field Games for the past thirty years. During this time more than 3,000 communities and over 400,000 kids have been introduced to the fun and rewards of physical fitness (www.hersheys.com). Today, this program is the largest youth sports program of its kind. This program strengthens activities such as running, jumping, and throwing. Each year 500 qualifying children receive an all-expense-paid trip to the North American Finals. Recently, The Hershey Company has partnered with USA Track & Field to further promote and increase awareness of physical fitness for America’s youth. The USA Track & Field professional athletes become spokespersons for the youth who attend the Track and Field Events.

Environmental Awareness

The Hershey Company pledges to protect Mother Earth. It is not only important to protect the environment, but also conserve natural resources. “Our emphasis on the environment is part of an established commitment to sustainability across our business” (www.hersheys.com). Hershey fulfills their commitment by participating in recycling and reducing their emissions. Hershey recycles 90 percent of their waste in their own recycling center. By using recycled paper, Hershey is able to save thousands of tons of paper and paper products (www.hersheys.com). “The company has found their recycling efforts are saving close to a millions dollars annually” (www.greenworks.tv). Hershey also continuously strives to improve their processes thereby reducing waste production across the entire business. They are able to save the amount of metal, paper, and plastic consumed. Hershey promotes recycling to the community by hosting recycling programs and contests.

Hershey also utilizes energy-saving technologies. Energy-saving lights and refrigeration systems are just a couple of examples of their technologies. Hershey also requires their vendors and suppliers to adhere to strict environmental standards set locally, statewide, and federally.

Helping Abroad

Hershey makes a difference locally and abroad. The Hershey Company supports organizations such as the World Cocoa Foundation, The International Cocoa Initiative, and the International Foundation for Education & Self-Help. These organizations provide teaching programs helping farmers to learn how to farm more profitably, ensure abusive child labor or force adult labor is not used in the cocoa facilities, and enhances teaching skills in the Ivory Coast and Ghana communities (www.hersheys.com). Helping the many communities in Africa helps the cocoa industry as a whole.

ETHICS

Ethics involves making decisions as to whether decisions are right or wrong. There are two main approaches to organizational ethics: integrity-based versus compliance-based. “An integrity-based approach to ethics management combines a concern for law with an emphasis on managerial responsibility for ethical behavior. The compliance-based approaches are externally motivated – that is, based on the fear of punishment for doing something unlawful (Dess, 422). Additionally, companies are classified as amoral (i.e., proactive to every situation), moral (i.e., reactive to problems), or immoral (i.e., defensive and deny problems) based on their managerial decisions. Hershey is most appropriately classified as a moral company that subscribes to the integrity-based approach. Hershey has promptly reactive to problems and issues the company has faced and has developed processes to reactive and prevent problems and issues from occurring in the future. Hershey’s commitment to high ethical standards started under Milton Hershey. Hershey’s commitment to sound high ethical behavior is expected from their directors, officers, and employees at every level of the organization. Hershey’s dedication has resulted in a reputation of integrity, fairness, and “doing what is right”.
Hershey’s “Statement of Corporate Philosophy” addresses four fundamental principles stating that the corporation will:

1. “Maintain and enforce high standards of ethical conduct”
- Relationships will be based on honesty, trust, fairness and respect
- Operations will be conducted in accordance with legal and regulatory
requirements and in an environmentally responsible manner
- Community needs will be met proactively and responsibly

2. Maintain a strong “people orientation” and demonstrate care for every
employee
- Employees will be treated fairly and with respect
- Employees will be offered competitive wages and benefits, good working
conditions and rewards for success
- Workplace diversity will be supported as a corporate priority
- Communications with employees will be clear, direct and timely
- Teamwork and collaboration, learning and personal growth will be
encouraged
- Promotion from within will be practiced whenever possible

3. Attract and retain consumers and customers with products and services of
consistently superior quality and value
- Consumer and customer needs will drive our efforts to win in the
marketplace with superior brands and a competitively-advantaged business
system

4. Maintain a prudent, results-oriented approach to business that builds
superior shareholder value over the long-term
- Discipline, focus, personal accountability and a passion for winning will be
encouraged and rewarded
- Challenging business objectives will be set to ensure a steady rate of real
growth, while maintaining the financial strength of the corporation
- Profitable growth will be pursued while maintaining excellence in our
existing business
- Growth opportunities will be sought actively within and outside the
corporation in areas which capitalize on Hershey’s immense strengths
- Positions of market leadership will be pursued” (The Hershey Company
Code of Ethical Business Conduct)

The Hershey’s “Code of Ethical Business Conduct” establishes their expectations for managers’, employees’, and other stakeholders’ behavior. The plan describes the general principles for the every Hershey’s director, officer, and employee as it relates to the following: compliance with laws, use of corporate funds and resources, political activities and contributions, payment to government officials, financial accounting and reporting, conflict of interest, antitrust and competition laws, trading in the Hershey Company and other related securities, relations with employees, commitment to consumers, environmental protection, protection of information, and fair dealing. Although the Code covers a wide range of topics the Code includes a disclosure declaration stating that, “the Code is not a substitute for good judgment, nor does it cover every situation you may encounter during your professional career. The basic principles and standards are here [within the Code]; you [officers, directors, and employees] must understand and apply them in your [officers, directors, and employees] work” (The Hershey Company Code of Ethical Business Conduct).

As a proactive measure to ensure ethical behavior, Hershey created the “Ethical Business Practices Committee to accomplish and the following:

1. Implementing or communicating to directors, officers and employees the Code and the Company’s overall ethics program.

2. Providing direction to directors, officers and employees, including managers, regarding questions or issues concerning the Code.

3. Being available to officers and employees for any reporting of potential conflict of interest, any other potential violation under the Code or other potential violation of law or other Company policy.

4. Providing advice and guidance to the various departments and personnel throughout the Company responsible for legal compliance and education efforts.

5. Making reports to the Chief Executive Officer and the Audit Committee of the Board of Directors relating to key issues or investigations and any changes in overall compliance and education with respect to the Code.

In addition to the Ethical Business Practices Committee, Hershey’s officers, directors, and employees have access to the a toll-free Concern Line and electronic resources that allow them to anonymously report concerns in good faith without retaliation.