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 / Autumn 2009 / Issue 56(originally published by Booz & Company)


Inside the Kraft Foods Transformation

Looking Forward

Jean Spence: Before OFG, the business units were able to say, “I missed my plan, but you left me nothing else to pull from my P&L besides marketing, and of course that’s going to make my market share go down.” They can’t say that now, because they make their own P&L decisions, and I think we’re getting more effort from them. We’re certainly getting better results.

In addition, we’re being forced to allocate costs more accurately. When we peeled out everything that people do — the functions had to list their services and what they really cost — it became clear that certain business units were getting charged disproportionately. That meant that some of our more profitable business units were subsidizing less profitable ones. I personally think the transparency will make us a better company, because now, if we can’t get the margin up in a particular area, it will force us into some tough discussions and decisions.

Dave Brearton: In 2008, in a further evolution of OFG, we gave our business units an internal cash-flow target and, with all the P&L and balance sheet levers they needed now at their disposal, they exceeded it handsomely. You’re not going to improve your cash flow unless the entire business works together. If the dots connect only at the office of the CEO, it isn’t going to work.

Rick Searer: Overall, I would say that OFG is working very well. The organization is adopting good practices and has embraced it very positively. I think it’s fair to say, though, that the flywheel is only just beginning to turn. That’s not too surprising given the dramatic change and the fact that we had a business that was in need of fixing as we entered 2007. So we are nowhere near the end state on this. One is never truly in an end state, anyway.

Irene Rosenfeld: When I talked to investors about it, they were often concerned. “You’re making this tremendous organizational change!” they’d say. But I knew in my heart that this was going to be a big enabler for us. It is a fundamental human desire to be in control of your destiny and to make the necessary decisions that will affect your performance. When we tapped into that desire, it took us to a whole new level. We’ve just about turned the motor on; now, we’re ready to make it hum.

Six Keys to a Successful Reorganization

The strategy+business team asked executives at Kraft Foods Inc. what advice they would offer a CEO or senior leader considering a similar corporate transformation. The following factors came up most consistently in their answers.

1.  Start with the business strategy. Whatever else it may be intended to do, the new organizational model should primarily enable and catalyze the strategic direction of the company. If the strategy isn’t clear, the organization cannot align behind it. In Kraft’s case, the need to move decision making closer to consumers and markets was a clear strategic shift that prompted other changes and discussions.

2. Go beyond lines and boxes in designing the organization. You must have the right people, and the right reporting relationships, in any change initiative. However, that alone is not sufficient for success. Kraft went further, addressing work-flow processes, decision rights, metrics, career paths, corporate policies, incentives, and talent development. Executives credit this deeper execution for many of the benefits their change initiative has produced.

3. Understand that one size does not fit all. Any robust organizational model will apply in different ways in different situations. Decentralization of the business units was Kraft’s theme. But there were also functions, and markets, where centralization served customers — and the company — better, because Kraft was able to leverage its scale. Where this was true, as in its North American sales operation, Kraft didn’t hesitate to make exceptions.

4. Have thorough planning discussions pre-launch, to be able to move quickly later. Major change initiatives work best when key stakeholders have had a chance to articulate their concerns — and when the team involved in the decision has had the time to think through the implications of the new model and establish some guiding principles. The detailed qual­ity of these discussions can engender some initial frustration, but at Kraft they built a sense of collective ownership. The discussions also led to a road map that allowed the corporation, in the long run, to move more decisively.

5.  Leverage the power of leaders. Transformation efforts that don’t have the support of senior leadership often fail in spectacular fashion. But Kraft required much more of its leaders than verbal support, asking its nine-person executive team, and then an expanded group of 120 senior managers, to hammer out the details of the new model and keep it moving forward. Kraft executives were in­volved in all major proposed changes — critiquing the changes, keeping them on track, and talking them through with other Kraft executives who might be affected.

6. Expect a multiyear journey. Even the best-planned change initiative requires some course corrections — or ends up working best when done in phases. Kraft began by moving decision making about such matters as product development and manufacturing to lower levels in the hierarchy — thus taking aim at one of the biggest perceived problems in the company, its general managers’ lack of control over key P&L levers. In 2009, Kraft is focusing on some other aspects of the new model, such as how to implement shared services. And now that the new organization structure is in place, the company is shifting its attention from rewiring the organization to building high-performing teams.

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  1. "CEO Forum: Rosenfeld Keeps Kraft from Being Too Cheesy,” USA Today, December 11, 2008: Interview discusses outlook for the recession, the “Innovate with Kraft” program, the glass ceiling, and the turnaround described in this article.
  2. Vinay Couto, Per-Ola Karlsson, and Gary L. Neilson, “Putting Headquarters in Its Place: The New, Lean Global Core,” Booz & Company white paper: Spells out the kind of organizational design that proved relevant at Kraft Foods Inc.
  3. Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, “The Secrets to Successful Strategy Execution,” Harvard Business Review, June 2008: Complements the suggestions in this article by showing why effective organizational redesigns go beyond lines and boxes.
  4. Jaya Pandrangi, Steffen Lauster, and Gary L. Neilson, “Design for Frugal Growth,” s+b, Fall 2008: How to use a similar type of redesign to cut costs and expand simultaneously.
  5. Janet Paskin, “The Corner Office: Cooking Up New Growth,” SmartMoney, July 2009: An interview with Irene Rosenfeld on how Kraft is staying competitive and creative.
  6. Kai Ryssdal, “Conversations from the Corner Office: Interview
    with Irene Rosenfeld
    ,” Marketplace, February 10, 2009: Kraft’s CEO, in a public radio interview transcript, on why it’s a good time to be in the foods business and how the company expects to grow.
  7. Central source for information about the company and its products.
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