Justify the outstandings,

KRAFT INCORPORATED

Some of America's best known brand names in food products are produced by Kraft. These include Kraft, Velveeta, Parkay, Miracle Whip, Philadelphia, Cracker Barrel, Sealtest, Light n' Lively, Breyers and Breakstone's. The company's products are sold to stores and restaurants in 130 countries by over 5000 salespeople. Kraft ranks second only to General Foods in the food processing industry. The company is truly an industry giant that grew from very humble beginnings.

Even as Kraft has changed, so has the food processing industry. In the 1980s, Kraft and its competitors have realized that the recent and projected slow population growth in the United States means that most future gains in the market share must come at the expense of one another. As a result, the industry is being restructured through mergers and acquisitions as the major firms seek to strengthen their competitive positions. In order to remain at the top of the industry, Kraft's top managers must make correct strategic decisions regarding the company's product mix and the manner in which to structure the organization in order to best compete in the changing industry environment.

HISTORY OF THE COMPANY

James L. Kraft came to Chicago from Canada in 1903 and began wholesaling cheese from a rented, horse-drawn wagon. His four brothers -Fred, Charles, Norman, and John-joined the prospering business. By 1914, they were selling 31 varieties of cheese under the brand names Kraft and Elkhorn.

Kraft merged with a rival company, Phenix Cheese, in 1928. Kraft-Phenix accounted for 40 percent of U.S. cheese production and also had operations in Canada, Australia, Britain, and Germany. The company was acquired in 1930 by National Dairy. The new company ranked as one of America's largest, with annual sales of $375 million. For the next four decades, Kraft functioned as a separate entity in Chicago, while National Dairy functioned primarily as a holding company from its headquarters in New York City.

James L. Kraft died in 1953 at the age of 78. In 1969, the National Dairy company name was changed to Krfatco. Corporate headquarters was moved from New York City to the Chicago suburb of Glenview in 1972. In 1976, the company name was changed to its current title, Kraft, Incorporated.

OPERATIONS AT KRAFT INC.

Michael a. Miles was President and Chief Operating Officer of Kraft, Inc. in 1985. Kraft's mission statement from that year is presented in Exhibit 2. Mr. Miles had publicly identified five strengths and three weaknesses of Kraft. The Five strengths and supporting reasons for them were as follows:

1. Huge mass and resources -Kraft is one of the four largest food business in the world, and second only to General Foods in the United States.

2. Growth markets and growth categories - from 1979 to 1983, per capita consumption of cheese in the United States increased 23 percent, pourable dressings 14 percent, and premium ice cream 18 percent.

3. Extremely strong brand names and market share positions - Kraft is either the leader or a strong contender in virtually all of the major categories in which it operates.

4. Excellent customer relations - research indicates Kraft has the best reputation for quality in the food industry and that only Procter and Gamble compares with Kraft in sales-force skill and effectiveness.

5. Worldwide infrastructure - the human and financial resources are in place to support new business initiatives anywhere in the world.

Mr. Miles also reported the following weaknesses:

1. No recent track record of success in developing significant new products

2. Too conservative; need more challenges

3. Increasing competition.

Mission Summary

Kraft's mission is to become the leading food company in the world, based on achieving superiority versus competition in the balance of these factors:

Outstanding overall quality of people, products, and business plans

Return on management investment (ROMI)

Rate of growth in unit sales and operating income

Innovation

Competition

Kraft has mass and resources that enable it to compete with any company in the world, and will utilize these resources to the fullest legal, ethical, and moral extent.

Kraft will engage any competitor in any geographical market, category, or channel of distribution of interest, where the combination of product quality, management quality, and innovation provides us with a sustainable competitive advantage

Kraft will defend its established business ferociously

Customers

Kraft's businesses will be built on the fundamental concept of achieving superiority versus competition in:

Identifying the needs of customers, both end-consumers and trade

Providing high-quality products and / or services to meet those needs in unique or advantages ways

Marketing those products/services to reinforce their appeal and achieve superior acceptance.

People/organization

Kraft recognizes that the quality of its people is the critical element in achieving the success of its mission

Kraft's human resources policies and practices will be built on a standard of excellence and a total commitment to equal opportunity and fair treatment.

Kraft will promote based on merit and from within wherever possible

Industries/Markets/ Channels of Distribution

Kraft will compete in any segment of the food business, in any geographic market, and in any channel of distribution, where:

Participation can make a material long term contribution to sales and income, while generating returns at or above corporate targets

The combination of product quality, management quality, and innovation provides us with a sustainable competitive advantage-or the prospect of same in a reasonable time frame.

Business Style

Kraft's business style is characterized by:

Overarching commitment to quality

Openness, honesty

Initiative

Innovation

Aggressiveness

Action orientation

Competition

Efficiency

Risk acceptance

Superior analysis and planning

A standard of excellence in people

What we say we do, we do.

James L. Kraft

In addition, Mr. Miles outlined five broad strategies Kraft was currently pursuing:

1. To protect and build the existing business - for branded products, increased spending on advertising - competitive pricing and more emphasis on advertisable product improvement -for commodity products, being the lowest-cost producer

2. To gradually weight the businesses mix toward branded, value-added products and away from commodities

3. To augment the growth of existing branded positions by a more active new business development effort

4. To continue to pursue expenses and asset minimization in all areas

5. To increases organization vitality

President Miles believed that these strategies would best capitalize on Kraft's major strength: quality reputation in producing and promoting branded food products. As theses branded products were expanded, the company planned to continue the retreat from fluid milk and certain private - label items, and from its bulk cheese and edible oil businesses in Europe.

The fifth strategy-increasing organization vitality - involved many actions. These actions included increasing employee communications, eliminating some excess layers of middle management, and a larger-scale test of doubling the size of the U.S retail force. The intent of these actions was to increase the sense of urgency and the timeliness of decision making. Some employees in Kraft's Retail food Group dubbed this the M/B/F Program, meaning more/better/faster.

KRAFT PRODUCT LINES

The key performers during 1985-86 were the Retail Food, Food Service, and Dairy Groups. These and Kraft's other operating units and their principal products are identified in Exhibit 3.

Exhibit 3: Key performers during 1985-1986

GROUP AND DIVISION PRINCIPAL PRODUCTS

Retail Food Group Process, natural, and cream cheese

Refrigerated Products Division Salad dressings, mayonnaise, dry packaged dinners, and barbecue sauce

Venture Division Bagels and herb teas

International Group Primary operations in Canada, West Wide variety of products representing all Kraft Germany, Italy, Australia, the Philippines, divisions Latin America, and Mexico

Dairy Group Ice cream, ice milk, low fat yogurt, cottage cheese, and sour cream

Food Service distributes products from the retail Food Group to restaurants

Industrial Foods Group supplies food manufacturers with edible oils and edible oil-based products, cheese items, snack seasonings, imitation cheese, flavourings, confections, dairy and non-dairy proteins, and other ingredients

All these activities in Kraft's five groups were designed to move the company toward the major goal enunciated in its mission statement: to become the leading food company in the world. As Kraft's top management strives toward this goal, the US food industry is changing. The dairy industry in which Kraft competes has witnessed changes in consumer preferences and consumption patterns during recent years. In addition, the larger food processing industry of which Kraft is part is undergoing major restructuring.