Maggie Jones MGT 590

Module 5Page 1

Sara Lee Corporation in 2011: Has Its Retrenchment Strategy Been Successful?

Executive Summary

Sara Lee Corporation was founded in 1939 and, as of 2001, had acquired more than forty

companies. Sales reached $10 billion in 1988, $15 billion in 1994, and $20 billion in

1998.However, revenues peaked in 1998, as Sara Lee struggled to manage the company’s

broadly diversified and geographically scattered operations.

In February 2005, Brenda Barnes, Sara Lee’s newly appointed president and CEO,

announced a strategic plan to transform Sara Lee into a more tightly focused food, beverage, and

household products company. The centerpiece of Barnes’s transformation plan was the

divestiture of weak-performing business units and product categories accounting for $8.2 billion

in sales - 40% of Sara Lee’s annual revenue. Barnes believed that Sara Lee could benefit from

concentrating its financial and managerial resources on a smaller number of business segments

where market prospects were promising and Sara Lee’s brands were well positioned. As the first

phase of Barnes’s transformation plan, Sara Lee was to exit eight businesses: Direct selling, U.S.

retail coffee, European apparel, European nuts and snacks, European rice, U.S. meat snacks,

European meats, and Sara Lee branded apparel.The latter was spun off as an independent

company, Hanesbrands Inc.

Following the disposition of these nonstrategic businesses in 2006, Sara Lee focused on

increasing the sales, market shares, and profitability of its remaining businesses including North

American Retail, North American Fresh Bakery, North American Foodservice, International

Beverage, International Bakery, and International Household & Body Care.

Maggie Jones MGT 590

Module 5Page 2

Sara Lee’s management estimated that by focusing more on the stronger brands with

good growth potential, its revenues would grow to $14 billion in fiscal 2010 and that the

company’s operating income margin would increase to at least 12%. Additionally, executives

believed that the retrenchment strategy would generate sufficient cash flows to pay the

company’s total debt down to between $1.5 and $2 billion by fiscal 2010, pay substantial

dividends to shareholders, and repurchase shares of common stock.

Sara Lee missed both revenue and operating profit margin projections for 2010 and it was

unclear whether the retrenchment strategy had increased shareholder value.During 2010, Sara

Lee had engaged in further retrenchment with the divestiture of its International Household and

Body Care business that produced and marketed Kiwi shoe care products, Sanex personal care

products, AmbiPur air fresheners, and various insecticides and cleaning products sold outside

North America.The same year, management launched a share buyback plan and Project

Accelerate, a company-wide cost savings and productivity initiative focused on outsourcing,

supply chain efficiencies, and overhead reduction, had saved the company $180 million.Barnes

suffered a stroke and was succeeded by CFO Marcel Smits as interim CEO. i

Analysis

Sara Lee’s retrenchment is based on a strategy of related diversification.As noted in our

text, “Related diversitication is based on value chain matchups with respect to key value chain

activities.”iiWith the exception of International Household & Body Care, which was slated for

divesture in 2009, the businesses retained were all in the food and beverage industry and, given

this relationship, relied on the same value chain activities such as production, purchasing,

advertising, marketing, R&D,distribution, and customer service.This strategy provided Sara Lee

Maggie Jones MGT 590

Module 5Page 3

the opportunity to focus on food and beverages as a core competency while taking advantages of

synergies between the different businesses.By facilitating the sharing or transferring of

competitively important resources and capabilities, related diversification promised to boost each

business’s prospects for competitive success.The retrenchment strategy allowed Sara Lee to take

advantage of several cost sharing, skill transfer, and joint promotion opportunities between

business units.

Evaluation

While Sara Lee’s performance has been underwhelming since the retrenchment initiative

was launched in 2005, the investment and divesture decisions were advised.Many of the

businesses that were selected for divestment were unrelated to the company’s core

competencies.That is, their resource requirements and key value chain activities were so

dissimilar that no competitively important cross-business relationships existed.iiiThese include

direct selling, European apparel, and Sara Lee branded apparel. Divested businesses in the food

and beverage industry such as European Nuts and Snacks, European Rice, and U.S. Meat Snacks

were, for the most part, poor performers with low sales volume. The benefits of the company’s

decision to discontinue European meats, however, are less evident. The $1.1 billion dollar

business seemed to have a good strategic fit with the other core businesses which were retained.

Overall, the food and beverage industries in which Sara Lee competes are only

moderately attractive. Nevertheless, the businesses which were targeted for investment have

strong positions in their respective industries. While Sara Lee may not have fully realized the

projected benefits of the retrenchment strategy, it continues to hold potential for the future.

Maggie Jones MGT 590

Module 5Page 4

Recommendations

In order to achieve the best results from their retrenchment strategy, it’s recommended

that Sara Lee continue to focus on those businesses that offer the best growth opportunities,

divest themselves of poorly performing businesses, and consider acquisition of companies that

can contribute to Sara Lee’s future growth.

Businesses that should be considered investment priorities in the coming years are those

that offer the best opportunity to increase revenue.The best candidates include Sara Lee

Foodservice and Sara Lee International Beverages.Simultaneously, the following businesses are

recommended for divesture are International Household & Body Care and Sara Lee International

Bakery.

Finally, Sara Lee could benefit from the acquisition of up-and-coming companies or

mergers with established firms in the other food and beverage industriesthat can help them

quickly enter new markets or more rapidly expand in existing markets.It’s recommended that the

company continually monitor new entrants to the market in order to identify acquisition

candidates.Similarly, it may be worthwhile to initiate discussions with larger food and beverage

firms to identify whether a strategic alliance or merger can benefit both companies.

i Thompson, Arthur A and Gamble, John E. “Sara Lee Corporation in 2011: Has It’s Retrenchment Strategy Been

Sucessful?” (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage. New York, NY.

McGraw Hill Irwin.

ii Thompson, Arthur A., Peteraf, Margareat A, Gamble, John E., and Strickland, A.J. ?”(2010). Crafting and

Executing Strategy: The Quest for Competitive Advantage. New York, NY. McGraw Hill Irwin.p. 255.

iiiIbid. p. 254.