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Strategic Management and the Law
John Budetti, Class of 2005

What can a CPG company teach a law firm about business? Quite a bit, actually...

The multi-billion law firm industry is rapidly separating into a marketplace dominated by two camps: multi-national firms with 500+ lawyers and super-specialized boutique firms. On one side, firms like Baker & McKenzie with 3,250 lawyers and almost 100 offices offer a superstore of legal services. On the other side, some smaller firms do absolutely nothing but appeals to the U.S. Supreme Court. The mid-sized firms continue to get squeezed. As this transformation occurs, the law firms taking the path toward colossal size may be able to look to a surprising source for competitive advantage – consumer packaged goods companies. (Disclosure: I’m going to work for a huge law firm next fall.)

This article includes an oversimplified analysis of two key players in the CPG industry – Kraft and Kellogg’s. For this model, think of a law firm name, like the fictional firm of Budetti, Bigdaddy, and Budee LLP, as akin to a parent corporation’s brand name like Kraft or Kellogg’s. Further, think of a law firm’s practice areas, for example BBB’s M&A practice as akin to Kool-Aid or Kraft Macaroni & Cheese.

Kraft followed a strategy of trying to own half the CPG brands in the world so that Kraft could be everything to all retailers and gain negotiating power in that way. Kraft is #1 or #2 in cheese and 20 other CPG categories of it’s top 25 categories, but they have many more in which they are not in the top two. Kellogg’s is #1 or #2 in all of its categories, even though they are limited to: Ready-to-Eat Cereal, Cookies & Crackers, Toaster Pastries, Frozen Waffles, Cereal Bars, and Veggie Foods. On one hand, Kraft is bigger at #201, compared to Kellogg’s #325 in the Financial Times Global 500. On the other hand, Kraft’s sales growth and profit are down and the company is selling-off brands. Meanwhile, Kellogg’s sales and profits are up and they are in the M&A market looking for category leading brands.

The CPG industry has played out this way, in large part, because direct customers' (not the end consumer) purchasing decisions are de-centralized and made by the buyer for each aisle of the store. The purchasing decisions are not made in the aggregate by a chief merchandise officer or another senior executive. Each individual buyer is empowered to control his aisle, has partial P&L responsibility for his aisle, and wants the brands and the prices that will deliver retail consumers to his aisles.

Unfortunately for Kraft, the buyers who stock the shelves of grocery stores and Wal-Mart with Kraft Salad Dressing do not care about the brand strength or price of Altoids, Cool-Whip, or Velveeta. “Bulking up…seemed like the best way to get leverage with Wal-Mart and other big retailers…What really matters is how big you are in a particular category, and being a star in one aisle doesn't guarantee respect in another,” as The Wall Street Journal put it.

Kellogg’s strategy, on the other hand, was to be at the top of every single category in which it owns brands and to limit its M&A strategy to dominant brands that are supported by Kellogg’s core competencies. The buyers of Rice Krispies’ do care about the brand strength and price of Frosted Flakes and the same is true in each of Kellogg’s categories. These items are on the same aisle of the store. The Journal alo noted the importance of having category kings, “The category leader advises Wal-Mart on category trends, and sometimes helps determine placement of all the brands in the category…Anything but the top brands can end up on the bottom shelf.”

Wal-Mart Shelves to Wall Street Firms

Corporate law firms could learn from CPG industry examples for at least two key reasons: direct customer purchasing decisions are de-centralized and each purchaser cares about getting the best for their “aisle.” In the law firm case, that would be the part of the company for which a particular in-house lawyer has responsibility.

Just as there is no aggregate purchaser at grocery store chains, Senior Vice Presidents/General Counsels do not, in large part, purchase law firm services in the aggregate. Rather, the mid-level corporate counsels with specific areas of responsibility (IP, M&A, Advertising, Litigation, etc.) make their own purchasing decisions. As with aisle-based buyers of CPG brands, corporate legal buyers want the best in their category. The in-house head of litigation wants the best outside litigators when looking for help with an internal investigation. Not surprisingly, he does not care about the prestige and price discounts of the law firm serving the in-house IP lawyers.

Many law firms are following a Kraft-type strategy. They are creating networks of hundreds, even thousands, of lawyers in offices across the world in order to be the one-stop legal shop to the corporate world. The common wisdom is to have the capacity to be everything to everybody so that firms do not miss out a single cross-selling opportunity. For these firms, the strategy is to get bodies and offices in order to tell the corporate clients, “We’ve got everything you need. Now, buy everything from us.” Recently, firms such as Brobeck Phleger & Harrison, Altheimer & Grey, and others, have moved away from their areas of strength to grow in a hurry in pursuit of the megafirm strategy. Unfortunately for them, this strategy went disastrously wrong; the firms buckled under their own weight and had to shut their doors. More are likely to be teetering on this edge.

In the alternative, I suggest they might look to the strategic plays of those CPG companies that are everything to some people, like Kellogg’s, so that they build up good will in the areas where they dominate, while understanding their limitations. In areas where they do not dominate, they can partner with other firms that do. By taking this strategic approach and delivering the best legal product to the customer, firms are likely to benefit. On the other hand, they would likely be hurt in the long-term by providing outstanding M&A work, but only average executive compensation services. In first-year marketing class, we call this sticking to one’s core competency. In the words of Professor Noel Kaplan, a 35-year McDonald’s veteran, “You must keep your eyes on the fries.” Some law firms are excellent examples of this approach (whether consciously or not)

Wilson Sonsini, the Silicon Valley law firm of the Internet bubble (who NU Law graduates going to corporate law firms can thank for their large first year salaries) owns “technology law,” whatever that is. It is 34th in Vault’s ranking of the Top 100 Most Prestigious U.S. law firms, but it is #1 in Technology Law. In the legal industry, prestige equals brand. The firm has only 8 offices nationwide, but more than 560 lawyers, and is the 27 th largest firm ranked by revenue ($460 million/year). It’s big, but its success is not because of size or a focused, yet comprehensive menu of services, rather it thrives on having the best technology law brand among major corporate law firms.

It has leveraged this reputation and has been able to “sub-brand” into all the areas that fall under the high-tech category, such as telecom and life sciences. It does not, however, play with the big boys in New York City who dominate the M&A tables. When a technology company tells the world it has hired Wilson Sonsini that means it has hired the best. An in-house Senior Associate Counsel for IP and Technology knows that Wilson Sonsini is the best, yet the in-house Senior Associate Counsel for Real Estate does not care. Wilson would have difficulty selling itself to that buyer. Tech and real estate law are not on the same legal “aisle” (think Altoids and Velveeta), while tech, IP, and life sciences are (think Rice Krispies and Frosted Flakes).

Not a Perfect Analogy

Without question, this is not a perfect model. For one thing, CPG companies produce and market hundreds or thousands of products; however, law firms produce and market one service – the ever-present billable hour. In addition, law firm brands represent the entire company. As a general matter, Wachtell Lipton is the brand, not Wachtell M&A and each area of practice is directly tied to the parent brand; however, corporate legal departments have a sophisticated understanding of who is good at what area of law. CPG companies, on the other hand, are a bundle of various brands each with its own identity, sometimes loosely and sometimes tightly linked to the parent brand. Finally, the management of a CPG company, in theory, is based on data and strategy, while many law firms are still run somewhat on conventional wisdom, market reactions, and gut feeling. Law firms have yet to fully cede decision making to those who earn responsibility based on merit, not longevity – an inevitable change made by corporate America long ago.

There is opportunity for strategic advantage to law firms who identify their core competencies and brand strengths and then leverage that information to grow strategically – by selling to the relevant, specific buyers as a CPG company does. There is little data to back up this theory, but it seems to be logical that being the “Category Leader,” in an area of law practice (as in a CPG category) is a winning strategy.

Is that a management consulting growth opportunity I smell?