Structure and Control Systems at Nestle - Case Study Example

? Research Paper on Nestle Table of Contents Table of Contents 2 Nestle 3 SWOT Analysis & Impact of External Environment 4 Evaluation of SWOT Analysis 7 Corporate Level Strategy 9 Business Level Strategy 10 Structure and Control Systems 12 Recommendation 13 Works Cited 15 Nestle Nestle is renowned Swiss multinational consumer goods and nutritional food company. The company was founded by Henri Nestle in the year 1866. Nestle is headquartered at Vevey, Switzerland. The company maintains a diversified product portfolio of Nespresso, Nescafe, Vittel, Maggi, KitKat, Nesquik etc. The company has achieved sales revenue of CHF 83.7 bn in the year 2011 (Nestle, “Annual report 2011”). Next section of the study will discuss the major milestones for the company. Time Period Milestones 1905 Nestle took over Anglo-Swiss Condensed Milk Company. 1920-1944 Nestle shut down operation in many plants and invested capital in launching Nescafe. 1945-1974 In this era, Nestle took the strategic decision to diversify its product portfolio. They took over Alimentana in order to launch Maggi. Nestle invested money for becoming one of the largest shareholder in L'Oreal. 1975-1979 Nestle took initiative to enter in pharmaceutical industry with the help of buyouts and strategic acquisition decisions. The company acquired Alcon Laboratories in order to enter American pharmaceutical industry. 1980-1994 Nestle used the acquisition strategy in order to increase height, breadth and depth of its food product portfolio. The Vevey based organization acquired food giant Carnation in order increase depth of the product line. Nestle enhanced the strength of the Nescafe brand by launching Nespresso which was a form of espresso coffee. 1996-2005 Nestle diversified its business into nutritional and health division. The Swiss company entered into of health, nutrition and wellness business segment with the help of series of merger and acquisition activities. 2006-2009 Nestle took few major steps like acquiring nutritional division of Novartis, establishing shared value forum in different countries, trimming down the value chain for bottled water segment in order to increase sustainability and profitability of business. 2010-2012 Nestle launched Cocoa Plan for supplying disease defiant plantlets to their value chain partners. (Source: Nestle, “History”) SWOT Analysis & Impact of External Environment Strengths Strong Brand equity is the major strength for Nestle. The company has established strong brand presence with the help of its diversified product portfolio. The Swiss giant offers more than 4000 brands to customers which talks about the product diversification capacity of the company. The company is the market leader in more than twenty five product categories like confectionery, pet care, coffee, bottled water, frozen meal, nutritional division and dairy products. Nestle has achieved leadership position in non-alcoholic beverage market with the help of products like Milo (energy drink), Nestle Pure Life (bottled water), Nescafe (coffee) etc. Nestle Pure Life is the highest selling bottle water brand in the world. Top brands of the company are growing at a rate of 10-20% annually which proves the strong brand equity of Nestle (Market Line, “Nestle S.A”). Research and development capability is the major strength for Nestle. The company has established more than thirty two research and development centers across five continents in order to incorporate high degree of diversification in product offering. The Vevey based company operates business with the help of three hundred application groups in order to develop products in accordance with the local market preference. Weaknesses Major weakness of Nestle is its inability to generate revenue from all the markets it caters to in equal proportion. For example, 58% of Nestle’s revenue comes from its operation in developed countries like USA, UK and other European countries (Market Line, “Nestle S.A”). The company is facing problem in maintaining its revenue growth in European countries after the economic recession and ongoing sovereign debt crisis. Fluctuation in the value of Euro caused by sovereign debt crisis has decreased the revenue growth rate of Nestle. Market Line (2012) has reported that more than 60% of the product portfolio of the company is in the declining stage. Total revenue earned by the company from European market and North American market has declined by more than 7% in last two years (Market Line, “Nestle S.A”). Market penetration of Nestle in developing country is very low in comparison to other consumer companies like P&G, Unilever etc. Opportunities Life style related health issues such as hypertension, diabetes and obesity have forced consumers to change their food preference in recent times. Consumers make conscious efforts to shift preference towards low calorie nutritional foods. This is the reason why consumer food companies are trying to increase their penetration in low calorie process food market. Market Line (2012) has predicted that total health and nutritional market of Europe and USA will touch the value of $150 billion by 2016. Nestle has the opportunity to expand its footstep in global nutritional and health market. Industry analysts have predicted that Nestle needs to increase production capacity for nutritional and health segment by 80% in order to cater to the demands of global nutritional market which is growing at cumulative average growth rate (CAGR) of 3.4% (Market Line, “Nestle S.A”). There is opportunity for Nestle to expand its penetration in single serve coffee machine business. Market Line (2012) has reported that single serve coffee machine business is growing at a rate of 30% and the market value will reach the mark of $10 billion within next four years. The company should focus on increasing the revenue earned from its beverage portfolio in near future. Nestle has the opportunity to expand its business in developing and emerging economies. The company should use its resource capability to achieve double digit revenue growth potential in developing and emerging economies like Africa, East Europe and Asia-Pacific. The company should try to compensate the financial loss associated with business operation in developed countries with the help of generating revenue from developing and emerging economies. Threat International Monetary Fund (2012) has reported that global commodity price and food price index would increase at a rate of 9% for the next one year (International Monetary Fund, “Commodity Prices Rebound on Supply Shortfalls”). This situation is indicating that overall production cost for companies who produce commodity based food products is going to increase in next couple of years. Increase in raw material price will increase the value chain cost for Nestle. Global financial crisis has decreased the spending capacity of consumers, which is the reason why they have shifted focus from purchasing high priced renowned brands to low priced private level brands. Nestle is facing competitive threat from low priced private level brands not only in emerging and developing countries but also in developed countries. Nestle is a food product manufacturing company, hence they are subject to face regulatory threat from European Food Safety Authority (EFSA) in Europe and Food and Drug Administration (FDA) in USA. Evaluation of SWOT Analysis It is evident from the SWOT analysis that competitive position of Nestle is strong in developed countries. The Vevey based company needs to work on their international strategies in order to strengthen its position in developing and emerging markets. The study will use a grid framework in order to analyze evaluate strategic options recommended in SWOT analysis section. Although Nestle has achieved strong market position in Europe and North America but they are struggling in developing countries. The company needs to decrease the size of product portfolio by eliminating unprofitable product lines. This move will help the company decrease its operation cost. Opportunity section of the SWOT analysis has clearly mentioned that Nestle needs to increase the depth of its nutritional segment in order to achieve strong position in health & nutrition business of both developed and emerging market. Nestle should continue its corporate or business level strategies in order to increase its market penetration and product diversification in developed and developing market. The company should use the strategy of gaining resources from synergy with other companies in nutritional and health business. It is evident from the previous section of the study, that Nestle always use corporate level strategy to enter into new business segment hence there is no doubt that the company should continue its business diversification strategy in future. Emerging market for Nestle is growing at a rate of more than 10% which means there lays opportunity for the company to expand its penetration in emerging markets in order to provide balance to its global business portfolio. The company should introduce low priced private level brands in order to increase its penetration in emerging market of private level brands. It is evident from the SWOT analysis that Nestle has the resource capability to develop new business, functional, or corporate strategies in order to increase market share in both developed and emerging market. Corporate Level Strategy Nestle emphasizes on country specific business model in order to generate revenue hence it is difficult to identify a universal goal statement of the company. The company has designed “Shared Value” model in order to synchronize mission and goal statement altogether. “Shared Value” concept states that Nestle always tries to achieve leading position in nutrition segment, health & wellness, consumer food and beverage segment by satisfying the requirement of customers. Achieving high financial growth and profitability is also an important aspect of the mission statement of Nestle. Corporate level strategy of the company is to maintain a diversified product portfolio in order to compensate financial loss incurred by one brand with profit earned by another brand. Product line of the Swiss giant can be explained in the following manner. (Source: Nestle, “Our Brands”) Depth of the product portfolio has helped Nestle to achieve a cumulative organic growth rate of 7.7% in the year 2011. Nestle uses international joint venture and acquisition in order to achieve both product and business diversification. For example, recently Nestle has acquired Pfizer Nutrition by investing $ 11.85 billion in order to enhance penetration in infant nutrition business (Nestle, “Nestle completes acquisition of Pfizer Nutrition, enhancing its position in global infant nutrition”). Nestle has gained 4,500 employees of Pfizer Nutrition, who have expertise in the infant nutrition business, with the help of this acquisition. Historically, Nestle used both related and unrelated diversification strategy in order to expand its business in the globe. For example, Nestle started their operation as Food Company but at a later stage they have diversified their business into four growth drivers such as food & beverage segment, nutrition segment, health & wellness segment and infant care segment. Nestle also uses joint venture or corporate synergy as an effective tool for increasing business strength. For example, Nestle did establish joint venture with Co-operative Group in order to increase its penetration in chilled and liquid dairy product market of Latin America (Redruello, “Fonterra/Nestle joint venture: A change of balance in Chile”). Business Level Strategy It is evident from the SWOT analysis and product portfolio analysis of Nestle that the company uses “differentiation” strategy for achieving business growth. The Vevey based consumer food company is trying to expand its presence in infant nutrition business in order to compensate the loss incurred in food segment caused by rise in global commodity price and food price index. Nestle use “Differentiation” as generic competitive strategy for two reasons. Increase the penetration and achieve sustainable growth rate in all four business segments such as food & beverage, nutrition, health & wellness and infant care. Avoid the financial and non financial risk of maintaining single product portfolio. It is evident from the SWOT analysis that the company has selected right generic competitive strategy in order to cater to the demand of customers. For example, differentiation strategy has helped the company to maintain cumulative growth rate of more than 5% even during the time of economic recession. The company needs to add one or two product line in portfolio in order to achieve high degree of differentiation. Nestle can do this with the help of acquisitions of related businesses in developed and emerging markets. The company can only use both low cost and differentiation strategy simultaneously for food & beverage and health & wellness segments but they cannot use the same strategy for nutrition and infant care segment due to two reasons such as customized nature of baby care products and unequal distribution of demand for nutrition and infant care products. Structure and Control Systems Organizational structure of Nestle can be explained by the following diagram. (Source: The Official Board, “Nestle”) It is evident from the above figure that Nestle maintains vertical differentiation in organizational structure. Corporate level strategy of the Swiss giant is backed by decentralized continent based strategic business units. Basically the company uses a mix of centralized and decentralized model to control its global business operation. For example, Nestle has appointed one independent director for business operation in each continent while each of the directors is responsible for reporting to CEO of the company. On the other hand business level strategy of the company is backed by fair degree of synchronization between global operational units, research & development centers and other strategic units. Nestle uses four components such as P-pay, benefits, growth and work environment in order to encourage managers to improve their performance and increase cooperation between business divisions (Nestle, “Rewards, Recognition and Benefits”). The company has rightly mixed performance with reward by introducing four components of reward systems. For example, employee turnover rate at top level management of Nestle is significantly low which shows the efficacy of reward system designed by the company. Recommendation Porter (1985) has stated that companies should analyze the external business environment by using “Five Force Framework” in order to achieve competitive advantage over business rivals. Five force analysis for baby food market in USA states that overall external threat is moderate for Nestle. The study will recommend three strategies for Nestle. Nestle should decrease marketing cost such as cost related to distribution, promotion for unprofitable product lines in order to increase overall profitability of the product portfolio (functional level strategy). The Swiss giant should use international joint ventures with market leader of particular business segment and acquisitions of small firms in order to achieve both business and product diversification in developed and emerging market (corporate level strategy). The Vevey based organization should use both low cost and differentiation strategy in food & beverage and health & wellness segments in order to cater to the demands of global customers. Nestle should add more products in infant care segment in order to achieve high degree of product differentiation. Nestle should focus on achieving economies of scale in production in order to implement low cost strategy (business level strategy). Works Cited International Monetary Fund. “Commodity Prices Rebound on Supply Shortfalls.” International Monetary Fund. IMF, 12 October 2012. Web. 9 Jan. 2013. Market Line. “Nestle S.A.” MarketLine. MarketLine, 23 December 2012. Web. 9 Jan. 2013. Nestle. “Annual report 2011.” Nestle. Nestle S.A, 2012. PDF file. Nestle. “History.” Nestle. Nestle, 2012. Web. 9 Jan. 2013. Nestle. “Nestle completes acquisition of Pfizer Nutrition, enhancing its position in global infant nutrition.” Nestle. Nestle, 2012. Web. 10 Jan. 2013. Nestle. “Our Brands.” Nestle. Nestle, 2012. Web. 10 Jan. 2013. Nestle. “Rewards, Recognition and Benefits.” Careers.Nestle. Nestle, 2012. Web. 10 Jan. 2013. Porter, Michael E. Competitive Advantage. New York: Free Press, 1985. Print. Redruello, Francisco. “Fonterra/Nestle joint venture: A change of balance in Chile.” Euromonitor. Euromonitor, 21 January 2011. Web. 10 Jan. 2013. The Official Board, “Nestle.” The Official Board. The Official Board, 10 December 2012. Web. 10 Jan. 2013. Read More