Nestle Company and Its Marketing - Case Study Example

 The NESTLE case study indicates the key connection between both strategic management and management accounting and the ultimate growth rates and behaviors of companies. Nestle Company was founded by Henri Nestlé, a pharmacist who wanted to improve breastfeeding by finding new recipes (Nestle, 2010). The brand, the founder and the company were all intertwined by the beginning: Nestle's name in German means “little nest”, and Nestle's coat of arms of a little nest with birds feeding nearby was added to every product. Historically, Nestle focused on infant care and nutrition with their infant formulas and cheese lines, but now the company is far better known for products like milk chocolate: Nescafe coffee and Nestle and Quik lines of cocoa (Nestle, 2010). Other major brands include Arrowhead and Perrier, baby foods like Gerber, cereals like Cheerios, ice cream including the famed Haagen-Daaz, microwavable food like Hot Pocket and Stouffers, health lines like PowerBar and Jenny Craig products, pet food like Dog Chow and Friskies, and professional food products (Nestle, 2010). With a few exceptions like Perrier and Haagen-Daaz, Nestle tends to target the lowest common denominator of the market, and most of their products are worldwide household names. They sell a tremendous variety of products, but all of their products have something to do with nutrition or food. They do sometimes attempt to control all sectors of the market. For example, they sell both the low-end Drumstick ice cream bar and the higher end Haagen-Daaz; similarly, Stouffers and Hot Pockets sell to radically different demographics. Nestle realized that their growth rate, while constant over the 20th century and producing many beloved brands, was unsustainable in the long term. “Nestle realized by the early 1990s that it faced significant challenges in maintaining its growth rate. The large Western European and North American markets were mature. In several countries, population growth had stagnated and in some there had been a small decline in food consumption. The retail environment in many Western nations had become increasingly challenging, and the balance of power was shifting away from the large-scale manufacturers of branded foods and beverages and toward nationwide supermarket and discount chains”. Many companies would experiment with different branding options, opening up new markets, new marketing schemes, etc. but would try to keep the core structure of the company intact. Nestle did these things: Its brand portfolio, as we've seen above, goes from luxury to bargain, is targeted at numerous demographics and income levels, and is increasingly expanding to try to get into different markets. Yet that is not all they did, and their choice of a new structure helps explain their success. Nestle's strategy for entering new markets and avoiding the inundation of existing ones is simple: “In general, the company's strategy has been to enter emerging markets early-before competitors and build a substantial position by selling basic food items that appeal to the local population base, such as infant formula, condensed milk, noodles, and tofu. By narrowing its initial market focus to just a handful of strategic brands, Nestle claims it can simplify life, reduce risk, and concentrate its marketing resources and managerial effort on a limited number of key niches. The goal is to build a commanding market position in each of these niches. By pursuing such a strategy, Nestle has taken as much as 85 percent of the market for instant coffee in Mexico, 66 percent of the market for powdered milk in the Philippines, and 70 percent' of the markets for soups in Chile. As income levels rise, the company progressively moves out from these niches, introducing more upscale items such as mineral water, chocolate, cookies and prepared foodstuffs”. This is a disruptive strategy (Malstrom, 2008a; Malstrom, 2008b). Disruptive strategies involve creating a new market: “The market did not need Super Mario Brothers until Miyamoto created it. Then, the market could not live without it. Blizzard studied MMORPGs like Everquest and realized there were too many barriers in the game that kept many people from ‘kicking ass’. “How do we fix this?” the Blizzard developers asked. The market did not need World of Warcraft until Blizzard created it. Then, the market could not live without it. When Will Wright made The Sims, he did not focus on the ‘waterfall’ effective production method. The market did not need The Sims until Wright created it. Then, the market could not live without it. When Capcom (back in the good old days where small development teams could harness their passions) made Mega Man II, the market did not need it (Mega Man did not sell well). But once it was made, the market could not live without it. The difference between Customer Satisfaction and letting the User in control is the matter of surprise which is critical in entertainment. It is ridiculous to ask your customers what surprises them” (Malstrom, 2008a). A disruptive strategy involves trying to expand the pie instead of competing for a larger portion of the same slice: Offer a simple, “downmarket” product solution which gets people interested in your products, then leverage that into brand loyalty so when your competitors try to come downmarket you've already moved upmarket. In using this disruptive strategy, Nestle has a number of advantages: Established brands which means that major grocery stores, vending machines, bodegas, gas stations and other food suppliers and retailers must provide their products. Their distribution channel is thus quite broad, which allows them to flow into new markets quite easily. Having largely established brands, Nestle doesn't promote new products but rather establishes the imprimatur of old ones. Nonetheless, they do quite a lot of promotion: The Quik Rabbit, for example, is a well-known brand mascot, and by using their established characters and promotion techniques, they appeal to a Third World dream of becoming more prosperous and Westernized. But all of this, while important, ignores a key way that the Nestle company has managed to put their disruptive strategy into play: Decentralization. “Nestle is a decentralized organization. Responsibility for operating decisions is pushed down to local units, which typically enjoy a high degree of autonomy with regard to decisions involving pricing, distribution, marketing, human resources, and so on”. Expanding into a new market which may be too poor for your products and may not recognize the need for them yet, just like the new market did not realize it needed Super Mario Bros., is difficult without being lean, agile and quick. Nestle accomplishes this by substantial local autonomy for their individual units. Notice that this is not only anathema to most corporate structures, which constantly push for more centralization, but also has command-and-control tradeoffs. For it to meaningfully work, Nestle corporate leaders at the top of the ladder cannot make overarching global decisions that can't be changed or adapted at the local level: They have to make their pronouncements and strategies far more flexibly and with far more room for input. It also means that they have to have an “expatriate army”: 700 managers traveling from location to location, taking the core directives of the Nestle company and acting as a bridge between heavily localized units that try to appeal to their local market and management which is trying to create global strategies to placate shareholders. It is an incredibly sophisticated, complex and elegant organizational structure and helps explain their success at creating disruptive strategies. It is hard to exaggerate the importance of local autonomy to their ultimate success. “In Nigeria, for example, a crumbling road system, aging trucks, and the danger of violence forced the company to rethink its traditional distribution methods. Instead of operating a central warehouse, as is its preference in most nations, the company built a network of small warehouses around the country”. Trucks had to be provided with armed guards, and marketing had to be done with local singers instead of through billboards. If global management had forced this local unit to abide by standard protocols regarding shipping using trucks or to adopt the new marketing scheme which required big TV and billboard ads, they would not have been able to make any headway: That would have been impossible. Instead, the people at the ground level were able to see the problems unique to the region and come up with innovative solutions without needing hand-holding or micro-management from higher levels. The beauty of this approach is that, when a disruptive strategy succeeds, there are no easy answers to combat it (Malstrom, 2008a). Competitors have two choices:1) Flee. Many companies will gladly ‘cede’ this new market. After all, this new market is not very profitable to the competitor and, besides, the competitor clearly is getting tons of money through the upmarket. While this choice works for the short term, the problem is that the encroaching company will swim upstream and begin to take customers away. Fleeing to the upmarket means ceding more and more of the market to the newcomer. Eventually, the competitor will have nowhere else to flee and will go out of business or be reduced to a niche. 2) Fight. Some companies realize that fleeing will ensure their demise so they stay and fight the newcomer for that market. However, the newcomer is patient for growth but impatient for profit. The competitor will likely be unable to defend that tier due to the newcomer gaining more profit. The battle becomes attrition until angry investors let the company’s managers know they do not enjoy them wasting so much money fighting over a market that has little profit in it. The investors will say the upmarket has plenty of profit to satisfy the company’s needs for growth. So, eventually, the competitor will decide to flee upmarket. (Malstrom, 2008) When Nestle becomes established in a Third World country, like their current endeavours in China and the Middle East, they force their competitors into this disruptive dilemma. It is true that these markets don't make a lot of money: Selling hot cocoa to people in Lebanon is not a cash cow dream. “Collectively, the Middle-East accounts for only about 2 percent of Nestle's world-wide sales, and the individual markets are very small. However, Nestle's long-term strategy is based on the assumption that regional conflicts will subside and intraregional trade will expand as trade barriers between countries in the region come down. Once that happens, Nestle's factories in the Middle East should be able to sell throughout the region, thereby realizing scale economies. In anticipation of this development, Nestle has established a network of factories in five countries in hopes that each will someday supply the entire region with different products. The company currently makes ice cream in Dubai, soups and, cereals in Saudi, Arabia, yogurt and bouillon in Egypt, chocolate in Turkey, and ketchup and instant noodles in Syria”. Nestle has chosen products that they know will sell well, and they use local wages and materials which are cheaper to make sure they still run a profit, but it is certainly not a big profit. But when those markets grow, as they are almost guaranteed to barring some catastrophe that would hurt Nestle and the whole market anyways, they will be the established players. Their competitors will either need to enter now, when the money is very bad, and compete against an already-established Nestle, or flee and give up the market for their more expensive goods when people in the Middle East and China turn to the offerings that make more money. Their accounting strategy is also based on this core philosophy (NamNews, 2010; Ogilvie, 2008; Kumar and Steenkamp, 2007). They do not prioritize short-term earnings over long-term viability and growth in value, which allows them to continue focusing on disruptive strategies (Ogilvie, 2008, 4). They set aside 70% of their R&D budget into direct development initiatives, in concert with local managers. Nestle uses their branding to achieve organizational focus, a classic technique of management accounting: They have Purina pet foods, Maggi, Nescafe, Nestea and Buitoni which are 40% of their business, and they use this portfolio rationalization to differentiate themselves (Kumar and Steenkamp, 2007, 192). Accountants rarely consider opportunity cost, but management accountants have to. It's true that Nestle could try to compete in new areas: Expand into different markets, say the bran markets, by leveraging their existing production, say their cereal factories. But Kumar and Steenkamp (2007) point out that it “makes no sense to support brands by which the manufacturer is not differentiated from a consumer perspective and cannot earn its shelf space from a retailer perspective”, even when the brand is profitable (192). Management accountants could increase local or temporary profits by making new products, the same way that knock-off producers like grocery stores and off-brand cereal producers do, but even when this makes profit it reduces the focus of the brand. Nestle benefits from knowing that all of their products are likely to be on every shelf in every major grocery store. Even recent changes in their accounting emphasises their strategy (NamNews, 2010). “Nestle has announced plans to bring its sales-reporting policy in line with its peers, in a move that will result in lower revenue figures but will boost profit margins. The food giant said it will come in line with International Financial Reporting Standards starting in January 2011. With the shift, discounts and promotions will be deducted from sales, reducing revenue by about 15%. Nestle said the move will not affect net income, earnings per share or the balance sheet” (NamNews, 2010). Discounts and promotions being deducted from sales gives a more accurate representation of real revenue to shareholders, but it also indicates in this case Nestle's commitment to aggressive expansion. Offering discounts and promotions, especially in emerging markets, allows their brand name to seep into the consciousness of the public and become associated with factors like comfort. Indeed, getting products like Quik into homes is worth a temporary loss in profit: Researchers have discovered that “comfort foods” become associated at early childhood (Schlosser, 2004). By making sure that, even at a temporary cost, the smell of Quik is associated with fond childhood memories, Nestle is insuring their long-term market viability: Adults in the developing world will become just as associated with the Quik rabbit as adults in the developed world and will purchase for themselves and their children accordingly. Nestle's brand positioning is quite strong. CoffeeMate, Nestle cocoa, Hot Pockets, and PowerBars all are like Xerox in that they are often used as shorthands for products of their kind. They produce staples and family necessities. It is difficult to imagine what such an entrenched brand like Nestle could do to grow within their markets. Nestle should attempt to make lateral moves instead of vertical moves, extending their dominance to new markets. Indeed, Nestle is attempting to do so: They consolidated and made “more transparent” their holdings in the L'oreal beauty line (Fleck, 2004). For many, beauty, health and nutrition are inherently inter-connected. Nestle should take advantage of this connection, cross-promoting lines like Jenny Craig with L'Oreal shampoos and cosmetics. Expanding into bargain lipstick, mascara, and other cosmetics, as well as diet products and accessories, may be wise. Nestle must also deal with a growing concern over health, as it relates to their products. Since they are a nutrition company, they could do a better job of distinguishing themselves in this regard. Their Cheerios commercials are an excellent example: They claim that their apparent benefits of lowering cholesterol help to unite the young and the old in nutritional eating habits from an early age. This should become a brand-wide focus, perhaps accompanied by emphasizing low-fat ice cream and cocoa offerings. In any respect, what Nestle has done thus far is the right move: Get out of the heavily glutted market, holding onto their present powerful position but seeking nothing more; instead, focus on optimizing for local markets. Their creativity here is truly remarkable. In Japan, instant coffee is a luxury item, so Nestle would change the packaging to more closely match a gift and thus play up the way that the culture perceived the product (Miltenberg, 2005, 135). In China, their products were totally unheard-of, so they marketed as if they were new products; in Britain, in contrast, their products were simply rejected, so they focused on making instant coffee seem hip (Miltenberg, 2005, 135). Focusing growth efforts on emerging markets or on markets where they are not as well known, like the UK example, does not just “make sense”, it is the key to their ultimate viability. As noted, their strategy regarding business development is a disruptive one. This strategy makes tremendous sense. It is important to note, however, that there are potential risks for lost profits or sunk costs in disruptive enterprises. Take their expenditures in China. After 13 years of talks, Nestle was formally invited into China in 1987 by the government of Heilongjiang province. Nestle opened a plant to produce powdered milk and infant formula there in 1990, but quickly realized that the local rail and road infrastructure was inadequate and inhibited the collection of milk and delivery of finished products. Rather than make do with the local infrastructure, Nestle embarked on an ambitious plan to establish its own distribution network, known as milk roads, between 27 villages in the region and factory collection points, called chilling centers. Farmers brought their milk-often on bicycles or carts-to the centers where it was weighed and analyzed. Unlike the government, Nestle paid the farmers promptly. Suddenly the farmers had an incentive to produce milk, and many bought a second cow,increasing the cow population in the district by 3,000, to 9,000, in 18 months. Area managers then organized a delivery system that used dedicated vans to deliver the milk to Nestle's factory. Although at first glance this might seem to' be a very costly solution, Nestle calculated that the long-term benefits would be substantial. By investing into long-term infrastructure and encouraging labor, capital and land to be attuned to their needs, Nestle managed to move from 316 to over 10,000 tons of output in four years. The cost was probably quite large, but the gamble was worth it for Nestle's viability in China and to secure arrangements with local suppliers. This disruptive strategy requires decentralised leadership to work successfully, true, but it also requires many other factors. As we've seen, the decentralised leadership and high degree of local unit autonomy is balanced out by the expatriate army who themselves bring the knowledge of many different regions to their new areas and allow this experience to be adapted to new situations and new needs. It also requires capital. Nestle made 107.6 billion Swiss francs (which amount to about one dollar on 2/11/2011) in sales and had an operating cash flow of 17.9 billion CHF. Their position was one of the leaders of the cocoa, food, coffee and beverage markets allows them to invest into developing countries and sink money up front for long-term return later. A smaller company would be unable to do what Nestle does, at least as regards capital expenditures; however, even a smaller company could have more decentralization and local autonomy Key benchmarks for Nestle performance would be a fewfold: Profits, success in particular overseas enterprises (to see the success of their long-term investments), sales and revenue (to see what they can afford to reinvest into new enterprises). In each of these areas, Nestle is doing well. Between 2009 and 2008 alone, their profit grew from 10.428 billion CHF to 18.039 billion CHF, though they appropriately and responsibly note that the sale of Alcon was a key part of that growth (Nestle, 2009). From 2009 to 2004, the years where financial information for the full year is available, their profit went from 6.717 billion CHF in 2004 to 18.039 billion CHF in 2009. Note that this occurred during a major recession during which other benchmarks were weak (Nestle, 2009). In the 2009 financial statements, we also get a glimpse into the company's corporate culture with the opening paragraphs, noting how bad the global recession has been for many of their customers and hoping to continue to lead to a “sustainable” and “just future for everyone (Nestle, 2009). This corporate culture is vital to their long-term success in developing markets: Their passion for corporate social responsibility and justice leads them to take the path of enlightened self-interest and invest locally so as to grow their markets. Nestle's Nigeria enterprise also shows a commitment to long-term success despite early problems (Nigeria Business, 2008). “Nestle Nigeria Plc has been consistent in its performance in the past years. The company has achieved appreciable performance in turnover, profit and return on investments in the financial year ending December 31, 2007” (Nigeria Business, 2008). It recorded a 3.8 billion naira profit, which is valued at about 150.34 naira per dollar or about 25 million dollars, not bad at all for a poor Third World Country (Nigeria Business, 2008; Reuters Africa, 2011). Innovation and “value added” products were key to their growth in Nigeria. Sales and revenue increased from 86.769 billion CHF in 2004 to 107.6 billion CHF in 2009; again, this occurred during a recession. They had 10.4 billion CHF in cash flow in 2004 and 17.9 billion CHF in 2009. Their huge sales and large amount of free cash both contribute to not only an immense and powerful share of the market but also the ability to invest into new enterprises. Note that one naira's conversion rate to 150 dollars means that having billions in cash flow means trillions in naira! In Third World countries, the ability to at any time dump billions in local currency into an enterprise allows Nestle to secure their long-term viability and continue their disruptive strategies. Nestle's strategy at a global level is truly unique: It is pursuing a globally local enterprise. Globalisation often implies standardization and uniformity: Offering the same product at similar prices to similar markets the globe over. Nestle's strategy is almost diametrically opposed to this. They are globalised: They use global brands, distribute their managers globally, and have global command and control integration. But instead of trying to force cultures to adapt to their products, they try to have their products adapt to their culture's need. With the noteworthy exception of the British instant coffee example, where Nestle simply had to get people interested in their product no matter the cost, Nestle overwhelmingly, from Nigeria to China to Japan, embraces localizing their merchandising, marketing, product appeal, discounting, and “value added” approaches (Nigeria Business, 2008; Miltenberg, 2005). “While Nestle has built businesses from the ground up in many emerging markets, such as Nigeria and China, in others it will purchase local companies if suitable candidates can be found. The company pursued such a strategy in Poland, which it entered in 1994 by purchasing Goplana, the country's second largest chocolate manufacturer. With the collapse of communism and the opening of the Polish market, income levels in Poland have started to rise and so has chocolate consumption. Once a scarce item, the market grew by 8 percent a year throughout the 1990s. To take advantage of this opportunity, Nestle has pursued a strategy of evolution, rather than revolution”. It focuses on developing local goods, local capital, and connections with local suppliers of raw goods as well as local retailers. This is starkly different from most globalised approaches and seems to be an ideal way of getting consumer goods into the hands of Third World countries. There has been a major globalisation backlash (Schlosser, 2004). People oppose Westernized products that act too cavalierly and don't respect their local culture. But companies like McDonalds and Nestle show that people are perfectly willing to embrace Western culture when it is not imperially thrust onto them, when it does not disenfranchise and disempower local businesses and farmers, when it is done with harmony with the culture of the region. Nestle's disruptive strategy requires respecting local autonomy both internal and external to their organisation. Nestle's management structure and philosophy is tied in at the highest levels with this philosophy. Even their financial statements emphasize compassion for people suffering in the recession, trying to offer Nestle goods to them to ease their difficulties, and creating sustainable and just economies (Nestle, 2009). Their fundamental accounting and business strategy, and their promise to their shareholders, involves long-term growth (Ogilvie, 2008). Nestle's organisational structure, management accounting, management style, and corporate philosophy all make it an ideal player to expand aggressively in the developing world. Other companies should pay attention and consider their decentralisation, their relationship with local suppliers and workers, and respect for and understanding of local cultures and autonomy Works Cited Fleck, F. 2004. “Nestlé to simplify its holding in L'Oreal”. February 5. New York Times. Available at: http://www.nytimes.com/2004/02/05/business/ worldbusiness/05nestle.html?ex=1391317200&en=9 bfbfa3f4307cbb5&ei=5007&partner=USERLAND Hill, Charles (2009) international Business: Competing in the Global Market Place, International Edition, 7th or 8th edition (London:McGeaw-Hill) Just-Food. 2009, “US: Nestlé on defensive over Toll House scare”, June 29, Available at: http://www.just-food.com/news/nestl%C3%A9-on-defensive-over-toll-house- scare_id107112.aspx Kumar, N. and Steenkamp, JEM. 2007, Private label strategy: how to meet the store brand challenge, Harvard Business Press. LeadCapital. 2009, “Equity Research Report on Nestle Nigeria PLC”, July, Available at: http://www.leadcapitalng.com/resources/nestle.pdf Malstrom, S. 2009, “Birdmen and the Casual Fallacy”. ---- 20009, “Disruptive Storm”. Miltenberg, J. 2005, Manufacturing strategy: how to formulate and implement a winning plan, Productivity Press. NamNews. 2010, “Switzerland: Nestle To Realign Sales Accounting Strategy”, November 19, Available at: http://www.kamcity.com/namnews/asp/newsarticle.asp?newsid=57078 Nestle. 2010. Available at www.nestle.com. --- 2009, “Nestle in the United States”, Available at: http://www.nestleusa.com/nirf/cm2/upload/E972BEFE-9C27-4B8A-A16B- 57CE4E8845C4/NiM_CSV.pdf --- 2009. “Annual Report, 2009”. Available at: http://www.nestle.com/Common/NestleDocuments/ Documents/Library/Documents/Annual_Rep orts/2009-Annual-Report-EN.pdf --- 2004, “Annual Report 2004”, Available at: http://www.nestle.com/Common/NestleDocuments/ Documents/Library/Documents/Financial_St atements/2004-Financial-Statements- EN.pdf Ogilvie, J. 2008, CIMA Official Learning System Management Accounting Financial Strategy, Butterworth-Heinemann. Reuters Africa. 2011, “Nigerian naira eases on dollar supply shortage”, February 7. The Economist. 2009, “In pursuit of beauty”, January 22. The Nigeria Business. 2008, “Nestle Records A Constant Good Performance “, April 28, Available at: http://www.thenigeriabusiness.com/invest161.html Read More