Nestles Operational Activity - Essay Example

? Table of Contents Table of Contents 1 Executive Summary 2 2.Introduction 3 3.Organic Growth Programs 4 3 Operational Excellence Programs 5 3.1.1.Strategic Marketing 6 4.Challenges faced by Brabeck: 7 5.Innovation and Sustainability: 10 6.Recommendations 12 7.Conclusion 12 References 14 1. Executive Summary This report focuses on Nestle’s initiatives on achieving organic growth through numerous strategies related to marketing, manufacturing and operation efficiency. The firm’s leadership under Mauncher from 1982 till 1997 is discussed and analyzed along with Brabeck’s strategies to make the company internally strong. Followed by this review, the company’s initiatives to achieve organic growth in mature markets are also discussed and explained in detail. Nestle’s strategies to achieve this was supported by launching operational efficiency programs worldwide. Including these programs, Nestle’s most important milestone is GLOBE, a program which aims to integrate the widespread manufacturing, accounting and operational activities of business units worldwide is explained along with its applications on the company’s overall objective to achieve internal growth though companywide synergies and integrations. Nestle’s strategic marketing decisions of bringing products under a few strategic brands are also discussed in detail and its implications on the company’s expenditures and strategic long-term objectives are also explained. Besides this, all the challenges which were faced by Nestle in pursuing its strife for achieving internal growth are also discussed in detail. How Nestle tackled them with its unique approach, are also discussed. Along with the challenges, how Nestle plans to survive in mature markets by incorporating innovation in a sustainable manner in its product and brand portfolio for long-term sustainability is also illuminated in detail. 2. Introduction When Brabeck took over in 1997 from his predecessor Maucher, Nestle had its presence in almost 19 food categories, predominantly in food, pet food, milk, coffee, confectionary, clinical nutrition etc. However, despite such massive growth initiatives taken by Maucher, Nestle lagged behind in some categories and it can be owing to bad investments which were made during Maucher’s period in office. Brabech’s focus on organic growth directed the company towards discontinuing allocation of resources towards unprofitable channels. (Maucher, 1994). Being one of the leading global food companies, Nestle has established its strategic brands in various segments throughout the world as one of its effective initiatives to boost internal growth, also known as organic growth. Nestle’s CEO Helmet Maucher from 1982 till 1997 had led the corporation from being just a European based company with strong footing as a manufacturer of milk and coffee to being a comprehensive and diversified global corporation dealing in a wide range of food products. Maucher’s main strategy for growth was to rely heavily on external sources and inorganic growth channels. Conglomerate mergers and takeovers were the major focus of Nestle’s growth strategy during Maucher’s tenure as CEO of the company. This did steer the company towards being the global leader in the food and beverage industry however, this was being done at the expense of not saving money through those channels which otherwise could have done so by not investing in unprofitable mergers and acquisitions. Brabeck however, did realize this fact and was determined to steer Nestle towards a more internalized approach to growth, with which he believed that the company will save a lot more capital and the resources could then be channelized into more profitable ventures. Brabeck took some important steps to promote organic growth by launching various programs and campaigns followed by setting up of special Business Units with various objectives (Maucher, 1994, Bell et al, 2009). 3. Organic Growth Programs In order to make Nestle’s operational activity more efficient, Brabech had to make some important decisions about continuing with ventures which were previously invested upon. These ventures can be considered as strategically important because of the fact that they were maintaining Nestle’s presence in internationally diverse markets. However, they were negatively affecting the profitability of Nestle overall which was a major barrier for internal growth of the company. In order to do this, Brabeck decided to cut back on Nestle’s external investments and allocated the released resources into the company’s Research and Development and Marketing activities. This will be backed by the company’s strong backbone of accounting capabilities which Brabeck believed will provide robust cash flows for this internal growth initiative. Besides this, the company’s focus was diverted from external investment towards improving existing capacity utilization and improving distribution logistics (Maucher, 1994; Bell et al, 2009; Goldberg et al, 2001). Operating in a maturing market means that all the players must now play on taking their competitor’s share away as there is no room in the market for any new offering. They do this predominantly by offering monetary incentives to the consumers that is, by either lowering their brands’ prices or by giving trade offers and promotions. Brabeck believes that no market is mature. This means that there are always heterogeneous segments of consumers with specific needs which can be targeted by the brand provided that the brand carries some unique value. Based on this notion, Brabeck insisted on increasing the budget of Research and Development to a great extent. This he believed would help Nestle beat competition in the long-run. Nestle now stands at one of the top packaged companies in the world Brabeck’s decision to divert the resources from unprofitable units of production and operation towards high-margin products was also a move to add up on the company’s liquidity and financial position (Bell et al, 2009; Goldberg et al, 2001). 3.1. Operational Excellence Programs One of the first initiatives which Nestle launched was to give boost to the company’s manufacturing capabilities. A manufacturing efficiency program called MH97 was launched in 1997 aiming to reduce manufacturing costs and making manufacturing processes more efficient. The result was that during 1997 and 2002, more than 150 of the company’s non-productive factories were closed down resulting in savings of CHF 4 billion. After when the objectives were met, the company was left with a few but highly efficient factories across the globe. This led to another program called Target 2004+ which was solely aimed to improve the manufacturing network/Supply Chain of these factories. Maximizing the capabilities of its manufacturing capacity, Nestle again made savings of CHF 3 billion in two years between 2002 and 2004. Following this achievement, Operation Excellence was launched in the year 2007 which incorporated many of the specifications of its prior projects (Bell et al, 2009; Goldberg et al, 2001). In order to leverage its internal growth, Nestle came up with one of its most important initiatives with the name of Global Business Excellence (GLOBE). Launched in 2000, GLOBE incorporated a wide range of strategic objectives and goals which were necessary to encourage organic growth in Neslte. One of the prime objectives of this program was to integrate the information within the global network of the company as much as possible. As the company had diversified operations worldwide, the information did not have a common platform or rather, data and information integration was a challenge. With GLOBE, Nestle attempted to integrate its diverse marketing, accounting and supply chain systems which would help the company gauge its operations in a more standardized way. Globe was expected to make additional savings of CHF 3 billion for the company with the new system integrated about 30% throughout the whole global operations of Nestle (Bell et al, 2009; Goldberg et al, 2001). 3.1.1. Strategic Marketing Apart from all the operational excellence and manufacturing efficiency programs, Brabeck also decided to push down Nestle’s marketing expenditure by introducing strategic brands in the market. These strategic brands will tend to be the only major brands in the portfolio of Nestle and the any new products introduced will either be branded under Brand Proliferation or Brand extensions to its existing strategic brands. This, Brabeck rightly believed will reduce the overall marketing expenditure of Nestle (Lamont, 2002; Business Insights (Firm), et al, 2008). Brabeck says that no markets are mature. Only the managers are. In a saturated market where there are a lot of competitors, it is difficult to sustain a strong market share unless the company is both internally and externally sound. Maucher’s strategy gave Nestle the exposure in global markets it needed. It was Brabeck’s strategy to integrate the external acquisitions into one common platform of Nestle. Organizational growth does not depend on either one of growth channels, namely external or internal. However, an organization must rely on itself when it comes to operating globally as, in the food industry larger companies with strong internal integration tend to enjoy huge economies of scale. As it can be seen from Nestle’s own example, its integration and introducing common standards throughout its global operations resulted into massive savings and released more resources for the company to channel them through more profitable ventures. External growth will have to be backed by internal strength as well as the organization needs to make its standards consistent. For example, as per Brabeck’s target, one fifth of the products had to be renovated or revamped in terms of its performance, brand extensions, packaging, positioning etc. With this innovation, the company will expect higher returns and turnover and hence, can generate revenue internally. Besides this, Brabeck proposed a change in overall positioning and strategy of Nestle. He anticipated a high demand and a strong opportunity in the nutrition sector of the food industry and therefore, launched two separate business units to make sure that all of Nestle’s products carried the nutrition factor in them in order to make sure that the company is going towards the direction where he wants it to go (Business Insights (Firm), et al, 2008; Nestle? S.A. (Vevey), 2009; Robinson, 2008). 4. Challenges faced by Brabeck: When Brabeck took over Nestle, the company was in somewhat haywire situation as far as internal integration was concerned. No doubt Maucher’s decisions to explore the wide global market through acquisitions gave the company a strong edge and also produced encouraging financial results but behind all the strong figures, there lay a huge vulnerability. Nestle, despite enjoying a strong position in the market in majority of its categories, was losing money and valuable resources in maintaining these unprofitable investments. Brabeck’s major concerns were to save money and capital for the company which could be used to vitalize the company’s internal strength. Brabeck therefore had to pull all the dispersed and diversified acquisitions under one umbrella of Nestle. This was not as easy as it sounds. Because of Nestle’s strategy to localize its brands as per the consumer preferences, there were many different systems of market research, input and processing of data and various different accounting systems. Brabeck therefore had to identify the loops and places where integration between the corporate head office and the localized companies spread throughout the world was possible. With GLOBE, this was made possible to a great extent. Because of this, Nestle could easily analyze which of its subsidiary firms were less profitable and that where in the operations processes they lagged (Rugman et al, 2006). Secondly, to motivate the employees and to steer Nestle towards growing and becoming strong internally, Brabeck set an annual goal of 4% growth. This was however challenging considering the business environment in which the company was operative. In mature markets, achieving this growth despite the size of Nestle was a difficult task as the company was facing fierce competition from both local and international businesses. Nestle was ranked 8th amongst the top 12 global packaged companies. Maucher’s acquired businesses were producing almost half of the margins as produced by the core businesses of Nestle. This limited internal growth prospects for Brabeck however, his objective of 4% annual internal growth were complemented by his unique operational excellence programs under which, 165 of the weak performing factories were closed down. This left the company with billions of savings and the loss of output from these factories were to be compensated by a few remaining highly efficient factories and well integrated supply chain and manufacturing systems (Rugman et al, 2006; Nestle? S.A. (Vevey), 2009; Robinson, 2008). Operating in a saturated market is a challenge as an organization needs to keep a stronger pulse check on the market which eventually results into high marketing expenditure for the business. With this in mind, Brabeck decided to minimize the company’s brand portfolio and integrate the product lines into a few strategic brands wherever there were possibilities of creating the synergies amongst the later. Moreover, with his idea as quoted above that there were no mature markets and only mature managers, Brabeck saw a potential in the nutrition based markets. He chose to incorporate the nutrition factor in all the brands and product portfolio of Nestle and aimed to make nutrition a Unique Selling Preposition in all the food categories in which Nestle had its presence. He saw a gap in the Deep Blue Ocean of all the competing brands in the market and decided to cash on nutrition as Nestle already had presence in nutrition based products. The resources released from unprofitable acquisitions and low-margin factories were allocated towards Research and Development. Keeping this in mind, Brabeck also set a challenging target for Nestle’s Research and Development team to innovate, renovate or revamp at least one fifth of all the products of Nestle sold worldwide. In order to ensure its effectiveness, Brabeck devised two main strategic goals. One was to add the nutrition factor as a value-added feature of all the food products of Nestle. The second was to strengthen its position as a market leader in specialized nutrition products. For this purpose, Brabeck instigated two separate business units called Corporate Wellness Unit and Nestle Nutrition Unit. The Corporate Wellness strategic unit was set up to ensure that all products of Nestle carry some level of nutrition for the end consumer. Nestle Nutrition Unit was responsible for undertaking long-term research and development as the nature of the products which fall under this unit require strong scientific support. Nestle, spends one fifth of its total research and development budget on nutrition products’ research. Besides these ongoing internal developments, Nestle also ventures into diverse markets. One of the examples of which, can be seen in Nestle’s joint venture with a renown brand beauty and cosmetic experts called L’Oreal. With Nestle’s competitive edge in Nutrition and L’Oreal’s expertise in cosmetic products, the venture produced which could be called “Nutricosmetics”. The product would be useful in improving the quality if the skin, hair and nails. The brand was called Inneov which quickly marked its presence in the European markets with a share of 11% (Lamont, 2002; Nestle? S.A. (Vevey), 2009; Robinson, 2008). Pertaining to the decisions of introducing separate strategic units to gear the company towards nutrition based products and to introduce operational excellence programs as stated in the start of this report gave Nestle a strong footing in the market internally. With the resources released from misallocation in unprofitable acquisitions, Nestle could spend smartly with efficient supply-chain, manufacturing and accounting systems which were integrated globally (Lamont, 2002). 5. Innovation and Sustainability: Nestle is equipped with about 3,500 scientists who are dedicated to the Research and Development projects throughout the year. As per Brabeck’s instructions, the company must revamp at least one fifth of its total product line. This decision is influenced by the company’s global business environment in which it operates. Nestle in this scenario, was successful to realize the importance of nutrition in the consumers’ minds because of which, Brabeck decided to steer the company towards being a business which provides quality products to its consumers. Nestle functions in a highly competitive market where innovation and product revamping becomes necessary if a business wishes to illuminate its presence in the market let alone remain at the top position. Along with this, the changes need to be made as per the consumers’ preferences. Operating in a competitive market also makes it necessary for Nestle that it consistently provides something new to the consumers. Be it the quality, the packaging, brand mantra, or the taste. In order to bring about both break through innovation and small variations in the products in the market and, Nestle has broken down its Research and Development team in two thirds for revamping the company’s existing product lines and the remaining one-third for bringing about major innovations in the market (Traitler et al, 2009; Nestle? S.A. (Vevey), 2009; Robinson, 2008). Managing Research and Development of such magnitude both efficiently and effectively is not an easy task. Brabeck had backed the Research and Development team with strong budgets and the results were a reflection of Nestle’s simultaneous Operational Excellency programs which can also be called the hub of all the additional resources which were being released and diverted from being allocated in unprofitable ventures to more useful ways. Investing smarty on Nestle’s Research and Development was a long-term strategy to enhance the company’s ability to compete in the mature markets. This was done primarily by closing down those units which were comparatively non-productive and investing on a few Research and Development facilities which had the capability to make the best use of the infrastructure and technical support which was being provided for by the company (Traitler et al, 2009). Apart from building a strong Research and Development structure, the system also had to be connected to the market. For this purpose, Product Technology Centers were set up which would translate the consumers’ needs and preferences from the research into actual consumer products. The Product Technology Centers had to be located close to the markets which meant that all the research information was to be processed at the relevant locations and then a product had to be designed accordingly. Not to forget that Nestle’s core strategy to sustain its presence in the global markets was to localize according to the market in which it was in. Owing to this fact, Local Application Centers were set up in regional the markets of Nestle. These units were to localize the global products and brands as per local tastes and preferences and were concerned with such product/brand adaption which could be launched in different regional markets. Because of culture diversities and variations in tastes and preferences, Nestle being truly a global company localizes its brands as much as a specific market requires. Any global company cannot survive if it weren’t to adopt the local culture and preferences of the diverse markets in which it operates (Business Insights et al, 2006). Besides the Product Technology Centers and Local Application Centers, the most important link in the strong link of Nestle’s Research and Development team was its Clusters. The clusters are mainly responsible for providing a link for communication and information sharing from the Product Technology Centers, Local Application Centers and the rest of the company. The concern of these clusters was to see which markets in the world could be synergized together. As stated above that Brabeck aimed to proliferate products into a few strategic brands, the clusters were mainly the ones seeing where the company may be saving marketing expenditures if the markets of any regions were somewhat identical (Lamont, 2002). 6. Recommendations Unlike operational business units, these strategic business units such as the Clusters, Product Technology Centers, Local Application Centers, Corporate Wellness Unit and Nestle Nutrition Unit etc should be focused more towards a long-term objective of keeping both internal and external growth at a balance. In contrast to the short-term targets of these operational units such as sales targets, cost cutting, profit targets etc, strategic units should be more focused towards long-term development. Strategic units formulate global strategies revolving around their product categories and where they want to see the category go in about three to five years time. Also, these strategic units are also accountable for brining innovations in their respective product categories. They must decide which product/brand to revamp or which product should be completely altered. This undoubtedly shows Nestle’s initiative to incorporate innovation in its long-term sustainable strategic decisions. 7. Conclusion In the quest for becoming the market leader and mark a strong presence worldwide, Maucher had taken some investment decisions which were strategically correct and may have been necessary in terms of global presence however, some of the investment decisions were a threat to Nestle’s profitability and long-term prosperity as the company was not as internally strong. With Brabeck’s initiative to guide the company to being internally strong, Nestle is now a global company which’s products and brands target consumers of every age everywhere around the globe. However, the magnitude of the company’s operations has to be managed efficiently and after Brabeck, the process of creating further integrations and synergies amongst operational activities must carry on as it is a slow process and Brabeck may not be there until every product is revamped under Nestle’s USP of nutrition in every offering; and until the network of manufacturing and supply chain becomes irrevocably strong. References MAUCHER, H. (1994). Leadership in action: tough-minded strategies from the global giant. New York, McGraw-Hill. BUSINESS INSIGHTS (FIRM), & MEZIANE, Z. (2006).Future innovations in food and drinks to 2012. London, U.K., Business Insights Ltd RUGMAN, A. M., COLLINSON, S., & HODGETTS, R. M. (2006). International business. Harlow, Financial Times Prentice Hall. http://www.myilibrary.com?id=60201. BUSINESS INSIGHTS (FIRM), & PILCHER, J. (2008).Consumer targeting in food and drinks lifestyle brands, personalized nutrition and customized flavors. London, U.K., Business Insights Ltd. TRAITLER, H., & SAGUY, I. S. (2009). Creating Successful Innovation Partnerships - To co-develop innovation with partners and produce value for consumers and customers, Nestle Co. utilizes open innovation, new business models, trust and goodwill, and the mindset of 'sharing is winning.'. Food Technology. 63, 22. LAMONT, D. F. (2002). Global marketing. Oxford, Capstone. http://www.netlibrary.com/urlapi.asp?action=summary&v=1&bookid=71328 NESTLE? S.A. (VEVEY). (2009). Nutritional needs and quality diets: creating shared value report 2008. Vevey, Nestle? S.A. Public Affairs ROBINSON, K. (2008). KARINA'S KOLUMN - PETER BRABECK - Nestle's chairman tells Karina Robinson why the multi-national company, like its customers, is embarking on a wellness and nutrition diet. The Banker. 158, 18. BELL, D. E., & SHELMAN, M. (2009). Nestle? in 2008. Boston, MA, Harvard Business School. GOLDBERG, R. A., & HOGAN, H. F., (2001). Nestle S.A., Harvard Business School Cases. Read More