Corporate Growth Directions of the Company - Case Study Example

Table of Contents Introduction 2 Cross-Business Synergies 2 Corporate Growth Directions of the Company throughout its History 3 Initial Inception 4 The Maucher Years (1980-1997) 4 The Brabeck Era (1997-2008) 5 Corporate Management Mechanisms used by Nestle to Leverage its Synergies 6 Future Scenarios 9 References 11 Bibliography 11 Introduction The twenty first century has been categorised as the age of globalisation. In this age corporate organizations across the world are trying to expand beyond geographic frontiers to capture attractive markets which offer numerous potential across the worlds. This has also trigged large scale competition among the market players as they are trying to grab the same share of the market. It has become highly imperative for organizations to intrude greater efficiencies in their business processes so as to maintain and sustain their profit and revenue margins. The present study discusses about the multinational firm and FMCG giant Nestle which has been among the pioneers in its product category and has a large number of Billion dollar worth brands under its umbrella. The present study would discuss the strategies that have been adopted by the firm to maintain its profitability in the industry. The study would also analyse the cross business strategies that have been employed at the firm. Cross-Business Synergies According to Knoll, Synergy is defined as “the effect that the combined return of the whole is greater than the sum of the returns from the individual parts”. In corporate world cross business synergy is achieved when the net returns of the combined entity formed by aggregating the different departments and units exceeds the net returns that is generated by a single entity taken as a standalone unit within the organization (Knoll, p.14, 18). The most important strategy of Nestle with regards to corporate synergy was its strategy of integrating the different departments across the organization. This strategy was named as GLOBE (Global Business Excellence) in which the different departments and the suppliers were brought together on a single common platform. This enabled real time information sharing among the different departments as well as the stakeholders that helped in generating greater efficiencies which has resulted in competitive advantage for the firm. All the 23 Research and development (popularly referred as Product Technology Centres) centres of the world were brought together on a single common platform which helped in generating greater innovations in the product line of the firm. The top management of the firm was of the strong belief that in order to sustain profitability the firm needed to continuously innovate its products line and would have to expand much beyond their borders considering the fact that Switzerland offered little potential of being a good market for the firm in terms of market size. Under their initiative of introducing corporate synergy the new CEO of the firm stressed upon the need to emphasise on the GLOBE strategy of the firm. The top management of the organization believed that this strategy would help them to gather the best resources and practices (Bell & Shelman, 2008, p.775, 786, 791). Integrating all the departments would also enable to achieve the firm’s policy of thinking globally and acting locally. Under this strategy the firm sought global expansion but also kept into account the local beliefs and sentiments of the target market (Morley, 2002, p.35). Adopting corporate synergy would also help the firm to source raw material at the best rates thus bringing about cost efficiencies in its business process. Corporate Growth Directions of the Company throughout its History Nestle has been the pioneers in its industry segment since the year 1867 when the firm was incorporated (Bell & Shelman, 2008, p.773). The growth history of the firm could be tracked down and divided among the following stages which have been associated with specific periods in history. Initial Inception Nestle was born in the year 1867 in Vevey in Switzerland by the famous pharmacist Henri Nestle. The first product of the firm was an innovation as it was the first substitute that would be used as an alternative for milk to be fed to new born babies. The first product of the firm was branded as ‘Farine Lactee Nestle’. The first product of the firm also bore the present in famous logo of the company with a bird feeding its babies in its nest. Mergers and acquisitions have been in the firm’s culture since its inception as the firm acquired the firm Anglo Swiss condensed Milk Company in the year 1905. In the subsequent years the firm undertook a massive expansion drive into the other potentially good markets which include the attractive markets of Europe, America and rest of Asia. The firm also opened a production unit in Brazil to augment its presence in the South American market. The firm also established the first ‘milk district model in Switzerland in 1870 which was used as a model and was replicated in many nations across the world. This period of time also saw the development of Nestlé’s famous coffee and tea brands named as Nescafe and Nestea (Bell & Shelman, 2008, p.773). The Maucher Years (1980-1997) This period in the firm was characterised by the appointment of Helmut Maucher as the top executive of the firm. This was also considered to be a period of financial turmoil for the company as its profit margins had dipped during this period. The CEO took several decisions to retain the profitability and sustainability of the firm as he closed down many non-performing brands and started to re focus of its age old strategy of being a market leader in the packaged foods segment. This period also saw the expansion of the company’s product line as it diversified into different areas apart from its usual product offering in the baby foods, tea and coffee segment. The acquisition of US based firm Carnation also saw the foray of the firm in the chocolate based product category (Bell & Shelman, 2008, p.773). The Brabeck Era (1997-2008) This period was initiated with the appointment of Brabeck as the CEO of the firm. Upon assuming the helm of operations the new CEO underlined four strategies that would serve as guiding pillars for the company over the next years. This model was named as the Nestle Model. This model was used as a guiding template for the organization so as to enable the firm towards achieving its intended target of 5-6 percent annual growth rate. 1. Cost effectiveness and greater efficiencies in the business process 2. Continuous innovation of the product line of the firm 3. Universal presence of the firm in all major consumer markets across the globe 4. Introduction of better Customer Relationship Management Policies and effective branding strategies. Apart from framing up the strategic model the firm also expedited its research and development activities, the 60/40 rating system of product quality was also introduced during this period. Nestle also started its strategy of integrating the different departments and divisions of the company into a single common unit. This strategy was code named GLOBE which stood for Global Business Excellence. This helped in getting access to real time information about the activities of different departments as the suppliers and other stakeholders of different departments were combined together as a single unit. The firm also undertook large number of mergers and acquisitions including the famous acquisition of Ralston Purina in 2001 which enabled it to diversify into pet food category segment. This period was the shining phase of the company as sales figures increased by about 78 percent with a corresponding increase in net earnings before interest and tax by about 142 percent. Share prices reached new heights which strengthened the shareholders confidence about the organization. Under the guidance of the new CEO Nestle also started diversifying and repositioning itself from a process driven food manufacturing organization to an organization engaged in health, wellness and nutrition (Bell & Shelman, 2008, p.775). Quality aspects of the products were given significant importance as the firm had a vision of providing hygienic and nutritional food item to its customers. Under this strategy the firm enhanced its research and development activities at the organization which were aimed towards its new vision of health, wellness and nutrition (Bell & Shelman, 2008, p.781-783). Corporate Management Mechanisms used by Nestle to Leverage its Synergies Nestle is a firm that has operations across numerous nations and has a large number of subsidiaries and departments which operate as distinct entities. The top management of the firm realised the importance of bringing these units and subsidiaries on a single common platform. The envisaged that such an aspect would help in generating real time information exchange and greater efficiency. ERP is defined as a software package that integrates the different business processes of an organization as a single common unit (Rutenbeck & Rutenbeck, 2006, p.95) Nestle signed a contract with SAP to incorporate ERP in its business process for a deal estimated to be worth 200 Million Dollars. Under this project the SAP would link each of the different subsidiaries of the firm with a central common database which would help in real time information sharing. Apart from these different departments the suppliers would also be linked with the firm which would help in quicker replenishment of goods and demand estimates could be made on the basis of real time data available from the firm. This would reduce the inventory carrying and holding costs as well as reduce chances of stock outs at the stores. The implementation of ERP led to cost savings of approximately 325 Million Dollars in the US market alone (ERP Forums, 2010). In order to generate greater efficiencies and promote faster decision making, Nestle has adopted a flat organization structure. The CEO along with the other top level managers formed the Executive Committee who reported to the board of directors of the company. The numerous regional units reported to their respective head offices based at their respective zones. The country manager based on the market scenario in particular region was assigned the role of fixing targets for the company in their respective regions. In addition to this Nestle also tried its best to retain the top management of the firms that it acquired as it felt that local individuals would have a better understanding of the market situation. This was in complete tune with the firm’s strategy of thinking globally and acting locally (Bell & Shelman, 2008, p.786). Another important strategy of the firm was to create shared value among its stakeholders. This involved all the stakeholders of the firm including customers, suppliers and employees. The basic presumption behind this strategy was to reduce the instances of adverse impacts in the value chain of the product while enhancing the value proposition to the company’s shareholders and the civil society. This also included providing value to the society by imparting Corporate Social Responsibility measures. Diversification was also another important strategy that was undertaken by the firm. Initially Nestlé’s product line was based on milk products which were later diversified into other related product categories like coffee, chocolates. The firm envisaged a vision of health, wellness and nutrition wherein the firm would diversify its product line. Nestle presently has a product line which includes products ranging from baby food to candies and health products. The firm undertook a strategy of large scale mergers and acquisitions to attain its vision. Presently the firm has brands under its company umbrella that are worth billions of Dollars in the global markets. Nestle also ventured into newer markets so as to reap the benefits of globalisation to tap the emerging markets across the world. At the organizational level the firm had an effective human resource management system which adopted employee friendly policies which is evident from the fact that most of the top level managers had a low attrition rate whose tenures and career span at the organization was over ten years on an average (Bell & Shelman, 2008, p.786). Nestlé’s strategies and programs like GLOBE and ERP implementation have helped the firm in realising its aim of corporate synergies which has generated sustainable competitive advantage for the organization in the tough global market. Future Scenarios Globalisation has opened up many new doors for the firm to expand its business activities across the globe. Emergence of developing nations like China and India hold numerous opportunities for the firm to pursue its business interests. As a part of its growth initiative Nestle has framed up a certain growth platforms which would help the firm towards achieving greater growth rates in the future years. These are stated below: 1. Focus on nutrition, health and wellness 2. Venturing into new and emerging markets 3. Promoting consumption based ‘out of home’ 4. Existing product ‘premiumization’ (Bell & Shelman, 2008, p.791). Nestle tried to diversify into different product categories like pet food, chocolates and candies. Aspects like enhancing quality control were taken up on a large scale basis, this included quality control measures like 60/40 tests etc. In addition to this the firm also spend billions on research and development of new innovations in the product line. ERP implementation and GLOBE strategy also helped the firm to generate greater efficiencies in its business processes (Bell & Shelman, 2008, p.792). Nestlé’s major markets constitute the developed nations but the firm aims to change this by giving greater importance to the markets in developing nations which presently contribute about one third of the revenues generated worldwide. In order to reach out to new markets Nestle has adopted a strategy named PPP (Popularly Positioned Products). The products have been have good nutritional values and would be targeted at one billion potential customer based in developing nations. Nestle also aims to improve its business and distribution models in rural areas so as to enhance its presence in the rural markets. This would be attained by modifications in the marketing mix of the product line (Bell & Shelman, 2008, p.792). Nestle also aims to grab the opportunities that are offered by the aspect of ‘eating out of home’ which implies individuals having food cooked outside their homes. According to statistics 30 to 50 percent of the spending on food happened mostly in this category with the market being valued at $ 400 Billion. Nestle Professional is a brand that intends to provide readymade food items including tea, coffee apart from other readymade nutritional items (Bell & Shelman, 2008, p.794). Nestle also plans to target the premium segment of the market. The basis for this strategy lies in the forecasted estimates of the firm that the demand for premium goods would increase in the developing nations. The main focus for this segment would be towards generating greater values rather than focussing on volumes. Nestle plans to include services like customised services, unique products to reach out to this market segment (Bell & Shelman, 2008, p.794). The study highlights the formidable brand image of Nestle which is characterised in the industry as having brands worth billions of Dollars. The firm has an effective leadership which has adopted numerous innovations in order to make the company profitable. The firm also follows some of the best strategies so as to ensure greater sustainability in its operations. The challenge for the firm lies in its ability to compete with the market players across the globe. Issues also emerge with regards to management of distribution network with stores like Wal-Mart which command greater bargaining powers. The recipe for success for the company lies in its ability to introduce innovations and to leverage its formidable brand image in the market so as to attain sustainable competitive advantage. References Bell, D.E. & Shelman, M. 2008. Nestle in 2008. [Pdf]. Harvard College. ERP Forums. 2010. Business Case for an ERP. [Pdf]. Available at: http://www.erpforums.org/index2.php?option=com_content&do_pdf=1&id=17 [Accessed on November 30, 2010]. Knoll, S. 2008. Cross-Business Synergies: A Typology of Cross-Business Synergies and a Mid-range Theory of Continuous Growth Synergy Realization. Gabler Verlag. Morley, M. 2002. How to manage your global reputation: a guide to the dynamics of international public relations. Palgrave Macmillan. Rutenbeck, J & Rutenbeck, J.B. 2006. Tech terms: what every telecommunications and digital media person should know. Focal Press. Bibliography Kotler, P. 2003. Marketing insights from A to Z: 80 concepts every manager needs to know. John Wiley and Sons. Read More