Nestle Business Strategy Analysis - Case Study Example

International Business Case Studies: Company Analysis of Nestle Introduction With reference to the NESTLE case study, provide an example of a coretheme or issue which clearly illustrates a link between theories or concepts drawn from at least two pre-requisite modules. Core Themes Innovation/renovation – Nestlé’s major focus is on renovating the existing products and redistributing them around the globe. On the other hand, the company has an expert group of managers who engage in generating innovative ideas on products to be produced in emerging markets. In order to successfully establish a renovated or innovated product into a new and emerging market, a detailed analysis of the company’s SWOT and PEST factors is vital (Porter, 1980; 1985; 2008). Operating excellence – Nestle aims at having successful and efficient operations at all levels of the organisational set-up in order to improve on its sales. The organisation focuses on minimising the cost of operation so as to ensure delivery of affordable products to their bottom-of-the-pyramid customers. Porter (2008) argues that a vital analysis requires to be carried out by the organisation in order to ensure operational excellence is the PEST analysis as it aims at evaluating the prevailing market situation and the potential for growth and development of the company. SWOT Analysis Strengths – Nestle combines its yogurt with its La-1 or Lactobacillus acidophilus product and formed a yogurt brand called LC-1 (Nestle Launches, 2000). This product has a number of strengths. First is the company’s emphasis on internal growth; a feat that can be achieved by increasing production volumes via the renovation of the existing products as well as innovation of new ones. Peter Brabeck’s (CEO) understanding of renovation is that, “to just keep pace in the industry, you need to change at least as fast as consumer expectations” (Hitt, Duane and Hoskisson, 2005). In addition, his understanding of innovation is that “to maintain a leadership position, you also need to leapfrog, to move faster and go beyond what consumers will tell you” (Hitt, Duane and Hoskisson, 2005). With these, the company has been able to achieve significant internal growth targets. Another strength that Nestle boasts is its low cost operators that put them in a position to shy off competition from within the industry via the production of low cost products, as well as be the leader with the low costs of operation. Weaknesses – the major weakness of Nestle comes with its LC-1 products. These products were positioned in the market as too scientific and with respect to Nestlé’s policy of providing affordable and accessible products to bottom-of-the-pyramid customers, this was a major weakness as most of the targeted consumers failed to understand that this was not a drug but food (Hitt, Duane and Hoskisson, 2005). This can be attributed to the low education levels of residents in areas which Nestle sees growth opportunities. These areas are usually characterised with high risks, probably the third world and or the developing nations. Opportunities – an opportunity Nestle is set to exploit is the rate at which health-based products are gaining popularity around the globe. The company has an opportunity of growing even further in Germany based on their first performance that saw the company acquire a 60% market share within its first two years of inception (Colin, 2008:42). Nestle believes in renovation and innovation which forms the basis of product differentiation. According to Colin (2008), product differentiation is healthy to the company as it distinguishes tastes of particular products enabling consumers to have a variety of choices (p. 44). The company can benefit by introducing more health-based products across all nations around the world. Threats – the major threat facing the company is entrance into markets that already mature, for instance, introduction of the LC-1 product in a French market that is already dominated by Danone products (Colin, 2008). Secondly, stiff competition in the US yogurt market from Yoplait products of General Mills poses a great threat to the company’s growth of sales as it also employs similar innovative strategies as Nestle (Porter, 2008; General Mills, 2005). PEST Analysis Carrying out a PEST analysis of Nestle aims at measuring the market situation and potential through indication of decline or growth (Hitt, Duane and Hoskisson, 2005). In addition, the encouragement to proactive thinking brought about by PEST analysis is vital for the renovation and innovation policies put forward by the organisation. Political – Nestlé’s products can be affected by changes in the political environment of a country since its operations are based on a legal framework put forward by the Parliament of the respective countries (Datamonitor, 2008). Nestle tries to meet all the set standard laws of the government and other local, state, global environmental laws and regulations on the company, for instance the Disability Act and the Health and Safety Act. Nestle is keen regarding stability of governments in their target countries which are often risky in terms political stability. Economic – Nestle requires collecting significant information regarding the target country’s inflation rate, income per capita and their economic growth rate (Datamonitor, 2008). Conditions vary with respect to country hence these should be considered before setting of the company’s corporate goals for they alter customer trends in terms of spending and or purchasing. Social – the social environment is changing in many countries at the moment. In addition, Nestlé professionals (2008) reports that different nations have varied culture in terms of food, beliefs, language, lifestyle etc. The company has to employ strategies that ensure continued growth in multicultural environments where all consumers have all their preferred tastes attended to by the company’s unique products. Technological – changes in technology present the most persistent, rapid and profound effect on Nestlé’s growth goals (Nestlé Online, 2005). As Nestlé Online (2005) reveals, technology presents the company with the opportunity for new products and improvements as well as marketing techniques like e-commerce and the internet. Nestlé’s operations are greatly influenced by technology since some of its orders are taken via phone and online by internet as well as using technology in management of employee and customer records (Nestlé Online, 2005). 2. What is the companys strategy with regard to business development in emerging markets? Does this strategy make sense? From an organisational perspective, what is required for this strategy to work effectively? In the face of the company’s unquestionable success, in early 1990’s, it realized that to maintain its growth rate, it had to face significant challenges (Hill, 2009). In order to respond to these challenges, Hill (2007) asserts that the organisation embarked on developing key strategies for ensuring development of business in economies and or markets that are emerging and growing as well. The strategy at Nestle is early entrance into emerging markets prior to competitor’s knowledge and establish a solid position in the market via trading in locally appealing basic foods for instance condensed milk, infant formula, tofu, and noodles. Nestle has dedicated its efforts towards narrowing the focus of its preliminary market to a few strategic brands (Porter, 2008). The objectives behind these efforts are to reduce risk, simplify life, as well as concentrate the efforts of the management and marketing resources of the company on a reduced of key niches. The primary goal of these efforts is establishing a market position that is commanding in the market of each of the key niches. The strategy was employed and has been pursued by Nestle and as a result, the company has taken-up up to three quarters of the instant coffee market in Mexico, 70% of the Chilean soups market as well as taking up 66% of the Philippines’ powdered milk market (Our Best, 2010). The company functions in a way such that when its income rises, it progresses out of these key niches while at the same time making way for their items that are more upscale, for instance chocolate, mineral water, cookies as well as other prepared foodstuffs. Despite the fact that the company is well established with respect to its worldwide brands such as Nescafe, it also employs a strategy that sees it use local brands in a host of markets (Porter, 2008). The company has eight thousand five hundred brands to its name but only seven hundred and fifty are registered in at least one country with a mere eighty having registered in more than ten nations. The company uses the same global brands in a host of first world countries. Nevertheless, the company’s strategy in the second and third world countries is focusing on trying to process technology as well as optimising ingredients and then use a brand name that locally resonates. From an organisational point of view, customisation and not globalisation is vital to the strategy employed by the company in developing and or emerging markets. 3. How would you describe Nestlé’s strategy at the corporate level? Are they pursuing a global strategy, a multi domestic strategy an international strategy or a transnational strategy? You should provide clear evidence in support of your reasoning. Nestle is a company that deals with food, health, wellness and nutrition. The creation of the global business organisation Nestlé Nutrition was aimed at strengthening the company’s focus on core nutrition business with an aim of reinforcing its competitive advantage in this market (Porter, 2008). This is because the company’s hierarchy believes that a key element of Nestlés corporate strategy is to strengthen its leadership in the nutrition business market (Nestlé Management Report, 2004). The major characteristic of this market is that a consumer’s motivation to buy a product is dependent on the claims made by the same product with regard to its nutritional content (Nestlé Annual Report, 2011). Nestlé Nutrition was charged with the responsibility of handling details regarding operations, profit and loss for the claim-based business of Healthcare Nutrition, Infant Nutrition and Performance Nutrition. Through offering customers science-based trustworthy nutrition products and services, the unit’s aim is to deliver these customers with s business performance that is superior in the whole market. At the corporate level, the Corporate Wellness Unit was established with duties of integrating nutritional value-added in the company’s food and beverage dealings. According to Bell and Shelman (2009), the developed unit will drive the health, nutrition, and wellness organisation across all their dealings. The unit encompasses external and internal communications efforts striving at closely aligning the scientific and R&D expertise of Nestle with the benefits of its consumers. The unit is also charged with duties of coordinating horizontal and cross-business projects addressing the prevailing concerns of customers as well as the anticipation in variations of consumer’s future trends. The International Strategy Being a multinational organisation, Our Best (2010) reveals that the company has established the international strategy as the major strategy of their competitive focus. The major competitive strategies employed by Nestle involve direct foreign investments in dairy and related food businesses. The consumer market can be divided into two market segments with respect to developed and developing world: those characterised with low risk and low growth (developed world); and those with high risk yet with high potential for growth (developing world). The aim of Nestle is to balance the sales between these two market segments. Nestle employs a hedging process that sees the company recognise the profitable opportunities in the high-risk nations of the world but is devoted not to invest or rather take risks that are unnecessary just for the sake of growth of the company. This process ensures that the organisation maintains a steady growth that will keep the company’s shareholders happy. Nestlé’s operation in developed markets is aimed at growing and gaining economies of scale via direct foreign investments in larger companies. An example is Nestlé licensing its LC1 brand to Muller in Austria and Germany. On the other hand, Nestlé’s operation in developing markets uses a different method to ensure continued growth (Nestle Launches, 2000). Here, the company manipulates the local processing technology and or ingredients, and employs the apposite brand. An example here is the Sveltesse brand in some European countries which is among other chilled products that sometimes have a higher fat content – two to three times higher – than those supplied in the American market (Jones, 2012). Another strategy employed by Nestle involves striking partnerships with large companies such as coca cola. Nestlé’s alliance with coca cola during the early 1990s with respect to coffees and ready-to-drink beverages was aimed at benefiting from the worldwide bottling system boasted by coca cola as well as their expertise in the preparation of beverages (Nestlé Management Report, 2004). According to the report, the reason behind Nestlé’s sights on new business and markets for growth is due to the realisation that the American and European markets have become extremely competitive and flat. As a result, the company has set sights in Asia, Latin America and African for expansion and business growth opportunities despite the high risks in these countries. Nestlé’s Asian strategy involves acquisition of local companies with the aim of forming a group of independent managers in the region with greater knowledge of the local markets’ culture as opposed to Americans and or Europeans. With its comfortable ratio of debt equity and strong flow of cash, Nestle has a stronger muscle for the acquisitions. Nestlé’s acquisition of Indonesia’s Indofood – the largest producer of noodle in Indonesia – was a sign of its great intent (Jones, 2012; Nestle Indofood, 2005). The company’s major objective is increment of their sales in the Indonesian market with a long term objective of exporting Indonesian food supplies/products to other countries. For Asia, the strategy employed by Nestle is the wide-area strategy and it involves the production of new and different products in every country so as to supply the whole Asian region with a given specific product from one specific country. A suitable example is where the company has a plant in Indonesia for production of soy milk, another in Singapore for the production of soybean flour, a plant in Thailand for the production of coffee creamers, one for candy in Malaysia and finally another in Philippines for the production of cereal. According to Nestle Indofood (2005), all these products are not only for domestic consumption but instead, Nestle ensures that these products are distributed in the whole region of Asia. 4. Does this overall strategy make sense given the markets and countries that Nestle participates in? Why? Nestle is involved in the production and marketing of food and beverages around the globe. According to the company’s 2010 financial year report, a total of 281,005 employees were under the company’s name, generating total sales amounting up to CHF 109.7 billion (Nestle Annual Report, 2011). These sales were derived from milk products and ice cream, liquid and powdered beverages, both attracting a combined 38% of the total sales; while prepared dishes and cooking abets, pet care, confectionery, nutrition, water and pharmaceuticals accounting for 16%, 12%, 11%, 9%, 8%, and 5% respectively (Definitions and Comments, 2011). The relevance of the international strategy employed by Nestle in realisation of growth can be seen in the company’s position in the developing markets, providing the bottom-of-the-pyramid customers with up to 4, 660 products that are popularly established in the markets and are greatly accessible at affordable prices (Jones, 2012). These products generate the company revenue of about 10% the total sales. As earlier mentioned, Nestle realises opportunities that are beneficial or rather profitable in high risk countries and or conditions (Grant, 1991). Most of these nations with high risks are developing nations characterised with high potential for growth. However, these countries are largely affected by poverty with some farmers unable to produce high quality products due to high costs involved. As a result, Nestle embarked on offering several fair-trade-certified products as well as development of Nespresso AAA Sustainable Quality Program that sees farmers who produce high-quality beans paid premiums. Despite most of Nestlé’s products having associations with health concerns, for instance, ice cream, coffee, chocolate, biscuits and sugar confectionery, other products of the company can be rated as good-for-you products. This can be evident in the 2010’s report which revealed that Nestlé’s sales from milk, nutrition and water were 11%, 9% and 8% respectively. 5. Through your own research on NESTLE, identify appropriate performance indicators (both financial and non-financial). Once you have gathered relevant data on these, undertake a performance analysis of the company over the last five years. What does the analysis tell you about the success or otherwise of the strategy adopted by the company? Performance Indicators In order to determine the growth of the company, a number of key performance indicators, both financial and environmental can be considered for analysis (Grant, 1991). Sales The year 2010 saw sales of up to CHF109.7 billion realised; an increased figure as compared to the previous year of 2009, which recorded total sales of CHF107.6 billion. The sales of the company have been increasing steadily from 2006, with the highest sales realised in 2008, standing at CHF109.9 billion. Sources: Half-Yearly Report: Jan-June (2012); Financial Statements (2009). The above chart represents a performance that reflects gains in the market share as well as growth in the regional market and across all categories of the organisation. This successful growth in sales can be attributed to the continued investment in the company’s growth pillars that are in alignment with the strategic policy and or roadmap of the organisation. Among these is the increased distribution of PPPs (popularly positioned products); rolling out of premium products in the global market; the company’s continued focus on all its categories i.e. health, nutrition and wellness; reaching the out-of-home markets, building the company’s innovation channel as well as increment of brand investment and consumer marketing (Nestlé Annual Report, 2011). EBIT Group (Earnings before Interest, Taxes, restructuring and impairments) Sources: Half-Yearly Report: Jan-June (2012); Financial Statements (2009). Profitability The group’s EBIT augmented from 15.7 billion to 16.2 billion in the years 2009 and 2010. This can be attributed to the company’s business mix coupled with growth in sales and achievement of huge operating efficiencies. Similarly, the profits recorded between the same years were significant. Sources: Half-Yearly Report: Jan-June (2012); Financial Statements (2009). The steady changes in profit margins between the years from 2006 to 2010 were accompanied by the company’s increased investment in brands. This increment resulted in a subsequent increase in marketing expenses as well as consumer marketing expenses. However, this excellence is an indicator of Nestlé’s continued drive for stand-out operations from production to consumption. Owing to the increased levels of quality, safety, environmental and service performance, the company realised reduced costs (Colin, 2008). These were vital in the company’s 2010 performance and at the same time creating a solid room for further development and improvements in the company’s performance in the following year. Volume of Production The performance of an organisation can also be arrived at via the evaluation of environmental indicators (Porter, 1985). The volume of production of a company can be defined as the total products produced based on the net weight. The production of the company increased from the period 2006 to 2010 as shown in the chart below. Source: Definitions and Comments 2011 In order to examine the increment in tonnage of production from the 2006 up to the year 2010, a number of aspects are looked at and they are discussed below. Materials This is the total of all input resources purchased for the manufacture of company products including the materials used for packaging of the products (Barney, 1991). According to the below representation, the total volume of materials used in 2006 were at 24.7 billion tonnes. Source: Definitions and Comments 2011 Due to increased production as a result of expanding markets across the globe and development of new products, materials used in transforming of products from farm to fork in 2007 and 2008 increased; with 2008 recording the highest figure of 28 billion tonnes. An increase in material inputs can be used as a direct indicator of a company’s growth and development due to increased production (Barney, 1991). Water In the year 2010, the total water withdrawn from different sources to the company for use in different departments increased from 142.7 to 144.1 billion cubic metres; an increase that can be attributed to the increased output of the company during the same period. However, during the 2006 period of production and towards 2007, the total volume of water withdrawn was at its highest, reaching the 154.9 and 152.5 billion cubic metre marks in 2006 and 2007 respectively. Source: Definitions and Comments 2011 The reducing trend in water withdrawal can be attributed to the organisations improved efforts in ensuring efficient use of water in all operations (Nestlé’s Environmental Impact, 2008). The company has installed reverse osmotic recovery systems that purify waste water which is then re-used in the industry, thus reducing the amount of water withdrawn from other sources. In addition, changes in relative volume of products and divestitures and acquisitions contribute to the variations in this figure (Definitions and Comments, 2011). The company has an obligation to adhere to the international environmental standards of operation. As such, it is clear that Nestle is well positioned in the market owing to the fact that its reduced withdrawal of water is directly proportional to the company’s compliance with the set legal and environmental regulations, thus presenting the company with humble and ample time for pursuing its goal of growth in emerging and or developing markets. Energy Consumption Performance of an organisation can also be monitored via the examination and or evaluation of the total energy consumption, whether produced or purchased by the same company (Bell and Shelman, 2009). According to the chart below, the total energy consumed from 2006 to 2007 increased from 844 to 857 billion joules respectively. Source: Definitions and Comments 2011 However, with increased production realised during the 2008 financial year, the company’s total energy consumption increased. Start-up processes at any business organisation are usually costly (Nestlé’s environmental impact, 2008). Nestlé’s policy of growth in emerging markets can be argued to be effective due to the increased consumption of energy that indicates development of new plants in different regions. These new developments contributed largely to the mass output from 2008 to 2010 due to increased production and distribution as well as increased acquisitions by the organisation. 6. Is Nestlé’s management structure and philosophy aligned with its overall strategic position? The management structure and philosophy of Nestle can be argued to be in alignment with the strategic position of the company in general. Overall, the organisation has a strategic objective of developing in emerging markets, dealing in a wide range of products, and like in Asia, produce and distribute products that are unique to each country in the region (Nestlé Annual Report, 2011). Owing to its wide distribution, the company can be termed as a decentralised organisation. Consequently, the responsibility of making decisions regarding operations is pushed to the local units. These units are independent in terms of making decisions involving prices, distribution of products, human resources, marketing, etc (Porter, 1980). The organisation of the company is such that it is in seven global strategic business units (SBUs) charged with the duty of making high level strategic decisions as well as the development of the business, for instance, one SBU deals in coffee and beverages and another in ice cream and confectionery. Overall, these SBUs are engaged in development of business strategy including the acquisitions strategies and market entry strategies (Hill, 2009). As an indicator that the company’s strategic position coincides with its management structure, Bell and Shelman (2009) report that recent years have seen two-thirds of the total growth at Nestle come from acquisitions. In order to bring together all its global operations, the company depends on its expatriate army consisting of averagely seven hundred managers working on foreign tasks (Nestlé Annual Report, 2011). These individuals are usually selected based on their ability, willingness to lead a semi-nomadic life, and their drive and they work in up to half a dozen countries during their whole careers. In addition, Nestlé’s management development programs work as the company’s strategic tools for creating morale among managers. This is evident where the company has set up an international training centre at Rive-Reine, Switzerland. These programs bring together managers at different stages in their careers from all around the globe for development programs of particular target for a period lasting between fourteen to twenty-one days. The aim behind these programs is to enable managers understand better the culture and strategy of Nestle as well as give them access to the top-most management of the company. Through a better understanding of the culture and strategy of the company, managers are able to focus on the company’s objective of growing in emerging markets as well as becoming a major stakeholder in the food and beverage market and or industry (Nestlé Management Report, 2004). In marketing and business related activities, research and development is a vital aspect in ensuring the establishment of a sustainable business venture. Within Nestle, this operation has a special place and it is made of eighteen groups operating in eleven different nations across the globe. To this function Nestle has dedicated three thousand one hundred employees accounting for an expenditure of around 1% of the total annual sales, with around 70% of this used up on development initiatives (Our Best, 2010). The focus of these development initiatives is on developing process and products that SBUs, regional and local managers have identified as fulfilling to the market. A suitable example of products developed via research and development (R&D) are the instant noodle products. They were developed in response to the supposed wants and or desires of the locally operating companies across Asia. With regard to continued growth and development of new products in the high risk markets around the globe, the company has put in place a long-tem development project(s) with complete focus on development of new and or innovative technological platforms like agricultural biotechnology products or non animal sources of proteins etc. References Barney, J. (1991) ‘Firm resources and sustained competitive advantage’ Journal of Management, vol. 17, no. 1, pp. 99-120. Bell, D.E. & Shelman, M. (2009) Nestlé in 2008. Harvard Business School Case Study, 9-509-001, Boston, Harvard Business School Publishing. Colin, M. (2008) ‘A town torn apart by Nestle’ Business Week, pp. 42-47. Datamonitor (2008) ‘Company spotlight: Nestle’ Food Market Watch, pp. 41-40. 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