Nestle Strategic Approach Analysis - Report Example

Strategic Approach of Nestle Contents Contents 2 Introduction 3 Overview 3 Current strategic approach of Nestle with application of relevant models, critical evaluation of their strategic practice and recommendations for further improvement 4 Recommendations 10 Conclusion 11 References 12 Appendix 14 Appendix 1: 14 Appendix 2: 15 Appendix 3: 15 Appendix 4: 16 Introduction Nestle is giant corporation having business segments such as milk products, beverages, food, ice creams, nutrition, confectionary, pharmaceutical products, pet care and cooking aides. The formation of this corporation was due a single man’s idea called Henri Nestle who was a pharmacist. He developed for infants a formula for milk products. This idea created a demand across Europe. The vision of Nestle is to be the leading wellness, nutrition, and Health Company amongst all the companies in the world. The corporation has its headquarters in Greenwich CT, USA. Nestle has always strived to be the renovator and innovator. It has always attempted to meet the needs of consumers for nutrition irrespective of the age group. This attempt has been successful with the help of its brand portfolio of beverage and food products with the highest quality. Nestle has a played a very responsible role in context of environmental, social and economic sectors. Overview The company has shown a profitable growth down the years and even delivered appropriate value to the shareholders. Nestle has a wide range of products including chocolates, bottled water, coffee, infant foods, ice cream, healthcare nutrition, refrigerated foods, seasonings, pet food and confectionary items (Klopping, 2013, pp.24-25). These wide ranges of products have helped Nestle to occupy a broader range of market area. Nestle is a global organization and the strong competitors of this organization is Unilever, Hershey foods, Kraft foods, Cadbury Schweppes, and Groupe Danone. Nestle has the strength of being a low cost operators. It has a competitive edge by manufacturing low cost products and also maintaining a low operating cost. The driving force for the sales growth of Nestle is its dairy products. Nestlé’s ice cream, milk based and nutrition products contribute 60% in the total revenue of Nestle (Franzen and Moriarty, 2008, pp.101-102). The growth and sustainability of this organization is because of the strategy adopted by the company. The strategic approach of Nestle has made it acquire more of the market share through its innovation. Current strategic approach of Nestle with application of relevant models, critical evaluation of their strategic practice and recommendations for further improvement Nestle is a Swiss company which was founded in the year 1866 by Henri Nestle. In today’s scenario it is the world’s largest beverage and food company. The corporate objective of this company is enclosed in its phrase ‘Good Food, Good Life.’ The journey of Nestle to become the world’s largest food company was not a cake walk. It required a well proved strategy formulation by which they could overcome the competition and offer the best quality of products to its consumer. Nestle has always followed the strategy of putting the consumer’s first. Nestle has always tried to design their products according to the changing needs of the consumers. The strategy was to make their consumers so much satisfied with their brand that they choose only Nestlé’s products over its competitors. As illustrated in Appendix 1. The company tried to appreciate the needs of customers belonging to all age groups (Simerson, 2011, pp.162-163). They believe that a company’s success and growth depends on the consumer’s trust towards the brand and its product quality. Their employees always think from the consumer perspective may that be designing the product or product packaging. Even the executives of the company spend some days in the homes of the consumer and also in shops to observe the consumer behaviour deeply. The hand on research like that which the company follows through its executives is much more beneficial and rewarding compared to those quantitative studies (Schwarz, 2003, p.115).The strategic approach of building such an innovative brand portfolio consisting of products belonging to all consumer category and market range has helped Nestle to have a long term profitable growth. The understanding of consumer needs is well seen in its products, example, Maggi soups in Indonesia and Germany. The Maggi brand remains the same but the product is different with different textures and flavours to meet the local tastes. Nestle does not follow a standardized taste worldwide. It adapts to specific changes in order to meet the local taste of the consumers. Nestle has more 10,000 products in order to meet the local needs. It operates in over 80 countries with almost 500 countries. Their brand portfolio is such that they target even the low income group with products of good quality in terms of taste and nutrition (Nestle, 2013, pp.145-146). This portfolio has been the key to success for the company. It operates under many brand names some of which are global, others are regional and some are even local to a specific. As shown in appendix 2. Nestle follows a strategy to focus on long term growth even by being a loss leader at the initial stage but capturing more of market share. It does not aim at short term profits even when there was an increase in inflation rate in the emerging markets Nestle had maintained a competitive pricing strategy. The strategy adopted by the company was to divest in underperforming business and invest in the strongest brands. The company believes that in order to preserve margins and drive growth it is essential to improve structural efficiency and capital allocation (Kapferer, 2008, pp. 153-155). Decentralization is a common strategy followed by Nestle. This strategy ensures flexibility in the organization as the wide range of products it deals with requires adaptability to the changing scenario of the particular region. Through this policy the company can take decisions in respect to a particular situation in a country (Pfiffner, 1995, pp.23-25). It even helps to create motivation among its employees that they know the entire business structure of Nestle. Nestle through this strategy aims at being an insider to the country rather than operating as an outsider. Nestle takes into account the local legislation in which ever market it operates to build the trust factor amongst its consumers and the employees. Nestle markets and manufactures its products in a way such that it creates a long term benefit for its consumers, shareholders, employees and the business partners. It has an integrated research and development team who analyze various areas of health and nutrition, and human physiology. On basis of search research Nestle creates its innovative products to meet the nutritional needs of the consumers (Keller, 2008, pp.413-414). The company has an empowered self management and effective communication techniques. It follows a fully integrated system and other non strategic products and activities are outsourced. Nestle always attempt for long term benefits which helps in avoiding many conflicts in relation to the employees as well as opposing interest and conflicts of the industry and trade. A company can only focus on long term benefit when it has the ability to survive in short term. In order to achieve this company maintains a satisfactory profit level every year. The corporate strategy of Nestle is to strengthen its leadership position in the market which is linked with the concern of people who purchase a product depending on the nutrition content of the product (Jeffs, 2008, pp.102-104). Though Nestle is a global business organization it has always tried to linked all it products and brand with its core business of nutrition. Following such a strategy the company has been able to become the strongest leader by having an unmatched product/ brand portfolio, geographical presence and R&D capability. Nestle in order to have such a competitive advantage has created an autonomous body within the organization named as the Nestle Nutrition unit. This unit has the responsibility to enhance the business performance by producing science based, consumer’s trusted nutrition products. The corporate wellness unit of the firm is to align the consumer’s benefit with the R&D and scientific expertise of Nestle (Jacob, 2003, pp.224-225). This unit coordinates the cross business and horizontal projects to address the current customers as well as to anticipate the future trends of consumers. Such a strategy of Nestle of developing some autonomous entity helps the company to analyze certain conditions that are overlooked by many companies. Being in a competitive market it has been able to create a niche market of its own, by offering such products which has a high quality in terms of nutritional value at the lowest cost. It maintains a satisfactory profit level and brings down its operating cost to offer a competitive price in the market. Even its strategy of developing such products that cover the maximum regions based on the local tastes has helped the company to become the world’s largest food and beverage company. To remain competitive the company has always the international strategy. The foreign direct investment in food and dairy business forms the competitive strategy of Nestle. Nestlé’s strategy is to balance the sales of low risk and low growth of countries belonging to the developed world with those of high growth and high risk markets of Latin America and Africa. Nestle understands the opportunity associated with such market which has growth but does not take any unnecessary risk in order to achieve growth in such market. Such method is known as hedging which keeps the shareholders happy and the growth of Nestle steady. Nestle through foreign direct investment in major big companies strives to gain economies of scale while it decides to operate in a developed market (Nestle, 2010, p.178). The growth of Nestle in developed market is mainly due to its manipulating process technology and ingredients for local conditions, and then employing the appropriate brand. Nestle has even adopted the strategy of entering into some strategic partnerships with some other big companies so that both the companies have mutual benefits through sharing of their respective expertise. The company’s strategy is aligned with understanding the local demand by employing locals to overcome the cultural barriers. This kind of strategy helps to understand the local preferences, and the cultural difference so as to position its products accordingly. In Asia the company has acquired many local companies to form a group of regional managers who knows well the local conditions and preferences than any Europeans and Americans. Its positive cash flow and comfortable debt equity ratio has given the company a large scope for many takeovers. The strategy mainly involves producing different products in each country in order to supply the region with a particular product from one country (Markides, 2013, p.179). Nestle strategy involves adaptation of some specific strategic models such as of strategic alliances, opening strategic business units, carrying out their innovation to develop new product category, and setting a particular positioning in the minds of consumer’s. Nestlé’s product has always been linked with health products. It has always aimed at capturing the untapped market; a common example of it is the launch of Maggi, and the nutritional products for infants. It has down the line been the strongest leader in whichever market it operates by delivering the best of products after understanding the culture of the specific region. In all 80 countries it operates it has set some strategic business units (Assael, 2005, pp.213-214). Even in Asia where it operates it has acquired some of the local companies in order to establish a strong workforce who knows the taste and preferences of the local market well. This strategic approach has helped the company to achieve profit levels in markets with very high competition. The method of divestment is followed by the company where it initiates more of investment in markets where the risk level is low. The company is more concerned with long term profit though it might not result into good returns initially but would help the company to avoid risk and secure trust of the employees, shareholders and even the stakeholders. Another strategic approach that has been adopted by Nestle is formulation of strategic alliances or partnerships. Strategic alliance is an approach in which both the parties join hands to get the best of returns in a competitive market (Thompson and Martin, 2010, pp.154-156). This kind of strategy is adopted by those companies who access some expertise of a different party to maximize the profit by cutting down the investment which would otherwise be required in order to develop such an expertise internally in the organization. As illustrated in Appendix 4. Nestle has entered into strategic alliances, as it aims to lower down the operating cost to maintain a competitive price of its products, such an approach has been beneficial for the company. Example, Nestle had entered into strategic alliance with Coca Cola in order to produce ready to drink coffees and teas. This alliance helped the company to gain the expertise of Coca Cola’s prepared beverages and bottling systems worldwide. Other such alliances were that with the Green millers, their cereal product manufacturer. Acquisitions have been the pillars for the growth of the company. Their positive cash flow is a reason behind such takeovers. To be the market leaders and acquire the untapped market has led the company to overtake many local companies (Heath, 1997, pp.297-299). This kind of strategy is adopted by Nestle to get the maximum benefits in the long run. The recent acquisition of the company was Indofood which is the largest noodle producer in Indonesia. The focus of the company was of long term through this acquisition. The company wants to expand sales in the Indonesian market and at a later stage even at a later stage export the food products of Indonesia to other countries. Similar acquisition was even in the markets of Asia where in order to understand the cultural trend of the market Nestle acquired many local companies to form an autonomous body of regional managers who are well aware of the local conditions. Nestle not only applied a diversification strategy by operating in different market areas but also went a step ahead by entering into such markets which has no link with the food products. An example of such an alliance was with L’Oreal which is a global brand in cosmetics. Nestle has even followed the diversification strategy in it product categories, by manufacturing different kinds of products depending on the cultural dimensions of a specific region where it operates. As illustrated in appendix 3. Nestle produces coffee creamers in Thailand, soybean flour in Singapore, soy milk in Indonesia, cereal in Philippines, candy in Malaysia etc. All of these Nestle products are only for regional distribution (Abell, 2010, pp.176-177). The Nestle Seal of Guarantee is the corporate logo which ensures the best of quality. A company’s commitment towards the society is well reflected by the professionalism it follows. Proper training and development is given to all its employees so that they are aware on the type of products they are dealing with and how important it is for the company to deliver the best of quality products to its customers (Pampel, 2009, pp.167-169). Nestle continues to make ingredients of its products from genetically modified crops. More than 150 years of age, this company has built its success story by constant innovation and adaptation of new technologies for improvement of their product at the same time ensuring safety and quality to its consumers. The formation of strategic business units has helped the company to decentralize its operations and understand the needs and demand of the local consumers more nicely (Ali and Kaynak, 2012, pp.116-117). There are certain strategic areas where Nestle can improve on one amongst them is the pricing strategy. When the company enters into a new market which is untapped it can opt for skimming price rather than a competitive price, as in some regions quality is directly linked with price. So in an attempt to be the low cost leader it can lose out that market share that are not that price sensitive but is highly concerned with the nutritional aspect of the food products. Recommendations Then another important strategy development process is to increase the supplier base. The diverse supplier base will provide the company with more amounts of products at the lowest cost possible; this in turn will give a competitive edge to the company (Cole, 2003, pp.134 -135). The company needs to develop a well trained workforce for quality control as there had been repeated issues regarding the quality of the food they deliver. The company needs to shrink down on the product portfolio and work on the pricing and quality of the products. As there is growing number of retailers and supermarkets which offer products under their own local brand name can lower down the importance of Nestle products. The expansion strategy of Nestle should be widely based not on investments in acquisitions or partnerships but in new product development. Conclusion Nestle through its strategic decisions has been able to maintain a leadership position in the food and beverage industry. It has adopted a wide range of strategies to get long term profitable returns. The strategy of low risk that it follows has helped the company to maintain a sustainable debt equity ratio. The core business principle of the company is to provide nutrition. To some extent in order to maintain its leadership position there is a drop in the level quality food products delivered by the company. Nestle should mainly focus now on improving the quality standard and gaining the consumer’s trust back (Lynch, 2007, pp.133-134). It has got threats from strongest competitors like Unilever but it can only overcome that if the company has a loyal customer base. The company should not only acquire new markets but also maintain the existing ones for a sustained growth. Nestle operates in more than 80 countries with 500 factories. These diverse set of operations requires an effective check on the kind of products that the company delivers. The decentralization approach has helped Nestle to understand the local consumer’s tastes but at the same time formation of these small strategic business units has bring down the level of quality in the products. Nestle being a 150 years pioneer company has a competitive advantage over many new players and need to maintain the reputation by enhancing the bet of practices possible. References Ali, A. A., Kaynak, E. 2012. Globalization of Business. New York: Routledge. Assael, H. 2005. Consumer Behavior. New Delhi: Dreamtech Press. Cole, G.A. 2003. Strategic Management. Singapore: Cengage Learning EMEA. Franzen, G., Moriarty, S. 2008. The Science and Art of Branding. New York: M.E. Sharpe. Heath, R.L. 1997. Strategic Issues Management: Organizations and Public Policy Challenges. UK: SAGE Publications. Jacob, N. 2003. Intercultural Management. Great Britain: Kogan Page Publishers. Jeffs, C. 2008. Strategic Management. California: SAGE. Kapferer, J .N. 2008. 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USA: Key Porter Books Simerson, B.K. 2011. Strategic Planning: A Practical Guide to Strategy Formulation and Execution. USA: ABC-CLIO. Thompson, J. L., Martin, F. 2010. Strategic Management: Awareness & Change. Hong Kong: Cengage Learning EMEA. Abell, D. F. 2010. Managing with Dual Strategies. USA: Simon and Schuster. Appendix Appendix 1: Appendix 2: Appendix 3: Appendix 4: Read More