Financial Control of Nestle - Essay Example

Describe the financial controls used byNestle Why are these financial controls effective or why not According to Matlack, Nestle is greatly underperformed compared to its competitors Unilever and Kraft Foods (56). The CEO Brabeck has delivered more than $1.5 billion in cost savings by "streamlining and integrating the far-flung Nestle operations". As the result the operations profits have much increased. The author of the article "Nestle bucks market trend" says that Nestle has managed to gain the predicted profits and maintain the sales volume in the year 2005 while its key competitors did not succeed as much. Nestle success is due to raised prices by only two cents in the nine months - this financial control helped to offset the higher costs of raw materials and oils which has made the packaging and transportation more expensive. Most of the attention is paid to the raw material prices easing in order to ensure that the major product categories will meet the financial targets this year. CEO Mr. Brabeck has noted that Nestle has a plan on how to deal with the higher input costs and this plan is working better than some other big food companies have. CEO predicted the increase of costs associated with the raw materials and had started raising the prices earlier and advanced the price increase in the beginning of the year. Such move has made it possible for Nestle to meet the financial targets. The increased prices have never been assumed as a competitive advantages, however, when the raw materials costs increase is predictable and inevitable, then the timely reaction can help to avoid the loss of customers and assure the sales level. Nestle did not only predict the potential cost increase, but has also timely reacted and gained the desired sales volume. One of the concerns CEO focused on was high division of financial operations - every country had its own financial system with managers making decision with freedom and choice of the most appropriate methods. Brabeck has centralized the financial activities and the whole structure became more controllable. The special attention is currently being paid to the creation of additional value for nutrition and wellness products. CEO has a clear vision of what products are desired by customers. The issue of extra weight is no longer the American problem and many people in Europe are struggling to become healthier and lose the weight. For this reason the wellness products are getting more and more popular. Nestle has managed to save enormous amount of money through acquisitions of the well-known brands. In addition, less money is invested into research and development of new products because the company has bought not only the brand name but the all operations with all specialists working for that particular acquired company. As it will be discussed further, acquisitions are the best cost saving investment opportunity that helps to control the spending and reduce the costs on research. What are some of the operating standards the CEO is implementing at Nestle Why are these standards effective or why not One of the key challenges of Nestle was to gain control over the decentralized structure - the country managers has freedom in everything starting with the purchasing and up to capital investments. From one side, it was very helpful from the marketing standpoint because local managers were more knowledgeable about the customer's preferences. From the other side, such system was highly inefficient - headquarters could not track the costs. First of all, the five global centers were established to control coffee and cocoa purchasing (Matlack 56). The information technology system was introduced to give managers data about the performance of other units. These standards are more effective because can be easier controlled and tracked. Matlack (56) provides the number Nestle recipe for Richer Margins: Streamlining operations (intensive costs savings through improvements in info tech and centralizing of activities), Strengthening key segments (through acquisition of other market leaders), Shed less profitable activities (tomato canning and pasta production), Developing new products (nutritionally enhanced cosmetics and toothpastes). All four of these steps can help Nestle not only remain the leader on the market, but also improve the efficiency of operations. As the recent results show, these initiatives are working. In addition, the company has a long history of acquisitions because the "strategy and priority of Nestle is internal growth" (Ball 4). Nestle is often criticized because of its margins are much below the competitors' and the major efforts are devoted to raise them. In the year 2005 the increase was relative small but it is only the beginning of the development of new structures and it is reasonable to expect further growth in the nearest future. Bickerton has noted that Nestle plans to buy ice-cream, bottled water and nutrition businesses in order to fill gaps in its operations. The CEO has made it clear that the primary objective of the company is to grow and expand its operations. As the result, Nestle would intervene is a takeover bid was launched for French food company Danone. In addition, the CEO strives to reduce the debts significantly and the current debt rating enables Nestle making large acquisitions at high cost. Another field of operations with greater control by CEO is the development of the specific business model for hard discounts - some of the products that are currently being development will be sold only through discounts. The baby-food and nutritional product lines will receive more investment in the coming year. The CEO clearly defined the products that bring the greatest income and most of the funding will be directed in their further development and improvement. How is the new reward systems structured at Nestle Are they succeeding and why or why not Manager's bonuses are lined to the improvements in the profit margins - factories are encouraged to use more efficiently the manpower and technology. This initiative is working and the new factory in Philippines has increased the efficiency by 15 percent in three years by retraining the maintenance teams to work faster (Matlack 56). When managers are rewarded for the actual performance and the contribution they have made, they are willing to perform better and feel that they are rewarded fairly. Unfortunately, there is no information about the reward system for the other employees; nevertheless, it seems that the same system applies to all employees. Reward for achievements has proved to be beneficial in many global companies and Nestle has used all of the advantages this system offers. Word count: 1078 Works Cited Ball, Deborah. "Nestle sales, net rise, yet margins disappoint." Wall Street Journal Europe 24 Feb 2006: 4. Bickerton, Ian and Wiggins, Jenny. "Nestle looks to fill niche gaps in operations." Financial Times London 24 Feb 2006: 28. Matlack, Carol. "Nestle is Starting to Slim Down at last but can the world's No. 1 food colossus fatten up its profits as it slashes costs" Business Week New York 27 Oct 2003: 56. "Nestle bucks market trend." Birmingham Post 21 Oct 2005: 27. Simonian, Haig. "Nestle looks at governance shareholders pressure. Financial Times London 16 Apr 2005: 9. Read More