The corporate management mechanisms used by Nestle
The writer believes it will be reasonable to first define cross business synergies and then relate it to the analysis of the Nestle case study provided. According to Martin et al (2003), cross business synergies is defined as understanding and recognizing the value which can be created and captured, over a period of time, by the sum of the business units together with regards to what it would have been individually. This assignment is based on the Nestle case study in 2008 from De Wit and Meyer (2010). The aim is to write a report that will critically evaluate the Nestle organization at the corporate level to identify the cross business synergies, corporate growth directions throughout its history. The assignment will also highlight the corporate management mechanisms used by Nestle to leverage its synergies and outline the future scenarios for the company corporate level strategy.
Identifying the cross-business synergies within the organization throughout its history
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According to the case study, Nestle replicated its milk district model that was initially introduced in Switzerland to ensure sufficient milk supplies in 1870s and modified it by adding value to it and facilitating the availability of the product across the continents, example, Latin America, Asia, Caribbean, African and Inner Mongolia. This shows that the company recognized that choices varies across continents and by adding value to the original product (milk) to make it easy to use and available in other continents represents a synergy which was created and captured.
Another important cross-business synergy in the history of the company is the Research and Development, R&D. Nestle understood the limitations and challenges involved in starting a new company that will stand alone and compete favourable with competitors in a new market and therefore, utilized the combined strength of its businesses to invent new products, Nescafe, (a soluble instant coffee) by the help of its R&D team. Nescafe remain one of the largest brands in the world and have changed the way we drink coffee across the world today by making coffee drinking fun, stylish, ready to use, high class and tastier. Also important is the production of another brand Nestea (an instant tea), and the chocolate powder Nesquik by the same drying process used in making Nescafe.
Furthermore, from the case study, Nestle reinvigorated Nesquik originally sold in the form of a powder used in milk into syrup form and into ready to drink varieties, this is also a very important cross business synergy for Nestle, which provided an easy access to coffee drinking in restaurants, hotels, cafe, and made the products affordable, available, and to suit individual taste and choice. Another cross business synergy was in leveraging marketing approach which helped the company to build expertise in various business units and invention of new products through its Research laboratories to launch a platform for growth which eventually increased sales and generated increase market revenue. An important cross-business synergies within the organization is GLOBE (Global Business Excellence), this is a comprehensive information system which used by Nestle to secure and bring together the company's businesses together under a common and unique technology infrastructure. Globe was used by the company to capture data and to standardized data which is based on the same definitions and units.
This enables Nestle to have a unified system and measurement across its business units anywhere in the world, manage information, and create knowledge that could be transferred and shared across its business units, and provided a better customer management system, thereby building customer confidence and promoting the quality of their products across the continents. Furthermore, GLOBE provided synchronization of data between manufacturers and retailers, which resulted in an improved order fulfillment. The system also enabled retailers to add new products to their store stocks simply by clicking the mouse of their computer.
Another cross business synergy is the invention of new nutrition, health and wellness vision by basic scientific research and state of the art tools such as nutrigenormics. This allowed Nestle to improve consumer healthcare, fitness and weight management, by making their products healthier and reducing fatty acids.
Corporate Growth Direction of the Company throughout its history
Figure 1 Corporate Growth Direction
From the case study, one of Nestle corporate growth came in the direction of Horizontal integration. This represents a horizontal integration because the company expanded forward within the food business by merging with a known food processing industry Anglo-Swiss Condensed Milk also a food business. The merger provided the company with more resources and capital to expand their products and later added Chocolate to their brand in 1905. (See figure 1.)
The growth continued in the horizontal integration trend and expanded to other countries example, Britain, U.S., Spain, and Germany, where they operated their processing plant. The growth within the industry continued horizontally and allowed the company to expand into Brazil, Australia, and established their presence in Singapore and Hong Kong. The company merged with Maggi, Europe large producer of food enhancer and prepared food such as soup, which indicates that the company continued to expand and grow within its food industry.
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Nestle continued the chain of growth towards the horizontal integration direction and acquired several businesses example, canned and frozen food, bottled water and pet foods. Nestle diversified for the first time outside the food industry, and in 1974, the company became a major shareholder in L'Oreal, one of the world's largest producers of cosmetics, with a 25 percent interest in the French company. Nestle undertook a second step outside food industry by acquiring Alcon Laboratories, a U.S. company which specialized in eye care products in 1977. This growth direction is called Horizontal Diversification, since it was the first time the company moved outside of its business industry.
The company continued its growth in the direction of horizontal integration under new management (Maucher era) and In 1985, acquired the American food giant Carnation for $3 billion, which was regarded as one of the largest in the history of food industry during the time. From the case study, Nestle moved away from the Agricultural and processing roots and sold their Cocoa and processing plants ending their growth towards the Backward Vertical Integration direction and involvement with their supplier business. This pointed out that Nestle was moving in the Horizontal direction and has kept their competitive advantages gained over the years by continuing in the same horizontal growth direction i.e. Horizontal diversification.
and Horizontal Integration. From the analysis, the writer believes that Nestle may no longer be interested in the Vertical growth direction, this may be evidence by the statement from its new CEO Brabeck who commented that the company want to reduce cost and devote more attention to other businesses that adds value There were also major acquisitions during Brabeck tenure which solidified the company position in key areas such as bottled water, coffee, ice cream, and infant formula, and also the company decision to dissociate from the Agricultural and processing business
Thereafter, Ralston Purina was acquired in 2001; the pet food business has become a recognized name around the world. The company diversified horizontally again during Brabeck tenure beyond its technology and traditional line of products and processing food towards a wider vision of nutrition, health and wellness. To continue its platform for growth, the company made three important acquisitions: by acquiring Jenny Craig, a U.S chain of weight loss centre in 2006, providing Nestle a platform of moving into weight management. Novartis Medical Nutrition in 2007, which helped Nestle to strengthen their position in the area of healthcare nutrition, and the Novartis's Gerber baby foods business in 2007, thereby extending Nestlé's leadership in all the areas of infant nutrition. This showed that the company became interested in the healthcare and fitness business.
The corporate Management Mechanisms used by Nestle to leverage its synergies
The three management mechanisms used by managers to leverage synergies are: Centralization, Coordination and Standardization. These will be applied to the case study in order to discuss the corporate management mechanisms used by Nestle to leverage its synergies already identified in this assignment.
One of the synergies identified earlier in this assignment was the replication of Nestle milk district model in Switzerland by modifying the product. This was possible from the writer's point of view because the company retained the same standardization process and procedure which has already proved successful in Switzerland. The company simply repeated the process and then added value to the product which eventually resulted in an improved quality for consumer satisfaction and then introduced the product to other countries, example, Britain, Germany, Spain, Asia and Australia, Africa etc.
Another corporate management mechanisms used by Nestle in leveraging its Research and Development are Coordination and Standardization. From the writer's point of view, the establishment of the research laboratories requires the coordination of Nestlé's resources, activities, product offering and integration of its business units together to build world class research laboratories, and Standardization integration resulted because the company used the same process to replicate, modify and re-invent new products. Furthermore, other identified synergies were the reinvigoration of Nesquik originally sold in the powder form into syrup form. The management mechanism applied in this process is standardization mechanism. According to the passage, Nestle used the same drying process in making Nescafe and re-invented it to produce Nestea an instant tea and Nesquik a syrup form.
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Also of interest is the leverage of the GLOBE system using a standardized system, which synchronized data, improved information management and created knowledge that could be transferred across Nestlé's business unit and allowed customers to add new products to their inventories by a click of mouse. Again, the company's leverage
of market approach which created a platform for growth and increase sales was based on the standardized integration mechanism system from the writer's point of view. This is because Nestle continued in the same level of progress, growth direction and transferred the same management mechanism already tested and applied in some countries into other continents, which led to a rapid growth in sales and market revenue.
The 60/40 benchmark standard used by the company to improve their nutrition, health and wellness and reduced fatty acids was also based on the standardized integration mechanism. According to the CFO, the process was based on taking out salts, fatty acids and sugar and putting in omega 3, whole grains and calcium to give it a healthier profile.
The Future Scenario for Nestlé's corporate level strategy, based on the integrated organization and portfolio organization perspective
One of the future scenarios for Nestle corporate level strategy is: how the company can remain relevant and dynamic and at the same time provide essential industry leadership in areas such as sustainable sourcing while keeping products affordable
Firstly, based on the integration organization approach, the company should remain customer driven, always adding value to their products and improving the quality of their products by emphasizing their core competencies. Nestle should regard competencies as the core of coordination and to place their synergies at the heart of their company. They should continue to innovate and re-invent through their various R&D centre's, and integrate their multi business units. The company should promote synergies more than responsiveness; they should make acquisition infrequent and focus more on internal growth as stated by Bulcke the CEO.
Building their business core competence should remain their strategic plan, while remaining tactical with their suppliers and sourcing of raw material. This is realizable by continuing their strategy of buying their agricultural products directing from farmers and encouraging continuity of their supplier business. These will ensure that prices are kept low and affordable while the premium quality is not affected. Besides, Integrated approach encourages looking after the brands to enable it remain relevant to customers in order to generate more sales.
Consequently, the writer thinks that achieving the future ambition will be difficult using the portfolio approach. According to the portfolio approach, responsiveness should be strongly emphasized over synergies. This is risky because it may result in loss of synergies and brands. Nestle has several billionaire brands already established across the world. It will be unreasonable to risk losing any of them. Besides, portfolio approach does not encourage internal growth but is well suited to diversification through acquisition, which is contrary to the CEO vision for the future growth direction of the company from the case study. Portfolio perspective only leverage financial resources and does not recognize any synergies which are not financial related.
The second scenario is to understand how Bulcke intend to balance local autonomy with global coordination. Based on the integrated organization approach, the company should balance local autonomy with global coordination by giving country managers reasonable degree of autonomy in matters dealing with the customers, they should integrate resources, activities and position along multi business synergies. Such coordination of work across multi business unit boundaries will result in the ability to operate in such a way that seems like the various part were actually in one units. The company should place the corporate centre at the forefront of competitive strategy. They should maintain the standardization activities, example GLOBE which synchronized data and information system management across the businesses. Based on the portfolio approach, the efficiency of the cash flow and balancing the business risk are regarded as more important. Portfolio approach supports, activities and products offering to be split along business unit lines, hence global coordination may be difficult to realize.
From the case study, Nestle future plan shows that the company will move towards an integrated organization approach. According to Bulcke, Nestle future growth will come from internal growth. The company is re-focusing its corporate strategy from the past. Nestle intend to build on their core competences and strength which according to their CEO is their products, R&D, global presence, people, brand portfolio and Nestle culture. From the writer's point of view, integrated approach will reinforce the company's product profile in the market and keep them very competitive by being focused, and put in more emphasis on developing and building their synergies rather than defending business unit responsiveness.
The company has gained enormous synergies by sharing advances in their basic and applied sciences and research, which also helped to rapidly increase developments. Following the integration approach will ensure that Nestle does not lose their synergies or its billionaire brands through lack of invention and innovation. Nestle R&D was identified as a fantastic platform for future growth, therefore, the management need to continue to leverage it better by building on the core competencies developed by the team of scientists and researchers, and integrating the multi-business units, activities, resources, and looking after their brands by supporting R&D and invention programs.
Nonetheless, the writer believes that the company may not be able to realize their internal growth ambition by adopting the portfolio organization approach. This is because Nestle culture over the years has been anticipation and being proactive rather than reactive according to the CEO, which showed that the company favours synergies rather than responsiveness. The company intends to focus more on reinforcing their brand, and capitalizing on their core competence for growth which does not agree with the portfolio approach. From the grow direction trend shown in figure 1. It appears that the company are not seeking to enter into any buyers or supplier business or pursuing new business opportunities towards the vertical direction but rather focusing on reinforcing their existing brand and building on their area of expertise.
This assignment has answered various questions based on the case study provided. The writer has identified the synergies which has enabled Nestle to expand its businesses globally. The growth direction of the company was also outlined and discussed with various analyses given. Furthermore, the writer highlighted the management mechanisms which relate to corporate level strategy and related it to the case study. Finally, the future scenarios of the company was outlined and discussed. Based on the discussions on integration and portfolio organization approach, the writer believes that the company will be better suited to realize its future vision and programs by adopting the integrated organization approach. This assignment presented an interesting discussions and an insight into the history and activities of a giant food industry Nestle.
Martin, and Eisenhardt, 2001,: 3. Cross-business synergy: Recombination, modularity and the multibusiness team.
Bob De Wit and Ron M eyer. Strategy Process, Content, Context, an international perspectives fourth editiomn.
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