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Strategic Analysis Of Nestle Company Management Essay

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Published: Mon, 5 Dec 2016

The purpose of this paper is to critically evaluate the strategic decisions that have occurred over the corporate history of Nestle mentioned in the case and to what extent has Mergers and Acquisitions and Strategic Alliances played a role in NESTLE’s strategy in that period. In order to evaluate these strategic decisions, the paper shall outline Nestlé’s historical strategic decisions; give a brief description of each decision and how mergers and acquisitions contributed to the growth of the company.

The paper goes on to explain the current strategies of Nestlé and how sustainable these strategies may be in the future. It explains the rationalisation of these current strategies and the new strategies that ought to be developed.

The paper then looks at the future strategies of Nestle to outline the issues that are likely to be faced when these strategies are implemented .Likely actions are then suggested which may help give solutions to problems faced by Nestle on implementation of its future strategies.

The strategic decisions involve new product development, extensive research development and entry into new product category which were mostly achieved through mergers and acquisitions.

The current strategy was noted as unsustainable in the long term due to the fact that most of the products of Nestlé cannot be classified as healthy .The suggestion made was that Nestle should come up with strategies that will make them healthier than their competitors.

Nestlé’s future strategies were also scrutinized and possible solutions given to overcome some of the strategic implementation issues the organization is likely to face.

1.    Evaluate the strategic decisions that have occurred over the corporate history of NESTLE mentioned in the case and to what extent has Mergers and Acquisitions and Strategic Alliances played a role in NESTLE’s strategy in that period?  

Expansion

According to Bell and Shelman (2009), Nestlé’s sales expanded rapidly across Europe a few years after its inception. The company started developing an international reputation, and in 1905 it took the strategic decision of acquiring its main competitor, the Anglo-Swiss Condensed milk company (Bell and Shelman, 2009). The Federal Trade Commission refers to this as a horizontal merger where a firm acquires a former competitor allowing for a consolidation of companies in the same industry (Barney, 2011). As a result, Nestle in the early 1900s began positioning itself as a powdered milk, and infant food company. Furthermore, the combined companies through the Nestle brand name continued to grow through product and market extension mergers.

Barney (2011) describes a product extension merger as one which adopts a complementary product through an acquisition, as seen in the case of Nestle which aligned product adoption in categories such as sugar, milk, cocoa and coffee. Nestlé further undertook market extension mergers which involve gaining entry into complementary markets through acquisitions (Barney, 2011); whereby Nestle entered the confectionary, coffees, cereals, soft drinks, ice cream, water and prepared foods markets (See Ansoff Matrix below).

Ansoff (1965) would argue that Nestlé uses four different approaches to grow its products and markets. To explain the reasoning behind Nestlé’s past M&As they can be assigned into these categories of growth which include: market penetration, product development, market development and diversification (See Ansoff Matrix above).

During the 1920’s, Nestle diversified its portfolio from infant formula to include Milo. This was its first powdered drink not created for infants. Spanning from 1938 to 1948, Nestlé made the decision to enter into coffee and tea sector with the launch of Nescafe and Nestea. Nestle also diversified into the confectionary market, prepared foods, water, pet foods, energy bar and weight loss markets with the acquisitions of Peter, Cailler, Kohler Swiss Chocolate Company, Maggi, Vittel, Friskies, Powerbar and Jenny Craig respectively. Diversification outside the food and drink industry to enter pharmaceuticals and cosmetics was executed in the 1970’s when it became a minority shareholder of L’Oreal (25%) and later acquired Alcon Laboratories. Barney (2011) highlights that acquiring new companies leads to reduction in production or distribution costs through economies of scale and vertical integration.

Mergers and Acquisitions are also beneficial

In increasing market share

For industry know how and positioning

For Financial leveraging (See appendix 3)

Reasonable for this industry

To improve profitability and EPS (See exhibit 2 for EPS 2006 and 2007)

Source: Lasserre (2012)

According to Lasserre (2012), M&As can also create several types of values for a company. He argues that they are justifiable if the economic value of the two entities is worth more combined than the sum of independent values before the merger (2012). Thus, the businesses must create shared economic values through synergy by increasing revenues whilst decreasing costs. Lasserre assumes these created values can be both short-term (one-off value) and long-term (‘synergistic’ effects).

Diversification and global reach were the main values created for Nestlé in its acquisitions. For example, Carnation enabled Nestle to extend not only in its product range but also to reach new areas around the world. The following table outlines the values created through Nestlé’s M&A’s.

Nestlé’s M&As

Value created

Anglo-Swiss Condensed Milk Company

·         Consolidation

Maggi

·         Diversification

Acquisitions in canned and frozen foods, water, ice cream and pets food

·         Diversification

Alcon Laboratories

·         Diversification

·         Options (to monitor the evolution of the technology)

Carnation

·         Global reach

·         Diversification

Ralston-Purina

·         Diversification

Jenny Craig

·         Diversification

Novartis’s Gerber

·         Global reach

·           Options (to monitor the evolution of the technology)

Table: Nestlé’s M&As and their value created.

Source: Authors’ own creation based on information from Bell and Shelman (2009) and Lasserre (2012).

Furthermore, the relationship between Nestle and L’Oreal developed further when they created two joint-ventures: Galderma and Laboratories Inneov. According to Barney (2011), joint ventures are undertaken in order to manage risk, share costs, and enter into new markets and industries. It is assumed that Nestle saw the benefits of alliances rather than acquisitions into the cosmetics market due to its lack of knowledge on the industry.

Once Nestlé diversified its portfolio, they followed-up by expanding brands through what Ansoff (1965) refers to as market penetration. In order to utilise its current resources, and take advantage of the market opportunities created by Milo and Nescafe, Nestle developed new brands such as Nesquik and Nespresso (Bell and Shelman, 2009).  Additionally, Nestlé acquired more brands consistent with its presence in the water and pet foods market: e.g. Vittel and Friskies.   

According to Ansoff (1965), market development is the introduction of existing products into new markets. This can be seen through Nestlé’s acquisitions of Stouffer, which enabled the company to sell its food products to different markets: frozen prepared meals.

Lastly, Nestle used product development to introduce new products such as Buitoni, Carnation, and Kit Kat to grow within its existing market of food, powdered drinks and confectionary.

Nestlé’s diverse portfolio provides it with a competitive advantage, and has enabled the company to become the world’s largest food and Beverage Company (Bell and Shelman, 2009). However, it seems that some product diversifications through mergers and acquisitions led to the downfall of its profits; especially visible in the years leading up to Maucher’s administration (Bell and Shelman, 2009). Barney (2011) suggests that mergers and acquisitions between strategically unrelated businesses do not necessarily create significant economic profits. Thus, it can be assumed that Nestlé’s strategically unrelated acquisition of Alcon and partial acquisition of L’Oreal between 1974 and 1977, contributed to a decline in profits between 1978 and 1981.

Supply Chain Rationalisation

As Nestle grew and entered new markets, they worked towards horizontally integrating their supply chain. According to Christopher (2005), companies such as Nestle seek to spread geographically, whilst reducing costs through economies of scale by prioritising manufacturing and operational processes. This can be seen throughout the 1900’s as Nestle invests in its value chain by: opening processing plants within the U.S., Britain, Germany and Spain; manufacturing in Australia; warehouses in Singapore, Hong Kong and Bombay; and factories in the U.S. and Brazil (Bell and Shelman 2009) (See Nestlé’s value chain).

Firm infrastructure

Decentralized organization

Executive Committee consists of the CEO and 12 top managers

The company is structured through 43 regional organisations reporting to directors of three geographic zones (zone Europe, Asia/Oceania/Africa and zone Americas).

Country managers are given a large degree of autonomy when dealing with customer matters.

Nestlé’s Value chain

Human Resource Management

Focus on developing local management

Investment in training and providing cross experiences

People start from the bottom and move their way up in the organisation

Unique culture/ focus on long term results

Developing people from acquired companies.

Technology Development

Strong R&D platform/ “open innovation” model

Big investment in R&D (investment to support pharmaceutical businesses and food, nutrition, health and wellness)

Creating an “innovation acceleration team” to support rapid product introductions.

Initiating a common technology infrastructure/ a comprehensive information system named the GLOBE.

Margin

Procurement

Purchasing some raw materials instead of processing them in-house.

60% of materials purchases from emerging economies

Direct sourcing -In developing countries agricultural commodities are bought from local markets and often directly from farmers- rather than on the world market

Service

Jenny Craig -personal nutrition counselling / Jenny Direct website and phone /Home delivery.

Personalized services – 24/7 service though telephone and internet help line for Nestlé’s premium products.

Marketing & sales

Positioning the company as healthy

Strong brands – product and brand differentiation.

Dealing directly with consumers.

Medical nutrition: market to professionals

Outbound Logistics

Synchronization of data between manufacturing and retailers- through the GLOBE system.

Introducing new distribution channels for some brands (e.g. “Nespresso corners”, boutiques and home delivery)

Inbound Logistics

Ware-

Housing

Operations

-Manufacturing, food processing plants

-Producing locally

-About half of the factories are in developing countries/ production for the local market.

-Partnership with local farmers -providing advice and support

-Implementing quality control processes.

Moreover, Nestle made the strategic decision of establishing local supply chains which meant deploying its agricultural capabilities down to the farm level through strategic alliances. This is referred to as their “milk district model” which allows farmers to supply milk to the company directly and in exchange Nestle provides its resources and know-how, such as providing storage and chilling facilities (Nestle, 2012). This highlights the fact that Nestle was seeking to establish its value chain activities, or Global business system, earlier on in its history (See value chain above).  According to Hill and Hill (2009), this type of model has the capability of reinforcing a company’s competitive advantage as it is able to overcome barriers to integration, better respond to delivery speed, simplify sharing of information and reduce costs of production (Bell and Shelman, 2009).

Adapting to a Global Role

Nestle recognised that for it to sustain its competitive advantage it needed to establish a global technological platform to capture data, manage information and create knowledge (Bell and Shelman, 2009). Consequently Brabeck made the strategic decision of initiating the GLOBE system. Using this common technological infrastructure, it would be able to share information amongst all Nestlé’s businesses and allowed for a synchronization of data in its supply chain (Bell and Shelman 2009).

Refocused Strategy: Nutrition, Health and Wellness

Nutrition has always been an integral part of Nestlé’s vision, dating back to its first nutritious infant formula. However, due to Nestlé’s realisation of “consumers being increasingly aware of the link between food, health and personal wellbeing”, there has been more of a shift away from a technology and processing-driven image towards health and wellness (Bell and Shelman 2009). Under Brabeck’s tenure, a Nutrition Strategic Business Division was created, along with the acquisitions of Proteika, Musashi (nutrition business), Jenny Craig (diet centres) and Novartis Medical Nutrition (Bell and Shelman 2009).

Restructuring of Research and Development Unit

Nestlé also made a strategic decision of restructuring its R&D unit to satisfy customer needs and internal growth. This was by shifting away from small decentralized units set up globally to limited large “resource-intensive” centres. This was done to renovate old brands by finding multiple uses for its product. Under Brabeck’s tenure, a 60/40 preference rating system was introduced where products were either discontinued or sold if they did not achieve the 60% level. This was done in order to ameliorate the company’s performance and market orientation (Bell and Shelman, 2009).

2.    To what extent is the current strategy of NESTLE competitively sustainable in the future? How should it be rationalised and what new strategies ought to be developed in the future?

Current strategy

Nestlé’s current strategy was to achieve worldwide sustainable ‘competitiveness through four strategic pillars’: “low cost, efficient operations, renovation and innovation of the Nestle product line, universal availability and improved communication with consumers through better branding.” They also had a vision of transforming the company from a “technology-and processing-driven food and beverage company towards a vision of nutrition, health and wellness.” (Bell and Shelman, 2009, p.3).

Nestlé’s current strategy of reorganizing its operations did come as an advantage as in some cases moved away from its “agricultural and processing roots” to buying the ingredients from outside suppliers (Bell and Shelman, 2009). This can be argued on the basis of Nestlé reducing the steps of its value chain activities as Brabeck explained some of these activities could not add value to some businesses. An example would be the fact that Nestlé exited from cocoa roasting but still carried on producing chocolate. This in turn reduced the costs and made the value chain more efficient. In fact, in terms of strategic operations, Lasserre (2012) argues that making fundamental changes in the value chain can lead to developing new products and services which can help a company sustain its innovative advantage. Moreover, to enhance the reliability of its suppliers, Nestlé implemented a strategy of forming partnerships with its suppliers by creating direct links with them and providing them with support and technical advice. This helped the company cope with the volatility of the supply market and enhance its operations.  Therefore, in terms of operational efficiency, Nestlé can be seen to be sustainably competitive.

Secondly, Nestlé’s current strategy was focused on renovating and innovating its product line through reorganizing its R&D.  Lasserre (2012) suggests that organizations such as Nestlé could be trying to gain a critical mass advantage. He further explains that in order to achieve this, a minimum amount of resources needs to be mobilized for an activity to perform efficiently and effectively. Hence, Nestlé’s shift from “decentralized units of R&D to few large resource-intensive centres.” As a result of its R&D centralization, Nestlé was able to reinvigorate old brands; an example was finding multiple uses of the Nesquik brand from not only being a powder but to also present it as syrup and into ready to drink varieties. However, this strategy came at a disadvantage to Nestlé as they lost the benefits of decentralization. These benefits include proximity to markets which gives a firm the ability to create products that fit local customer specificities, gaining access to geographical clusters of knowledge creation and development access to good-quality scientists and the capability of a firm to learn from different market and cultures (Lasserre, 2012). Therefore, in terms of its R&D strategy, it could be argued that Nestlé will have trouble sustaining its competitive advantage in the future since part of its future strategy is to expand to other markets.

Thirdly, with the introduction of GLOBE in the mid-2000s, Nestle initiated an era of capturing data by tying all of Nestlé’s entities together under a common technological platform. This led to the company standardizing its data to manage its vast information and create and share knowledge among its Strategic business units, manufacturers and retailers. The main idea was to use shared knowledge to enhance the collaboration between all the different units of the company which can reduce costs and produce value all over the organisation. Bauwens (2012) outlines this as a social innovation where knowledge is shared and can be used by others. A good example would be the fact that the Globe system allowed for a synchronization of data leading to an improvement in order fulfilment between manufacturers and retailers. This has allowed Nestlé to sustain its competitive advantage by adapting much faster to change and delivering value to customer (Lasserre, 2012). Therefore, knowledge sharing has the potential to play a big role in helping Nestlé maintain its competitive advantage.  

Nestlé’s final “strategic pillar” of improving communication between the organization and consumers through better branding could signify the company’s efforts to differentiate its products. Barney (2011) would argue that Nestlé could be trying to alter perceptions of current and potential consumers by altering its product features. In fact, Nestlé focused on reducing fat and calories as well as incorporating healthy and natural ingredients into a wide range of products. It could be argued also that better branding is linked to its vision of moving from a food and beverage company to a wellness, health and nutrition company. This could also be Nestlé’s way of differentiating its products by taking advantage of its reputation in the marketplace as a leading company in its industry. Therefore, customers would, in the long term, respond positively to the company’s efforts of producing healthier products. Thus, if Nestlé actually succeeds in changing people’s perceptions and position itself as a health driven company, it can manage to maintain its competitive advantage in the future.

It is through these four strategic pillars that Nestlé derives its current model, the “Nestlé model,” which refers to the company’s long term of objectives of organic growth (target of 5% and 6% each year), continuous yearly improvement in EBIT and improve capital management which determines the assets of the company against the profit it generates (Bell and Shelman, 2009). The company seems to be achieving its objective as it has slightly improved its earnings before interest and taxes as seen in exhibit 6; it has slightly made progress in its capital management through its improved return on capital employed as seen in Appendix 2; and it has been able to achieve its objective of organic growth between 5% and 6% except for 3 years between 1996 -2007 years also indicated in Exhibit 6.

Therefore, it is safe to assume that Nestlé’s current strategy is competitively sustainable in the present however it remains to be seen if it can be successful in the future with its new vision . This is due to the fact that Nestlé is possibly trying to implement both product differentiation and cost leadership strategies. Porter (1980) defines such firms as “stuck in the middle” (Barney, 2011). On the one hand, three of its strategic pillars indicate the company’s intention of becoming a cost leader through low cost operations, restructuring its product line and efficiently managing its knowledge.

On the other hand, it wants to differentiate its whole portfolio of products and services by changing the product features or by diversifying their products. Porter (1980) cited in Barney 2011 further explains that if a firm tries to implement both strategies then one of them will fail. He continues to add that for a firm to be economically superior in a single industry then they need to sell  at a high price and have small market share (product differentiator) or sell at a low price and gain significant market share (cost leader) therefore Nestlé needs to decide which of the two it wants to become . As a result, a lot of their organizational requirements such as organizational structure and management control systems are stuck in the middle for example the fact that certain products need to be managed globally especially in the nutrition division while others are locally managed.

Nestlé’s current strategy could be rationalized by foregoing their vision of being a nutrition, health and wellness organization. Instead they should focus on being more of a healthier food and beverages company as a cost leader with its current Nestlé model. First of all, if Nestlé was to pursue a health, nutrition and wellness strategy Nestlé would then have to restructure its product portfolio by getting rid of its unhealthy products such as Hot Pockets, and Kit-Kat. In exhibit 8 it can be seen that these products do not deliver growth to the company yet in exhibit 9 they seem to have a higher market share. This shows that the unhealthy products are in fact the cash cows of Nestlé which indicate that they are the foundation of the company. It should try and follow Unilever’s example of focusing on its core products.

Therefore, Nestlé should frame new strategies and make changes to its vision. Instead of holding on to unrealistic goals, the company could reposition itself in the market as becoming ‘healthier’ than the competition. In fact, Nestlé has already implemented this approach in the past with several products by introducing some nutritional improvements. As an example, Nestlé reduced ice-cream fat by 50% and calories by 30% for Dreyer’s Slow Churned ice-creams and added healthy ingredients to some chocolate snacks (Bell and Shelman 2009). This indicates that the company has the resources needed to deploy this repositioning strategy.

The company should also revaluate its SWOT analysis in terms of switching its vision to ‘Health, Nutrition and Wellness’. (refer to Appendix 2)

Indeed, the strong R&D platform enables Nestlé to produce more healthy products while maintaining its taste. Moreover, Nestlé has the capabilities of doing so with its ‘open innovation’ model (global network with 5,000 scientists and technologists as well as R&D centres worldwide) which enables the company to maximize its chances of coming up with new and innovative products.

   

3.    With regards to future strategies what are the strategic implementation issues likely to be faced by the company and what actions should they take to overcome them?

Future strategies

One of the future strategies of Nestlé is to grow internally instead of growing through mergers and acquisition. Implementing this strategy could be catastrophic for the company as its growth has been largely relying on acquisitions and joint ventures. Nestlé would also lose the benefits of using joint ventures, strategic alliances and acquisitions (Appendix 4). This would then imply that Nestlé would have to use its own resources and core competencies to expand thus placing a greater risk on the business. It can also have a negative impact on the liquidity position of the company.

A way in which this issue could be overcome is by applying both strategies. By applying both strategies, the company would be able to spread its corporate risk and share its costs as its return on capital employed still continues to generate profits for the company. Additionally, Nestlé has managed to build strong foundations through mergers and acquisitions which has led it to improve its financial position. As seen on Exhibit 4, the acquisition of businesses has increased from 447 million in 2006 to 456 million in 2007 which has improved its cash flow. Therefore, in order to maintain a strong position, Nestlé should carry on with mergers and acquisitions as well as growing internally.

Another of the future strategies initiated by Bulcke is to shift the structure of Nestlé from an “organisation by country” to an “organisation by business” through sharing best practices using GLOBE (Bell and Shelman 2009, p.10). He argues that this would enable Nestlé to start managing its operations globally instead of adapting to every market. However, using the McKinsey 7s framework, many issues can be foreseen as seen on the table below.

Factor

Strategy

– Produce variety of quality products, wide variety of brands.

– Focus on nutrition, health and wellness.

– “4 strategic pillars” (“low cost, efficient operations, renovation and innovation of the Nestle product line, universal availability and improved communication with consumers through better branding”) (Bell and Shelman, 2009, p. 3)

Structure

– Decentralised and relatively flat organisational structure which helps to cater for local needs thus increasing flexibility.

– organized by country/ every country is like “a small kingdom”

– It has operations worldwide through strategic business units.

System

– Comprehensive information system:  the GLOBE

– Employees move from the bottom up in the organisation.

Style

– Democratic leadership style: managers are given autonomy to take decisions.  As such, they feel a sense of belonging in the organisation

Staff

– Nestlé maintains local companies with regional staff in local markets as they better understand the needs of customers.

– 43 regional organisations. More than 275,000 employees.

– It has a pool of experts- its staff consists of scientists, technologists from top universities (Bell and Shelman, 2009, p. 6)

Skills

– Nestlé’s competitive advantage is its R&D. It has a high level of technology (23 Product Technology Centres), and a network of experts around the world. (Bell and Shelman, 2009, p. 9).

Shared Values

– Deliver long term value to shareholders.

– Focus on long term results.

– Unwritten culture – strong personal culture (Bell and Shelman, 2009, p. 8).

Although the change in the structure and the strategy was supported with a change in systems by adapting the GLOBE, other elements of the framework have not been adapted. For instance, the style used by Nestlé was a democratic leadership style where management in the different countries are given a great deal of autonomy. By changing to a more centralized and global management style some internal resistance from the people can emerge.  The different markets are used to operating as “small kingdoms” (Bell and Shelman 2009, p.10). Therefore, given that country managers in the different countries were used to be given a great deal of freedom especially when dealing with issues related directly to the customer, this new strategy can produce some internal problems for Nestlé.

To overcome this issue, other elements of the 7s framework have to be adapted. The main element that links everything together is shared values. Nestlé has to work on making changes to its internal culture by introducing new shared values between its people. Implementing the GLOBE is not enough to implement the new strategy, a culture of sharing information and best practices should also be introduced and reinforced. Nestlé should teach its people to move from a management style of taking control and matters into their own hands to a style of sharing control and producing decisions globally and collectively.

The implementation of this approach may differ across countries due to the cross-cultural differences between countries. According to Lasserre (2012), country specific cultural values influence managerial values and assumptions in an organisation. As an example, Lasserre (2012) illustrates that western countries are more individualistic while Asian countries are collectivists which heavily impacts how business is done in these countries. In terms of implementing a culture of sharing, it can be assumed that Asian countries would respond more positively to the change than western countries.   

Nestlé intends to achieve its future growth by implementing four platforms for growth which are ‘health, nutrition and wellness’ (to be the centrepiece), ’emerging markets’, ‘out of home consumption’ and ‘premiumisation of existing products’. (Bell and Shelman, 2009).The aforementioned strategy for growth is expected to double Nestlé’s sales in the next 10 years. (Bell and Shelman, 2009)

           Bulcke emphasized that the priority should be on ‘health, nutrition and wellness’ to implement the vision into every product segment and every country. This vision is in line with Brabeck’s strategies of going beyond food to Nutrition, Health and Wellness (Bell and Shelman, 2009). The total sales for Nestlé Nutrition segment has significantly increased from 5,964 million in 2006 to 8,434 in 2007, which represents an improvement of 41% as shown in Exhibit 11.

Although total sales have increased, most products that have led to this increase in sales were unhealthy. So, in order to maintain its vision as a Health, Nutrition and Wellness, Nestlé should give up its unhealthy products in the long term. However, this would negatively impact on the financial position of the company as these are its core products. Moreover, making the same products available in every market might not be adapted to the needs of every customer in terms of tastes, preferences and nutritional value so Nestlé should make sure at least every different product are tailored to the needs of every different market.

           Regarding emerging markets, Bulcke found out that these markets are growing at a faster pace and therefore Nestlé should integrate further into it as there is a high potential for growth. The implementation of ‘popularly position products’ (PPP), a strategy designed for low income earners so they can afford good nutrition products on a daily basis, is ex


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