The Strategic Finance Of Nestle Management Essay

Nestlé’s case study provides various examples which demonstrate a link between concepts drawn from pre-requisite modules. In my opinion, the link between First Mover Advantage model clarified in Strategic Management and the concept of Merger & Acquisition covered in Strategic Finance are the most interesting. Figure 1.1 provides evidence found through the combination of these two concepts.

Figure 1.1: Link between FMA and M&A

Evidences

In the 20th Century, Nestle expanded through a series of acquisitions

Nestle enters markets early-before competitors

Acquires local firms when good opportunities arise

Local brand for local market (Customization)

2/3 of Nestlé’s growth generated from acquisitions

FMA to Polish market – Nestlé’s Acquisition of Goplana

Strategic Finance

(Narayanan&Nanda, 2004)

First Mover Advantage

Strategic Management

(Johnson et.al, 2008)

Merger &Acquisition

First Mover advantage is defined as the benefits generated for a firm that breaks in new markets first (Johnson et.al, 2008). The aim is to build a strong and sustainable position within the market as a way to defend potential competitive newcomers. Regarding Nestlé, the company enters emerging markets early before prospective competitors in order to build a significant position within them (Case Study, 2011). Thus the company is able to respond to any potential economic and population growth within emerging markets as well as to any possible upcoming competition.

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Mergers & Acquisitions are strategic components dealing with buying or combining different companies that can assist the company to a speedy growth and improve its financial performance especially in the long term (Narayanan&Nanda, 2004). During the 20th century, Nestlé has undertaken a number of mergers and acquisitions, most notably the acquisition of Maggi in 1947, and thus has achieved to extend its geographic presence and product line (Case Study, 2011).

Nestlé’s acquisition of Goplana, is an interesting example of how its activities link with the company’s long-term strategy of achieving first mover advantage within the Polish market (Case Study, 2011). The company was aiming to rush its development inside the market and maintain its authority. As such, Nestlé retained the local staff and management of the acquired company and carefully adjusted the Goplana product line to better fit local opportunities (Case Study, 2011). Overall, acquisitions have been an important function for Nestlé’s growth (Cook et.al, 2003). Alongside the M&A group, the firm uses people from the finance sector as to assist the financial analysis of M&A process (Cullinan et.al, 2003).

This shows a clear link between Nestlé’s FMA strategy and its M&A activities. The firm maintains local companies with regional staff in local markets as to better customize its performance by creating share value and local expertise. Significantly, the success of Nestlé in growing local companies also depends on the management development programmes that Nestlé uses in order to come closer and train its local managers (Case Study, 2011).

The process of entry for a company influences its ability to create value. According to Rahman & Bhattacharyya (2003), Nestlé has benefited by acting as a first mover in emerging markets. In terms of business development, the company sometimes involves mergers and acquisition activities as a way to grow and create value. Moreover, the reasons behind the M&A activities can vary according to expectations. These may be the economies of scale, speed of entry, shareholder expectations and so on (Johnson et.al, 2008). Mergers and acquisitions are considered as one of the most dynamic ways in which a firm can recombine assets to create value (Ahern&Weston, 2007).

By being the first mover into a market it may hides some drawbacks. Hill & Jones (2009) noted that first movers have to tolerate large costs of pioneering that later movers may not. Also first movers may fall into substantial mistakes and risks as they lack experience, where second movers can enjoy knowledge and improvements through first movers’ gaffes. Similarly, M&A is a particularly stressful practice for people involved within the new corporate culture and structure that can create ambiguity, anxiety and antipathy amongst company’s staff (Appelbaum et al 2000). Such a fact can destroy the organisation’s value.

2nd Question: Does it make sense for Nestlé to focus its growth efforts on emerging markets? Why?

According to the Case Study (2011), by the early 1990s Nestlé realised that it faced important challenges in maintaining its rate of growth within the markets of Western Europe and North America. Therefore, the company has turned its attention to emerging markets for further growth.

Rapoport (1994) stated that developed markets are in the saturated phase of their life cycle where the competition is becoming higher, creating the war of price and substitution. Due to the economic downturn in such markets, people’ incomes have been characterised as incomplete and thus consumers are becoming more price conscious. Additionally, population indexes show that the population growth rate has been stagnated in contrast with the emerging world which is expected to expand by the year 2015 (Delegge, 2009).

Delegge (2009) stated that emerging market economies are growing at a faster pace than those in developed countries. Furthermore, the researcher indicates that due to the combination of the global recession and the downturn of real estate prices, residents of emerging markets are expected to outperform both American and European consumers in terms of spending dynamics. Thereby Nestlé translated emerging markets as an opportunity of higher growth returns with the promise of significant market share in the long term.

In order to maintain its growth rate, it does make absolute sense for Nestlé to focus its growth efforts on emerging markets. Goldman Sachs introduced the BRIC acronym (Brazil, Russia, India and China) that refers to the countries which are estimated for the next decades to be at a better stage than the current developed markets (O’Neil&Stupnytska, 2009). Furthermore, they announced the concept of the Next Eleven (N-11) countries such as Nigeria, Mexico and Turkey which have the potential of becoming along with BRIC’s, the world’s dynamic markets by 2032 (O’Neil&Stupnytska, 2009).

Nestlé has already been active in developing economies but it is therefore slight in contrast with their rival company Unilever. Moreover, the US food &drink report (2010) notes that even with the greatest exposure in such markets; Unilever has experienced negative average revenue. This was due to its poor business management and incorrect decisions made over the last five years.

Nestlé’s core competencies and capabilities can enable the company to continue performing in emerging markets. Nestlé has the ability to create brands quickly and in a sustainable fashion with products such as Nescafe, which also give strong focus on R&D which enables the company to generate greater profits (Datamonitor, 2010). The company has the unique strength to customize global products with the same quality standards based on customer needs in the local market. Also, the firm has unmatched geographic existence in the emerging markets and so the company has the flexibility to deal with circumstances that sometimes cannot be easily predicted (Singh&Child-Villiers, 2010). Applying those distinctive competencies, Nestlé can earn greater returns and gain a sustainable advantage over its competitors. Rahman & Bhattacharyya (2003) supported that unique performance within emerging markets can offer differential advantages for a first mover company.

Following a first mover strategy, Nestlé has benefited in many emerging markets as it was the first company which offered differentiated affordable products in local markets (Rahman&Bhattacharyya, 2003). Nestlé aims to build a substantial position by achieving successful customer perceptions. Moreover, as the market grows and income levels rise, Nestlé can potentially benefit by being responsive in such possible situations.

Nestlé can also take advantage of location economies, which are created from performing a value creation activity in the best location possible (Hill&Jones, 2009). For instance, Nestlé has opened a new factory in Nigeria which was dedicated in Popularity Positioned Products (Nestle, 2011a). This enabled the company to achieve lower costs and therefore facilitated the company to customizing its products in terms of price and accessibility. Thus, by enduring in such location economies, Nestlé can gain a competitive place in each single location.

3rd Question: What is the company’s 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?

Regarding the business development in emerging markets, Nestlé’s strategy was to enter markets before competitors in order to get the first mover advantage. The company aims to build a significant position within the developing world and thus be able to understand and satisfy the requirements of local population.

Nestlé acquires local firms when valuable opportunities arise during the entry process of the company into new emerging markets. A good example is that of 1995 where Nestlé acquired Rossia, one of the leaders of chocolate manufacturer in Russia (Nestle, 2009). Nestlé realised the chances that have been offered from the opening of Russian market and the increase of income levels, by making this new investment.

In addition, there are times when Nestlé enters emerging markets by building its own infrastructure from scratch, such as in China. Considering such a method, the company enters markets where no actual competitors exist and thus creates its own paths as a way to establish a market presence.

Nestlé’s product portfolio includes a strong presence of numerous key brands which focus on developing local marques for their respective markets thereby escaping its global brands for these customers (Urde, 1999). Overall, the company owns 8500 brands under its organisational umbrella and less than 10% are registered in more than one country.

As an alternative way of trying to force a product in a market, the company customizes its product based on the needs of the local consumer and focuses at the extent of achieving economies of scale. At the moment, Nestlé follows the strategy of adaptation to local conditions by using its in house PPP (Popularity Position Products) method which offers affordable products of high quality to meet the needs of emerging consumers (Nestle, 2010b). In the long-term, Nestlé is aiming to supply the whole region with various products in order to realize economies of scale. For instance, as part of its long term business development strategy in Middle East, Nestle has established a network of factories in five countries.

According to Porter’s generic strategies figure 1, Nestlé adopts focus/niche strategy which reduce company risks and focus its marketing efforts on a limited number of market segments (Eldring, 2009). By adopting such a strategy, the company aims to build a substantial position in these particular markets so as to gain a competitive advantage using product innovation and marketing activities. Due to the fact that these economies are growing at a fast pace, Nestlé is able to escape such segments and can offer a wider variety of upscale products such as mineral water and prepared foodstuffs (Case Study, 2011).

(Source: Adopted from: www.mindtools.com/media/Diagrams/GenericStrategies)

The successful presence of Nestlé within developing markets verifies that the implication of Nestlé’s strategy has been correctly applied. The corporate structure that Nestlé comprises is closely related with the idea that all markets are equally important. Lavelle (2004) mentioned that Nestlé’s strategies originated from a particular point and are independently applied from its local units.

In order for the strategy to work effectively, it is necessary for the company to consider the following issues. Firstly, the firm must have available resources to invest in R&D as well as the fast and effective production of innovative products (Hitt et.al, 2009). Nestlé has established 6 R&D centres in emerging markets that provide the ability to launch new products quickly and efficiently (Bulcke&Singh, 2011; Bauer, 2011). In order for the company to maintain its advantages over the competition it is imperative to continue focusing and investing on its R&D activities. Secondly, the company must ensure that products can be customized at the requirements of any local market. Using the PPP model, Nestlé is able to offer its products based on the requirements of the emerging consumers. Finally, Nestlé must continue focusing on long-term investments in order to sustain a competitive advantage within the emerging markets.

4th Question: Through your own research on NESTLE, identify appropriate performance indicators. Once you have gathered relevant data on these, undertake a performance analysis of the company over the last five years. What does the analysis tells you about the success or otherwise of the strategy adopted by the company?

Key Performance Indicators can be described as the main company’s parts that assist to define and evaluate the success of a strategy in which the business is involved (Eckerson, 2009).Obviously, company’s performance indicators can differ according to the reasons that have been composed for. Performance Indicators can be defined using numerous models, one of which is the Balanced Scorecard. The concept involves both qualitative and quantitative measures which evaluate the performance regarding the strategy chosen (Johnson et.al, 2008). Figure 4.1 applies the concept of Balanced Scorecard for Nestlé; an analysis has been carried out and can be seen below.

Figure 4.1: Nestlé’s Balanced Scorecard

Financial

Sales

EBIT

Net Profit

NESTLE

To be recognised as the world leader in Nutrition, Health and Wellness, trusted by all its stakeholders

To be the reference for financial performance in its industry

Internal Business

Employees

Factories

Customer

PPP

Customer Acquisition

Learning & Innovation

GLOBE-NCE

R&D

(Source: Adapted from Johnson et.al, 2008 & www.nestle.com)

Firstly, the financial perspective can help the company understand its shareholders’ perception. Nestlé’s EBIT grew steadily in the past 5 year period from CHF 13302 million to CHF 16194m in the year 2010, a growth of 21.7% (Nestle, 2011c). Significantly, 2009’s EBIT was reported at CHF 15699m, an increase of just 0.15%. Moreover, the relative sales figures grew from CHF 98458m in 2006 to CHF 109722m in 20010, dropping at CHF107618m in 2009 after a successful year in 2008 where sales were at CHF109908m (Nestle, 2011c). In addition, the net profit margins showed a dramatic growth over the last five years from CHF9197m in 2006 to CHF34233m in 2010. Such a significant increase of net profit was due to the disposal of 52% of Alcons’ outstanding capital, which increased the profit (as a percentage of sales) from 9.7% in 2008 to 31.2% in 2010 year (Nestle, 2011c).

Secondly, an internal analysis makes it possible to identify the level of operational procedures of Nestlé. During the year 2006, Nestlé’s workforce involved 265 000 people, a number that increased in the year 2008 to 283000. Throughout 2009, the company cut about 5000 jobs resulting in a 281000 person workforce for 2010 (Nestle, 2011b). In addition, the company in 2009 was operating 449 factories 30 less from the year 2006 (Nestle, 2007b; 2010a).

With respect to the third perspective of Learning & Innovation, Nestlé seems to have a strong focus throughout the years. Taking into consideration Nestlé’s product innovation, it can be seen that the company is aiming for a deeper scope within this area. In 2006, Nestlé spent about CHF 1.7 billion for its R&D with a further increase in the following years (Nestle, 2007b). According to Nestlé (2010a) spends about 1.9% of its annual revenues on its R&D program which is considered as one of the key drivers of growth. In addition, the company combines two programs, GLOBE and NCE, which enable the reduction of production waste. Through these models, Nestlé has achieved CHF 1 billion in 2008 which has further increased its efficiencies to a CHF 1.5 billion saving in 2009 (Nestle, 2010a).

Finally, the consumer perspective is related to how customers perceive Nestlé. This can be measured through Nestlé’s PPP model which aims to focus on low-income consumers around the world (Nestle, 2010b). Within 2007, the PPP performance involved 37 countries while in 2008 this number almost doubled to 70, generating an organic growth of 27% (Nestle, 2008). In 2009, PPP achieved sales of CHF 8.8bn with an organic growth of 12.7% (Nestle, 2010b). As a final point, 2010’s concept encompassed 90 countries with sales figures of CHF 11bn and a double digit growth (Bulcke, 2011)

Overall, the analysis of such indicators shows that Nestlé has been able to improve its performance over the last five years. Despite the crisis triggered in 2008, Nestlé is actually steady on a financial and non-financial scale. It seems that the long term strategy generates positive results for the short term as well. Giving focus on customization of local markets through the PPP concept, the company builds strong roots for the future, particularly in emerging markets as there are high growth potentials.

5th Question: How would you describe Nestlé’s strategic posture at the corporate level; is it a pursuing, a global strategy, a multi-domestic strategy, an international strategy or a transnational strategy?

Multinational companies use four main primary strategic postures when competing in the international environment. These are illustrated in figure 5.1. Such strategies depend on factors that are related to two types of pressures, Cost Reductions and Local Responsiveness (Hill, 2009).

Figure 5.1: International Operations Strategies

TRANSNATIONAL STRATEGY

Move material, HR, ideas across national boundaries

Economies of scale

Location Economies Ex. Nestle, Kraft

GLOBAL STRATEGY

Standardized products

Economies of scale

Ex. Motorola, Intel

High

MULTIDOMESTIC STRATEGY

Customization

Different National Markets

Ex. MTV, McDonald’s

INTERNATIONAL STRATEGY

Import/export

Minimal local customization

Ex. Microsoft, P&G

Low

High

Low

(Source: Adapted from Hill, 2009; Ahlstrom&Bruton, 2009)

Figure 5.1, demonstrates the conditions under which each of the International Strategies are most appropriate. In addition, it shows some key characteristics of each strategy and gives examples of companies that follow different strategies. Regarding Nestlé’s strategic posture, the company traditionally operated on a decentralized structure as a way to customize its product offerings to local needs, a key characteristic of a multi-domestic company. With the multi-domestic strategy, an organisation focuses on national differences and customizes its products by responding to the needs of the local preferences. This is in contrast to the global strategy where the company is able to improve its profits and development through lower costs that are derived from location economies and economies of scale (Hill, 2009).

Due to the high competitive conditions that Nestlé faced along with the need to obtain cost reductions, the company moved one step ahead by adopting a transnational strategy (Busco et.al, 2006). Such a strategy involves elements of global and multi-domestic strategies through which the company seeks to achieve both cost efficiencies and local customization (Hitt et.al, 2009). Child-Villiers, Head of Investor Relations, noted that Nestlé is now integrated in a proactive and efficient way within the markets. He also supported that the company goes one step ahead as it links the globe with Nestlé’s Continuous Excellence programme (Bulcke&Singh, 2011). Similarly, its competing company, Kraft Foods shifted to a transnational international strategy to better compete and grow (FoodProcessing.com, 2007).

Within Nestlé, its national units are characterised as semiautonomous as they are able to involve decisions such as pricing and marketing in order to customize the products to local needs. Localization rather than globalization is the key characteristic of the company’s idea which is also supported by the belief that there is not a single product for everyone (Nestle, 2007a). Although the authority of local subsidiaries are still decentralised, the firm has an integrated structure of seven strategic business units (SBUs) that manage advanced strategic decisions for key products ranks and achieve cost economies by centralizing operations such as acquisitions, production and R&D (Hill, 2009). The company is divided into five divisions made up of Africa, America, Europe, Asia and Oceania. However, each zone assists in the development of the overall strategy but do not interrupt the local strategic decisions.

It can be noted that Nestlé’s activities and resources are neither centralised in the company, nor decentralised so that each subsidiary unit is able to operate separately in local market. Peter Brabeck-Letmathe, the CEO of Nestlé noted that while the company comes closer with the consumer the more decentralized it is, he nevertheless supported that the more it is dealing with high level judgments, the more centralized decision making becomes (Wetlaufer, 2001, p.116)

Moreover, following a transnational strategy it may sometimes require the company to adapt a more flexible tactical expansion and therefore involves a partnering with other organisations or exclusively owned acquisitions (Doole&Lowe, 2008). For instance, in 2003, Nestlé formed a partnership with Colgate-Palmolive in order to develop a gum and candy product line. This was done in an attempt to capture a share of a market dominated by other competitors (Fox, 2005).

6th Question: Does this overall strategic posture make sense given the markets and countries that Nestlé participates in? Why?

Generally, Nestlé operates almost in every country all around the world. Within the developed markets Nestlé has a strong basis while in developing world the company involves a huge presence as they are potential markets for growth. According to Hill (2009), transnational strategy makes most sense in markets where the pressures for cost reductions and local responsiveness are high.

Due to the high competitive levels and the financial complications that exist in developed markets, companies have to rethink about their strategies in order to survive (Hill, 2009). Then again, emerging markets involve low spending consumers with different preferences and tastes as well. It is therefore important for firms to respond at the cost pressures and the local requirements of the markets (Hill, 2009).

Following this transnational structure, Nestlé is able to customize global products in accordance with consumer requirements in the local market. This can be achieved through its autonomous local units which are responsible to understand the local needs and decisions related to marketing and distribution. Using an extensive market research, the company offers its products under the organisation umbrella and specializes on building brand names that are associated with local conditions (Xie&Boggs, 2006). Consequently, the company achieves the advantage of building customer loyalty and brand equity in local markets (Pass et.al, 1994).

Allowing the subsidiaries to modify their packaging and distributions channels to meet local needs is a further benefit for Nestlé. In instance, Nestlé and Mars in UK have combined their confectionery deliveries to Tesco, as a way to reduce as much possible trucks from Britain’s roads (IGD, 2010). This had a result to reduce both environmental and distribution costs. Since the early 1990s Nestlé UK has been recycling its packaging as a way to reduce the amount of packaging used (IGD, 2008). The company decreased not only the costs of packaging but also its transportation costs since less Lorries are required.

Regarding Nestlé’s strategic posture, the company’s subsidiaries within emerging markets have achieved to reap previous learning and ideas that have been used in developed markets (Bulcke&Singh, 2011). It seems that the company has succeeded to successfully transfer capabilities, skills and core competences in these markets. Hill (2009) supported that a transnational enterprise must give strong attention on flexibility by exploiting an information flow among the organisation and its local units. Thus, the key characteristic of transnational strategy offered the ability for Nestlé to achieve almost 40 billion of sales in emerging markets and a growth of 11.5% in 2010 year (Bulcke&Singh, 2011).

This worldwide combination strategy allows Nestlé to enjoy benefits of low cost through location economies and economies of scale (Ireland et.al, 2008). For instance, as part of its strategy in the Middle East region, Nestlé has set up a network of factories in five countries with a prospect to supply the whole region, achieving at the same time economies of scale (Case Study, 2011). Through the integration of regional economic groupings the company is able to produce larger units which can supply entire areas, building at the same time competitive advantage (Nestle, 1999).

Sometimes, the transnational strategy involves a complex structure which includes a potential danger of losing control. Under this circumstance the organisation involves problems of creating a practical and valuable organizational structure and it is therefore impossible to manage the strategy (Hill, 2009). According to Bartlett et.al (2010) in order avoid any risks the transnational strategy requires a balanced binary of decision making and not a choice of one or the other but of where, how, when.

7th Question: Is Nestlé’s management structure and philosophy aligned with its overall strategic posture?

The management structure and philosophy is well affiliated with Nestlé’s overall strategic posture. Nestlé provides cooperation between local autonomy and centralized decision making. Even that the authority to local subsidiaries is decentralised, the firm is organised into seven SBUs that involve in the overall strategy development. Thus the multinational firm focus on local responsiveness and global integration (Bartlett&Ghosal, 2000).

The company’s structure is well matched with the concept of transnational strategy. The SBUs that Nestlé performs around the world are responsible for top strategic decisions which have specific focus on particular product lines such as coffee and beverages (Parsons, 1996). In addition, these SBUs participate within the overall company’s strategy where Cook et.al. (2003) noted that the acquisitions made from the SBUs are essential drivers of firm’s success.

Beside that structure of SBUs, Nestlé includes regional divisions in five key geographical zones (Case Study, 2011). In combination with SBUs, these regional organisations are also supporting the overall strategy and business development. It is also important to state the R&D that Nestlé operates which focus on the creativity and production of products that meet local requirements. The R&D function involves 29 research groups within various countries around the world (Bauer, 2011). Beyond such structure, Nestlé decentralized as the responsibility for market decisions is carried down to local units which are basically operate autonomously for various local judgments. Nestlé supports the philosophy that there is no single product for everyone, which achieves to understand local preferences through its subsidiaries and thus develops tailored products that meet those tastes and habits.

Figure 7.1: Nestlé’s organisation chart

(Source: Adopted from: www.Nestle.com)

Following the above figure 7.1, it can be seen that Nestlé operates within a global matrix structure. As it has been already stated above, Nestlé’s structure centralizes in some operating decisions and at the same time decentralizes in cases of national operations. The company integrates its functional competencies and capabilities into local teams such as to successfully respond within the global marketplace (Bulcke&Signh, 2011). Thus using a global matrix structure the company is able to fulfil customer requirements from different geographical places (Ireland et.al, 2008). According to Hill (2009), a global matrix structure is highly recommended for an organisation which adopts transnational strategy in order to be effective implement.

Since 2000, Nestlé has developed its Global Business Excellence (GLOBE) approach with a prospect of simplifying its organisational process structure through an integrated knowledge system. The programme provides Nestlé’s companies with similar plans, structures and best performance to integrate actions thru the entire organization and to support organizational strategy for business objectives (Johnson, 2005). Recently, the company reorganised its structure through the development of an additional programme known as NCE (Nestlé Continuous Excellence). Through that method Nestlé is able to reduce production waste by saving million tonnes of product material through know-how production such as recycling (Nestle, 2010c). Bulcke & Signh (2011) noted that the combination of those two programmes, GLOBE and NCE, enable the company to drive cost-effective growth and outperform the market. Concluding, the idea behind those programmes was to reorganise the organisation’s structure as to be linked with the overall strategy.