Nestle and the food and beverages industry

Nestle has strong corporate culture which is reflected by the company logo itself. The logo, “Good Food Good Life” which is always attached to its products is the main guidance for every activity within the company. Nestle believes that good food is the primary source of good health throughout life thus it always puts nutrition, health and wellness as the core of its business. The company tries to further develop and emphasize on these aspects. These three things Nutrition, Health and Wellness can be found in all Nestle products and in the company mission statement as well.

Talking about the company culture which is related its people structure, Nestle has the culture of team focused and open door policy which become one of its corporate strengths. The company focuses on collectivism and performance orientation attitude to encourage employees to work harder (Ali et al, 2009).

Strategic Purpose

Mission of Nestle is to make better food so that people live a better life. There is an apparent relationship between this mission statement and the company logo. As what the company believes in, it strives to bring consumers foods that are safe, of high quality and provide optimal nutrition to meet physiological needs. In addition it also brings the vital ingredients of taste and4rrf4f5f5gt pleasure.

Nestlé’s corporate objective is to be the world’s largest and best branded food manufacturer, whilst ensuring that the Nestlé name is synonymous with products of the highest quality (Nestle Corporate Objective, 2009). It shows that Nestle has achieved one part of its corporate objective which is to be the world’s largest manufacturer. This objective is related to another objective of Nestle which is the company wants to make sure that the product creates value that can be sustained over the long term for shareholders, employees, consumers, business partners and the national economies in which Nestle operates.

The main concern of Nestle is to deliver nutritional value for the customers. That’s why in the website of the company, it’s clearly stated that Nestle is the world’s foremost Nutrition, Health and Wellness company. The CEO of Nestle, Paul Bulcke once said that the objective is to be recognized as the leader in the Nutrition, Health and Wellness and as the reference for financial performance, trusted by all stakeholders.

The statement from the CEO is in line with the fact that Strategic Purpose isn’t only concerned with what the organization should achieve but also who has influence over the purposes. In every organization there should be some people that have complex role in affecting the organizational purpose. These people are the stakeholders of the company. Nestle wants the stakeholders are well-served which is returned in the company’s long term objective: to create sustainable value for its shareholders which require it to create the value for the societies at first place.

2.0 Industry Analysis

The threat of entry

At first glance, people may think that food and beverages industry is quite easy to enter. This is true if the consideration is only about the capital requirements. The capital requirement of entry is not high thus enable many parties to open their business in this industry. This opinion is also supported by the fact that many brands are occupying the shelves of supermarket or retailer.

But if more factors are taken into consideration, the threat of entry for food and beverages industry is moderately high (medium level). The threat of entry is affected by many factors which are economies of scale, capital requirements, access to supply or distribution channel, customer of supplier loyalty, experience, expected retaliation, legislation or government action and differentiation (Johnson et al, 2005). For this industry there is no specific government legislation that governs the entry of new entrants.

The fact is that there are many big players exist in this industry and they are at multinational level which means the retaliation is very great. These big players have broad product lines and they have global marketing strategy that those local brands are not able to compete with. These big companies also have an advantage in term of achieving economies of scale. They have more experiences to give them advantage in terms of cost, customer and supplier loyalty.

Entering the food and beverages industry to compete with the big competitors such as Nestle won’t be a wise decision unless the new comer has careful attention paid to the strategy. Nestle has the most important thing to retain its customers which is the brand name itself. In 2008, Nestle is one of the companies in the list of 100 Best Global Brand (Best Global Brands, 2008). Nescafe as one of the brand under Nestle was reported to have 13,056 million USD of brand equity. This shows how valuable the brand name of Nestle as the market leader in the industry which can’t be imitated by competitors. The brand name is used to differentiate Nestle product from the competitors.

Threat of Substitute

Threat of substitute is high in the food and beverages industry. There are many substitutes available that might reduce demands for company in the food and beverages industry. To identify the threat of the industry, the company can’t only look at close substitute. Threat can be assessed using price/performance ratio and extra industry effects. There is a tendency for food and beverages manufacturers to product broad range of products. These products may compete with one another to gain market share. It means that they become substitute for each other. For example Nestle Koko Krunch Cereal can be the substitute for Nestle Nesvita cereal drink since both of them are intended for breakfast consumption.

Because Nestle is offering not all kinds of food and beverages, those unoffered kinds may act as the substitutes for the Nestle products. For example Nestle has coffee in its product lines which is Nescafe, the substitute for it can be the soft drinks which are not in the portfolio of Nestle. In this case the substitutes are also very broad. For certain food such as baby food, the substitute can be breastfeed which is free and offer same or higher value.

Power of Supplier

The power of supplier in food and beverages industry tends to be medium. The basis of Nestle products are agricultural raw materials such as milk, cocoa, and coffee. By referring to 3 factors that affect the power of supplier, only 1 factor can gives the supplier the power advantage which is the non-existence of forward vertical integration.

Supplier power is increasing as many of the food and beverages manufacturer are not involved in agricultural raw material production and don’t own or operate farms. Nestle, Cadbury, and Kraft are some of the examples. They rely on the suppliers to provide the raw materials. Nestle itself purchases agricultural materials in either raw or semi-processed form directly from farmers or via trade channels (Raw Materials, 2009).

On the other hand, by considering the number of suppliers in the industry and also the switching cost, the dependency to a particular supplier can be reduced. The suppliers are not concentrated that enables the companies to choose the most appropriate suppliers. For multinational companies that have their operations in many countries throughout the world, if one supplier can’t offer good price for the company, it can look for the other suppliers (can be in different countries). One issue for some companies is how to get the suppliers that can supply high quality materials as needed for producing high quality finished products. Switching cost from one supplier to another is not high.

The bargaining power of supplier depends heavily on the strength of the company’s brand. In this case, big companies such as Nestle can take advantage in bargaining. Small scale companies or local companies may feel that the power of supplier is higher as compared to the well-established companies.

Power of Buyer

Competitive Rivalry

Food and beverages industry is a very competitive industry. This is affected by the other 4 factors discussed above. It’s not too difficult to enter to this industry, the bargaining power of supplier and buyer are medium and threat of substitute is high. Some other factors also determine the intense of competition.

The competitors are of roughly equal size which can make the competition even stiffer. They will attempt to gain dominance over another. For example Nestle and General Mills have joint ventured for breakfast cereal market. By having such joint venture these two companies instead of competing with each other they can gain better success (Jones, 2008).

In overall this food and beverages industry has its own attractiveness to attract new comers to enter. Although from the 5 Porter results the industry isn’t so attractive, it has its own set of appeal for the business party which is the growing opportunity (profit). If the new comers can have good strategy to penetrate into the market and know how to compete with existing companies, they can gain benefits in the competition.

{draw:frame} Since Nestle is operating in world-wide market, the industry life cycle may vary among different geographical areas. In general food and beverage industry is at the growth stage of life cycle but for European market and non-European market they are at the different point of growth stage. Figure below shows the position of the food and beverages industry in the life cycle.

Another reason for the difference is the demographic differences between the two different areas. A very important issue that makes European market is hardly to grow is regarding the population growth rates. As compared to other markets, the population growth rate is lower that makes the industry can’t grow or generate higher profits for the market players. For food and beverages industry, the consumption is driven by the population growth. Slower population growth means the industry also grows slowly.

The industry life cycle analysis is related to the Porter 5 forces. The relationship can be seen from the characteristics of the forces which vary for each life cycle stage. In other words the life cycle can be determined by looking at the 5 forces of the industry.

As for the food and beverages industry, since it’s still at the growth stage the competition will keep increasing (intense rivalry) till it reaches maturity stage. One obvious fact is that in European and North America market the competition is stiffer as compared to the other markets. As shown in the curve before, these 2 markets are approaching the maturity stage while the other markets are just at the middle of growth stage. Nestle knows this thus it put more attention to the Asian market (Jones, 2008). The competitive rivalry is driven by the increasing number of new entrants.

The power of buyers at growth stage isn’t high but it will increase as the industry goes further in the life cycle. The main reason for this is because of increasing number of competitors to offer more products to the customers. In the Porter 5 Forces analysis it has been identified that the bargaining power of buyers is quite high already. This is because this industry is very broad and the companies can come out with many product selections. When the companies step into the maturity stage by sure they will have even more products providedto strengthen the company’s brand. For example Nestle MILO has strong market share and remains a perennial favorite amongst Malaysia consumers. In order to further strengthening the brands image, the company added MILO GOLD to its product range. This was done to keep the consumers loyalty towards the product (Business Review, 2008).

Reversely the power of supplier will be lower when this industry reaches the maturity stage. It is because the brand of the company will be more powerful when it enters to the maturity stage. As explained before the power of supplier is relative to the company brands. Currently since the food and beverages industry is still at the growth stage the power of supplier is medium. Nestle is an exception case. For Nestle whose brand is very strong, the power of supplier becomes lower. One proof to show that the power of supplier is low is the presence of Nestle Supplier Code. This Nestle Supplier Code establishes non-negotiable minimum standards that the suppliers must respect and adhere at all times when conducting business with Nestle (Nestle Supplier Code, 2009). The Code also helps in implementing the commitment to foster responsible practices in the company supply chain. It is used to ensure the responsible sourcing and supplier relationships that deliver a competitive advantage for Nestle. Not all companies have capability to implement such thing. Suppose Nestle isn’t a well-known company, it won’t dare to have supplier code, instead it may have to listen to what supplier requires.

A major barrier to entry for the growth stage is the learning or experience. Nestle and other companies have gained many experiences that allow them to achieve economies of scale. Pricing during this stage is also declining (lower than the introduction stage) and the profit is also increasing. Nestle and its competitors still have growth opportunity.

Another proof to show this industry is still at the growth stage is more differentiated products are being introduced these days. The research center of Nestle is still striving to come out with innovative products and renovate existing ones.

Before identifying the key drivers for change, the PESTEL analysis should be carried out.

From the key factors in the macro-environment (PESTEL), there are 2 of the factors that influence food and beverages industry the most which are economic and social factor. These two are the key drivers for change in food and beverages industry.

Demographic is also one of the factors that keep changing. The main factor within demographic that will impact the operation of the company is the lifestyle. As mentioned earlier, people are shifting to healthier life. The demand for food and beverages that don’t fulfill this requirement can’t stay long in the competition. But for Nestle this won’t affect much since Nutrition, Health and Wellness has been the company focus for years.

According to Johnson (2005) critical success factors are those product features that are particularly valued by a group of customers and therefore where the organization must excel to outperform organization. CSF can be related to the differentiation by the companies within the industry. There are 4 common forms of differentiation which can be used by the company which are: product attributes, price, support, and brand image.

For the food and beverages industry the most critical success factor will be the product quality and innovation (Nestle: Global Strategy, 2009). It means that for the company to success in this industry, the product quality should be taken care the most while innovation process is also carried out. This is what Nestle has been doing so far. As mentioned before Nestle brand has been the symbol of quality. Innovation is said to be the critical factor because in this kind of industry the company should be able to come out with new ideas to keep pace with the changing customer preferences.

Another critical success factor for the food and beverages industry is the healthiness of the products. This is closely related to the key drivers for change as discussed earlier. As people are very concern about their health, the healthiness of the food and beverages they are taking become a key determinant in their purchasing. Many groups of customer valued this healthiness issue thus allows Nestle to conquer big market share.

Indirectly the brand image itself can be built from the product attributes thus brand is of the same importance with product quality in food and beverages industry. The company also needs to develop its corporate brand using CSR (Corporate Social Responsibility). Probably this factor is applicable for any industry in the business world.

As Nestle is the market leader of its industry, by sure it has its own set of core competencies to deal with the critical success factors in the industry. All CSF is of Nestle capability which means it has the resources and competencies to cater all CSF. Without these competencies, Nestle can’t sustain its position any longer.

This core competency of Nestle has made the company reached the first place in the industry. Quality which is the most important factor for food and beverages industry has been so attached to the Nestle brand itself. Nestle knows that innovation and quality are the key determinants thus it transferred these competencies to the foreign market wherever it entered into (Nestle: Global Strategy, 2009).

One of the innovations from Nestle which gives it first mover advantage is its nutrition labeling on all the products packaging. It was launched in 2005 and comprises three elements: Good to know, Good to remember, and Good to talk. These 3 labels can be found in all the Nestle products.

There is another first mover advantage Nestle has which is becomes the first in the industry to offer a full range of chilled dairy products with “No Artificial Coloring” in 2008 (Business Review, 2008). Some examples of the products are BLISS Yogurt Drink, NESTLE Yogurt and YOCO Cultured Milk Drink. It was communicated under the “Some Things are Best Left Natural” communication campaign and received very positive feedback from consumers.

Nestle also has competencies in leading and developing people (Roongrerngsuke, 2006). This is important since Nestle is operating worldwide. As the market in each country is different from the others, the company needs to adapt itself to the macro-environment accordingly.

Nestle has the ability in adapting itself to local demand and cultural differences although it operates in global level. It uses local brands in a wide range of local markets and focuses on trying to optimize ingredients and processing technology to local conditions. Doing business in different countries means different ethical standards, different business expectations, and different cultural norms. One example to show Nestle’s ability in responding to local condition is when it penetrated to Nigeria, the company had to rethink its distribution method (operating a central warehouse) because the road system was poorly developed and much violence there. The global strategy must be backed up with the necessary financial and human resources and knowledge management should be introduced to spread information throughout the company (Nestle: Global Strategy, 2009).

Nestle can take advantage of location economies to lower the cost of value creation thus it can achieve low cost position which will give the company even better market shares (Nestle: Global Strategy, 2009). The experience of Nestle itself also can help the company to sustain its competitive advantage in term of lower product price.

For Nestle to sustain its competitive advantage shouldn’t be a problem. This is due to the value and inimitable of the core competencies of Nestle especially for its corporate brand image and commitment. To achieve what Nestle has achieved so far is very difficult for the other companies. This requires long term experience and investment. The most important thing is that Nestle is aware of the intense competition and keeps improving itself so that competitors can’t take over its position. For the nutritional labeling, it was protected by law and other companies can’t follow the same thing. Another thing that enables Nestle to sustain its competitive advantage is the intangibility of “innovation” in Nestle and first mover advantage. Innovation has been the culture of Nestle and it can’t be transferred to other parties.

Furthermore with the presence of this competency, Nestle shouldn’t be worry whenever there are any changes in the industry (macro-environment) especially when people life style change. The company still can come out with nutritious food and beverages to cater the demand of customers worldwide.

5.0 Strategic Directions and Corporate Level Strategies of Nestle

Corporate level strategy is also dealing with the product diversity, international diversity, corporate parenting roles and management of portfolio (Johnson et al, 2005). It is strongly related to the strategic direction of the company.

Nestle applied international diversity which means it differentiates its products based on the local market and competition. The example has been given in the chapter before which shows the Nestle ability in adapting itself to the local market.

In selecting the corporate strategy a firm might refer to Boston Matrix, Ansoff Matrix or use a simple SWOT analysis to establish where the company is and in which direction it wishes to head. Below is the BCG portfolio matrix for Nestle SBU. The classification is based on the performance of the SBU (the profit it generated to Nestle).

Most of the Nestle SBU is in the category of star. The SBUs in this category generate high profit for the companies. This is the main reason why Nestle can gain its number one in the industry. All its SBUs are generating profit. Nestle doesn’t have any SBU in dog and cash cow category. Take example of Ice Cream SBU to show why it’s considered as star. Nestlé Ice Cream registered double digit growth in 2008 (Business Review, 2008). The division continued to spearhead the market with even stronger brand awareness, which saw continuous and sustained brand building efforts even during lackluster market conditions. This SBU can come out with innovative products such as DRUMSTICK Techno, DRUMSTICK Retro ice cream and MAT KOOL Tangle, MAT KOOL Super Blaster and TROPICANA Plus ice confection. In the following years if the innovation is kept carried out, this SBU can still generate high profit for Nestle.

Strategic direction or development directions are strategic options available to an organization in terms of products and market coverage (Johnson et al, 2005). There are 4 strategic development directions which are: protect/build, product development, market development and diversification.

Nestle has done the 4 strategies. In recent years, the company has pursued a policy of expansion and diversification through acquisition and divestment to achieve a more balanced structure to the business.

Product development is the main direction of Nestle and done by the company R&D team. As what a director of Nestle said, renovation is to keep pace in the industry; company needs to change at least as fast as consumer expectation. Innovation is to maintain the leadership position; to move faster and go beyond what consumers will tell (Nestle SWOT analysis, 2005). These 2 strategies are intended for internal growth to achieve higher volumes. In 2005, Nestle’s ice cream business unit for the China Region launched 29 new products to attract more consumers having its quality improved (Nestle Attacks with New Products, 2005).

As the multinational company, market development is also very important in order to increase the geographical area coverage. In this case Nestle is expanding the market by geographical area. Nestle expanded to Asia region as it saw good opportunity there.

In some cases Nestle used joint venture to assist itself in entering into new market. As a multinational company, Nestle has done some sorts of international strategy such as joint ventures with Coca Cola and General Mills (Nestle SA, 2009). These 2 joint ventures still main for the food and beverages industry (this also can be the example of related diversification). Joint venture with General Mills is to form Cereal Partners Worldwide and joint venture with Coca-Cola is named Beverages Partners Worldwide. The main reason for Nestle to do the joint ventures for its market development strategy is to benefit from the traditional marketing expertise and distribution strength of Coca-Cola and General Mills. These 2 joint ventures also allow the companies to have their market penetration (existing product in existing market).

Nestle has related diversification and unrelated diversification. For the related diversification, it can be seen from the wide product portfolio which encompassing baby foods, dairy products, chocolates, breakfast cereals, food seasoning etc.

For unrelated diversification, Nestle did it by acquiring or joint venturing with other big companies. For example Nestle acquired Alcon Laboratories Inc. in Texas which is a pharmaceutical company specializing in eye care (Company Related, 2009).

Another example of unrelated diversification is the joint venture with L’Oreal. Nestlé and L’Oréal have a close relationship dating back to a shareholder pact made in 1974. Nestlé holds a 26.4% stake in the world’s largest cosmetics group. Whilst it is unlikely that Nestlé will take over L’Oréal in the immediate future, it could well do so in a few years (Nestle SA, 2009).

For the future days, Nestle may still come out with market development, product development and diversification. Nestle with its R&D team can come out with more and more innovative idea in developing the products and try looking for new market segment. The new market segments can be new geographical unit or based on demographic factor. However for the unrelated diversification Nestle shouldn’t go to extensive. It is because the more extensive the unrelated diversification the lower the performance will be.

6.0 Conclusion

Conducting industry analysis is very important whenever a company wants to enter into new market. Porter 5 forces and industry life cycle are have-to-do analysis before making decision. However for the existing companies especially large scale companies, they need to pay attention to the future changes that might happen in the industry because these changes will impact the operation of the company in the business environment.

Nestle as the leader in the food and beverages industry has its own set of competencies that allow it to conquer the largest market share and left the competitors behind. The core competencies or strategic capability of the company should fit what the most influential factors in determining the success of the company are. It means that the core competencies should be able let the company to sustain its competitive advantages.

Portfolio matrix assists the company in determining how to allocate the investment based on the SBU. By understanding this, the company knows the direction it should go. This is related to the issues of market penetration, consolidation, product development and diversification.