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The strategic management process is based on the belief that organization should continuously monitor internal and external events and trends so that timely change can be made as needed. An organization must be capable of wisely identifying and adapting to change. In this report, I will choose Nestlé S.A, one of the most successful food processing company in the world to discuss its strategy management process.
2.0 COMPANY PROFILE
Nestlé S.A. is the world's largest food processing company and is headquartered in Vevey, Switzerland. The company was founded by Henri Nestlé in 1866. Nestlé Company had made several name changes from 1866 to 1947, and finally adopted Nestlé S.A. in 1977 as the company's name. Nestle S.A. has factories or office in almost every region of the world and markets a wide range of brands. The company is often described as "the most multinational of the multinationals." in the current food industry market.
Henri Nestlé, also know as of the main originator of condensed milk. In 1867, he developed the first milk food for infants and a baby who could not be breast-fed was rescued. Nestlé's invention responded to the need for a nutritionally safe alternative to breast milk. Thus, Nestlé S.A has targeted to build a business based on sound human values and thoughts.
The key to success of the company is due to its huge Research and Development network within the food processing industry. With R&D as the competitive advantage, Nestlé has become the world's leading nutrition, health, and wellness company. The company is devoted in continuing to improve the nutritional value of their products while enhancing the flavour. Nestlé achieves this through its brands and with initiatives like the Nutritional Compass and 60/40+. Millions of people choose to consume Nestlé products everyday because the company sustain the quality as the fundamental ingredient in all of its brands. Consumers choose to place their trust in Nestlé due to the company's dedication to achieve distinction and turn to Nestlé brands to preserve nutritional balance in today's fast paced world.
Switzerland-based Nestlé S.A. has the highest ranking as the largest player throughout the entire world in the competitive position within the food industry. The rating reflects the company's competitiveness and market attractiveness. With combined sales of 110 billion (Swiss Franc) in 2008, Nestlé states a diversified business portfolio, being the market leader in numerous product categories worldwide including bottled water, instant coffee, milk and cheese products, nutrition and baby food, ice cream, frozen foods, culinary preparations, and coco products. Nestlé's broad geographic coverage includes North America and Europe as well as Asian markets.
The vision of Nestlé R&D is long term, it helps shape the future of foods making consumer needs into research priorities and convert new technologies into consumer benefits, and services.
3.0 STRATEGY ANALYSIS
3.1 Environmental Scanning
Environmental scanning has the management scan internal environment and external environment. The factor which are the predominant factor for an organization factor is SWOT standing for strengths, weaknesses, opportunities and threats.
3.1.1 SWOT Analysis
SWOT analysis is a strategic planning method developed by Albert Humphrey using data from Fortune 500 companies in the 1960s and 1970s.
18.104.22.168 Internal Environment
Strengths include anything a company does well and its resources and capabilities for developing a competitive advantage.
The greatest strength of Nestlé is culture that is team focused and an open door policy. Nestlé focuses on collectivism and performance orientation attitude which encourages employees to work harder.
Nestlé achieves broader range of products by improving existing and innovating new products. Consumer demands are switched to changes of taste, colours and design that have been undertaken to products such as Nestlé's Smarties and Kit Kats.Â The launch of Kit Kat Chunky has proven that creativity and innovation can extend the life cycle of a product.
The lack of certain strengths and things a company does not do well are viewed as weaknesses.
Nestlé is poor in targeting some of its products.
Nestlé MilkPak is a premium product targeted to upper middle and high class consumers. Most consumers in Pakistan are from lower middle and poor class. They are not afford to purchase it due to the premium price.
Nestlé has a complex supply chain configuration too and traceability is a critical issue for Nestlé India. High standards of hygiene, quality of edible inputs and workforce are required in the food industry. Fragmented nature of the Indian market will cause more problems.
22.214.171.124 External Environment
The external environmental analysis a firm's new opportunities for profit and growth.
Nestlé in Pakistan has a great opportunity for expanding its milk products because Pakistan is the seventh major milk producer in the world with annual output more than 22 billion litres.
Adjustments in the external environment present threats to a firm. For an example, shifts in consumer's preferences.
The major threats to Nestlé's products is Unilever's Walls, a famous ice-cream brand. It is distributed nationwide and has total control within the local market.
Besides, economic slowdown can reduce demand, and inflation is getting higher and higher causing the purchasing power of consumers is decreasing day by day.
126.96.36.199 General Environment
Pest Analysis is used to illustrate a structure for the analysis of macro-environmental factors.
Political factors include a country or government's regulations and legal issues and rules which a firm must follow. For example, Nestlé's famous brand Milo.
The product stay within the law in all countries including being aware of legislation health and safety, commercial standards, consumer protection and trade description.
Economic factors such like economic growth, exchange rate and inflation rate will influence potential customers' purchasing power and the firm's cash flow.
During recession, customers have less disposable income, demand for Milo might drop in the market.
Social factors comprise the cultural aspects and demographic of the external macro-environment. These factors influence customer needs and potential markets' size.
The society are more aware of health conscious nowadays, Nestlé can build up Milo as a new fashionable drink like 100 plus in the fitness industry.
Technological factors can reduce barriers to entry, improve products quality and influence outsourcing decisions.
Advance in science allows Nestlé to improve its product such as Milo, the company can add energy and healthier formula to Milo.
3.2 Porter's Five Forces Analysis
Michael E. Porter developed Porter's five forces in 1979. It is a framework that helps marketer to differentiate a competitive environment.
Threat of substitute products
An analysis of the threat of substitute products will identify the consumers of a company might switch their purchasing alternative. There is a tendency for food and beverages manufacturers to produce broad range of products. These products may compete with one another to gain market share and become substitute for each other.
Nestlé Koko Krunch Cereal can be the substitute for Nestlé Nesvita cereal drink since both of them are intended for breakfast consumption.
Nestlé is not offering all kinds of food and beverages, those unoffered kinds may act as the substitutes for the Nestlé's products. For example, Nestlé has coffee in its product lines which is Nescafé, the substitute for it can be the soft drinks which are not in the portfolio of Nestlé. In this case the substitutes are very broad.
Bargaining power of suppliers
An analysis of the bargaining power of suppliersÂ will identify the changing price, quality and service of suppliers without consequence. Supplier power can be different due to seasonal or economic cycles. Supplier power is increasing as many of the food processing companies are not producing their own raw materials.
Nestlé itself gets material in the form of raw or semi-processed directly from farmers and trade channels.
By considering the number of suppliers in the industry and the switching cost, the dependency to a particular supplier can be reduced. Nestlé has operations in many countries throughout the world, if one supplier unable to offer good price for Nestlé, it can switch to other suppliers.
The bargaining power of supplier depends heavily on the strength of the company's brand. Big companies such as Nestlé can take advantage in bargaining.
Bargaining power of buyers
Food processing industry is very broad and rivals can come out with numerous product selections. When the companies step into the maturity stage, they will have even more products provided to strengthen the company's brand.
Nestlé Milo has strong market share and remains a constant favourite amongst Malaysia consumers. In order to further strengthening the brands image, the company added Milo Gold to its product range to keep the consumers loyalty towards the product.
Threats of new entrants
An analysis of the threat of new entrants will identify entry barriers within an industry. Industries with high barriers to entry will face low risk from new competitors than an industries with low barriers to entry.
The competition of ice cream business in Pakistan is very small. This could create chances for other international ice cream brand to penetrate their products to compete with Nestlé in Pakistan. The major substitutes of Nestlé's ice cream would be Walls ice cream and Hico ice cream.
Competitive rivalry within an industry
Rivalry among competing firms is the utmost of the five competitive forces. Firms within the same industry are competing with one another to gain customer share to increase profitability. The competitors are of roughly equal size which can make the competition even stiffer. They will attempt to gain dominance over another.
Nestlé and General Mills have joint ventured for breakfast cereal market. By having such joint venture these two companies can achieve better success instead of competing with each other.
3.3 Value Chain Analysis
Value chain analysis is a development for understanding the general factors and conditions under which a value chain and its firms can achieve higher levels of performance.
Manufacturing and the environmental footprint
Nestlé has a great commitment to the environment.
They put in great efforts to protect the access of water and ensure everyone's responsibilities as water users.
Nestlé moves to different fuel types to produce their products to improve the environmental performance.
One of the significant steps in theÂ value chain is transport. Nestlé initiated an experiment withÂ Schenker, toÂ evaluate the effectÂ ofÂ different types ofÂ transport, distancesÂ driven and fuel type used to create a better environment.
The company determined by skilled and motivated workforce for continued success.
Nestlé includes many nationalities, religions, and ethnic groups working together in one single unifying corporate culture.
Farmers and Agriculture
Nestlé always assist farmers to be successful suppliers.
This great effort is helping the entire region to develop a positive long-term impact to boost economic performance.
Nestlé share good environmental and water management practices with farmers by carrying out agricultural programs.
Nestlé insist code of ethics to maintain good and long-term relationship with their suppliers.
Products and consumers
Nestlé strengthens its brands and customers' loyalty to respond to consumers changing preferences.
Nestlé preserves the nutritious in its products while enhancing the flavour and improve the quality of their products.
According to Julio Frenk, former Secretary of Health Mexico, from his experience in Mexico, he believes that Nestlé is delivering genuine shared value through its products in the society.
A company should has its benchmark to improve quality of its products.
In June 4, 2009, Nestlé started make use of ASSET4 to benchmark its environmental, social and governance (ESG) performance.
ASSET4 is the top supplier of idea, comparable, and auditable extra-financial information.
According to Nestlé's head of Investor Relations, Roddy Child-Villiers said that Nestlé is committed to improve its ESG performance via Creating Shared Value, which build continuous business triumph and the establishment of shareholder value to the creation of value for society at large.
4.0 STRATEGY FORMULATION
Strategy formulation is the second stage in the strategic management process. In the aspect of corporate strategy, the current objectives and strategies of Nestlé will be discussed as well as suggestions given on how Nestlé to be more successful in the food processing industry. For example, what amendments should be made to achieve the development objectives and strategies of Nestlé, the lines of business that Nestlé is in now, and how these lines of business fit mutually.
There are three main components fall under corporate strategy. These components include directional strategy, portfolio analysis and parenting strategy.
4.1 Directional strategy
Directional strategy refers to a firm's overall orientation towards growth, stability and retrenchment.
4.1.1 Growth strategy
Growth strategy has two fundamental categories, concentration within existing industries and diversification into other lines of business or industries. In this report, I will choose to discuss the concentration strategy of Nestlé. Concentration strategy can be achieved via merger and acquisition (M&A).
M&A have emerged and are widely used in many industries today. Nestlé has been using these form of strategic alliances to link technology gaps and resources, to recruit expertise and obtain market positions. M&A are essential and potentially useful for a company that wishes to enter a new industry and new markets.
Merger is defined as the combination of companies.
In 1905, Nestlé S.A was formed by the merger called the Nestlé and Anglo-Swiss Milk Company.
Nestlé stepped outside the food industry for the first time and diversify its business in the cosmetic industry. In 1974, Nestlé became a major shareholder in L'Oréal, one of the world's leading makers of cosmetics.
Acquisition is the act of purchase or takeover of a company that is completely absorbed by the subsidiary or division of the acquiring corporation.
Since 1985, Nestlé has made over 50 acquisitions. Nestlé's growth strategy began with acquisitions to diversify its product offering.
In the early 1990s, it used acquisitions to expand geographically. More recently, Nestlé has focused its acquisitions on growing a select number of very attractive businesses in markets where it can achieve leadership positions.
For example, Nestlé has acquired Frozen Food in 2010. The factors of the acquisition are due to Frozen Food's number one position in United Stated and Canada as well as strong growth profile in North America by proving fast recovery in times of economic downturn.
Meanwhile, concentration strategy includes two strategies which are vertical growth and horizontal growth. I will choose horizontal growth of Nestlé's for further discussion. Horizontal growth refers to the expansion of operations into other geographic locations and enlarging the variety of products and services offered to current markets. Horizontal growth can be achieved via joint venture. As an example, in 2001, Coca-Cola Company and Nestlé S.A. continue their existing joint venture business, Coca-Cola and Nestlé Refreshments. This co-operation will be renamed Beverage Partners Worldwide (BPW) to emerge their beverage segments, especially ready-to-drink tea.
4.1.2 Portfolio Analysis
Portfolio analysis is basically a product portfolio in which a company rank their products and where their products are stands in the market. There are two popular portfolio analysis techniques that will be used to analyse Nestlé's portfolio. There techniques include BCG Matrix (Boston Contingency Group) and GE Business Screen. For this report, BCG Matrix is selected to explain the current standing of Nestlé's brand in India.
In 1960, Bruce Henderson, president of the Boston Consulting Group design BCG Matrix to develop business strategy. There are four categories of product position which are stars, cash cows, dogs, and question marks.
When an industry is growing and the share of a firm is high as well, then the firm is the leader in business.
Nestlé's Nescafé is one of the leading coffee brands in the Indian market.
It has the strong position in the market which is incomparable by other brand within the country. Nescafé has high market share in the industry as well as the growth rate is significantly high.
In addition, the name of Nescafé has become generic with coffee.
When the industry growth is low but the firm has high market share, then the firm's products are considered Cash Cows.
Nestlé's Maggie Noodles has more households of consumption in India and has become the first preference of Indian children in terms of instant food, yet it is still considered as Cash Cows, not a star.
It has a significantly high market growth rate in the Noodles market in India, but the market growth rate of Noodle consumption is not very high.
Question marks refer to products with the potential to penetrate into the market and succeed but will require a lot of cash for development.
Maggie Pickles has limited variety especially in this taste crazy country, India.
Maggie Pickles is doubted for two main reasons. The first reason price and packing of the product is high, which seems to target customer from upper class.
The second reason is it lack of significant number of alternative, therefore it is a challenge to maintain itself in the market. Thus, it is suggested that Maggie Pickles to review its packaging and price so every citizen in India can afford to purchase the product.
If the industry growth is low and a firm's share is instability or low, then the products of the firm is considered dog.
Nestlé's Dahi is considered Dog because people in India was unaware that Nestlé offers a Dahi.
The product is facing competition from Amul's Masti Dahi.
The concept of Dahi's packaging is not favourable by the consumer who prefer to play it safe with the local manufacturer. Nestlé Dahi is placed in as a Dog due to lack of growing market. It is recommended that Nestlé has to think on what it can do to make everyone in India recognize Nestlé Dahi.
4.1.3 Corporate Parenting Strategy
Corporate parenting strategy is developed to examine each business unit in terms of its strategic factors, areas in which performance can be improved, and analyze how well the parent company fits with the business unit.
To expand a business to another geographic location, extra cost such as import duties, logistics and other packaging requirements will weigh down a products launch in the targeted region. Hence building an overseas plant or subcontract the manufacture of the product to a licensed local manufacturer.
Nestlé's has many manufacturer in almost every country in the world to manufacture its products. This strategy has helped Nestlé to cut down the extra costs as I have mentioned above.
Multipoint competition refers to a multinational organization compete against other multinational organizations in a number of markets.
Nestlé competes in a wide range of geographic areas in addition of broad range of product categories. Therefore it faces competition from multinational companies such as Unilever and Philip Morris with similar product lines that cross regional bounds. Since Nestlé is facing this type of competition, it is suggested that Nestlé must compete briskly across its worldwide customer base.
5.0 STRATEGY IMPLEMENTATION
Strategy implementation is the third stage in strategy management. In order to carry out the formulated strategies, Nestlé needs to establish annual objectives, planning policies, motivation employees and allocate resources. This stage is also known as the action stage of strategic management and it is often considered to be the most complicated stage. It needs the collaboration from all the employees at all levels in Nestlé in terms of personal discipline, commitment, and sacrifice. In this stage, I will discuss several issues that will affect to Nestlé during the process of strategy is being implemented.
5.1 Management Issues
Management changes are essentially more extensive when strategies to be implemented move a firm in a major new direction. I will select several factors from the management issue to discuss how are they going to affect Nestlé's organizational performance.
Annual objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives represent the basis for allocating resources.
Nestlé need at least four types of resources in order to achieve desired objectives.
Financial resources. One of the major strengths of Nestlé is its R&D which contribute a lot in supporting the company's strategy implementation. In 2006, Nestlé invested CHF 1.73 billion in R&D and over CHF 1.5 billion in Venture Capital. Thus, the company needs sufficient financial resources in order to continue its R&D.
Physical resources. Nestlé has a committed sales force which is the major resource strength in terms of physical resources. It is very important as part of the company's success particularly after the strategy is implemented, and the employees able to develop markets and sell its products.
Human resources. Human resources is one the significant concern while implementing strategy because it is the backbone of any organization. The fact that Nestlé is more people and product than system oriented reflected in the way HR is functioning and is organized.
Technological resources. R&D at Nestlé is an international group of science and technology centres of excellence. Its R&D has a long tradition of building its own machines based on extensive in-house engineering experience. Proprietary technological claims in all products categories assist Nestlé to maintain and improve its position as market leader.
Rewards and Incentives
The Real Rewards in Nestlé USA's investment in you is a comprehensive package for waged employees. Compensation is a key part reward of Nestlé USA's Real Rewards package to help to attract, motivate, and retain a workforce of top performance. There are three types of compensation of the Real Rewards package.
Base Pay. Based Salaries are designed to be competitive which based on data specific to different position as measure in marketplace. High performance over time is recognized by base pay that is higher than the market.
Short-Term Incentives. Short-Term Incentives Pay is designed to reward employees (typically yearly) for their accomplishments and contribution to Nestlé USA's success.
Long-Term Incentives. Nestlé USA's Long-Term Incentives Plan are designed to motivate and reward those in eligible leadership position for the company's sustained success for a longer period, often three years or more.
Nestlé Human Resources Policy encompasses those guidelines which represent a sound basis for effective and efficient HR management in the Nestlé Group around the world. Learning is part of the company culture in Nestlé. Employees at all levels is conscious of the need to upgrade constantly his or her skills and knowledge to achieve personal and organizational goal.
5.2 Marketing Issues
Marketing variables can determine the success and failure of strategy implementation.
Marketing segmentation is the process in marketing of grouping a market to identify different groups of customers with different needs or responses to marketing activity. Consumer can be segmented on the following characteristics.
I will use Nestlé' Juices to discuss how Nestlé's marketing team is going to target the market segmentation.
Geographic Segmentation, Region. People would prefer to drink juices during the hot weather or summer season. The marketing team can segment the market on the basis of high temperature zones. To boost the demand of its juices products, they can focus more in the region where the consumption remains almost the same all the year around.
Demographic Segmentation, Gender. Women will be the best targeted customers as they usually shop for their family. When they are convinced that the juices will be good for the health for their family, they will eventually purchase.
Psychographic Segmentation, Life style. People belonging to luxury life style tend to spend more on luxuries as compared to people in the lower class.
In strategy implementation, market segmentation is an important variable. It allows Nestlé to operate with limited resources due to unnecessary of mass production, mass advertising and mass distribution. The market segmentation decision directly affect the marketing mix variables.
Product strategy. Nestlé juices main competitive advantage is its quality leadership. The company aim provide the original and best quality to their customers and fulfill their need.
Place strategy. In Pakistan, Nestlé established the distribution channels for its juices products in famous cities such as Karachi, Lahore and Gujranwala. Then they acquired maximum two to three suitable distributors in these cities to hinder from their own competition.
Promotion strategy. The marketing team of Nestlé use various sources to promote their target marketing. Sources used such like TV, Newspaper and Billboard to advertise their products. When Nestlé launches new juice, the marketing team will use the promotion strategy that are mentioned to spread the awareness of their brand.
Price Strategy. Nestlé juices are available six flavored and two size. The packing of 200ml size is targeted for individual customer while 100ml packing is targeted for whole family. They charge price premium since they provided high quality and 100% clear juices other than competing low cost with their competitors. Nestlé juices contain maximum profit margin compared to their rivals.
After segmenting markets, Nestlé can target particular customer groups, the next step is to find out what customers wants and needs. In 2009, Nestlé launched two fortified juice drinks for children, Juicy Juice Brain Development and Juicy Juice Immunity.
Customer wants. Children are targeted easily targeted for these two juice drinks because they can choose three flavours that are available including apple, berry and grape flavours in these two juice drinks.
Customer needs. Parents are very concerned with their kids' development. Therefore, these two juice drinks are specifically targeting brain and immune development in under five age group.
5.3 Research & Development Issues
R&D is an investigative activities that a business choose to conduct with the purpose of discovering new products and to improve the existing products. Nestlé is the global leader in the food processing industry with regard to R&D. The R&D expert team in Nestlé have provided best practices and help in the company's implementation. For example, the R&D structure offers the flexibility to use the huge sources of local ideas, bring them back and develop them for the global implementation.
The major advantages of Nestlé R&D include:
The company attract the best scientist and engineers from top-level universities who want to work and partner with them.
To build plants, expand, grow, and market products and services more efficiently.
In a nutshell, it is not easy to maintain the position as the world leader in food processing industry like Nestlé. A company must be able cope with any unexpected changes in order to survive and compete in the world of business.
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