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Economies of scale is a economic term that illustrating a business model where the long run average cost curve declines as production increase. In another way, it also can explain as the reduction in average cost per output resulting from additional output production. Economies of scale can be distinct in two types, which are internal and external economies of scale. Internal economies of scale can achieve when a company can increase its production with decline of average cost while external economies of scale occur outside the firm but within an industry. For example, when an industry’s scope of operations expands with certain factors will result a reduction in cost for those companies working within that particular industry then it can be achieve. External economies of scale will benefit all the companies within that particular industry.
Research and Development
Nestle has delivered significant improvements in operational efficiency over many years. Its manufacturing strategy follows what is the best serves its consumer and consumer needs. In order to achieve the economies of scale, Nestle is involved in every stage of production chain for providing growers with technical advice, maintaining the supply chain, researches and development, advising quality issue and others. For example, Nestle has its own researches and development (R&D) department with total spending $70 million as long-term investment on it. Product innovation is becoming a necessary for a company because of it brings the awareness of company’s situation and competition heated up in market. Therefore, Nestle need the R&D to wring out efficiencies to slash the costs and boost the output production. In response, Nestle had set a vision is called One Nestle which it introduced common processes, standards, and system across the enterprise. It used System Application & Products (SAP) software to automate and integrate all the operations, procurement, production, distribution, and customer care. Automation extent its contributions toward productivity and improvement and this innovation of technology maintain the efficient scale of production. As a result, Nestle achieved unprecedented economies of scale in its business (Ansari, Ali, Dogar, Shafique, and Bukhari, n.d.).
Moreover, economies of scale can achieve by specialization in Nestle’s labors. Increased specialization in used of labors has high possibility of expanding size of its business. Workers can use full time to do their task at which they have specific skills. This can reduce the time consuming with lower the production costs than the skilled workers to spent more time and costs in unskilled tasks. With the expertise of labors, Nestle can produce different types of high quality products to meet customers’ needs and wants (Ansari et al., n.d.). For instance, customers nowadays are more health conscious. Therefore, Nestle has employed the labors that expert in the nutrition, health-wellness, and environment friendly aspects to produce health conscious products. The products with medical benefits can be known as “functional foods” or “nutraceuticals” can bring big growth to Nestle with cost saving when production efficiency by expertise workers (Benady, 2005).
Popurlarly Positioned Products (PPPs)
Furthermore, “Popurlarly Positioned Products” (PPPs) are an important strategy and the main growth drivers to Nestle in recent year. PPPs focused on providing high quality and nutritional food products at affordable cost to emerging consumers. With this strategy, PPPs achieved 8 percent increase in annual sales which equivalent to USD 8 billion in year 2009. This strategy can achieve that profitable return by Nestle because it relies on local sourcing, local manufacture, and local distribution to minimize the costs. Nestle business are using the range of local distribution such as street markets, door-to-door distributors and mobile street vendors to expand its business opportunity not only in developed but also distribute its products to emerging countries. With wisely used of locally distribution, this can lead Nestle to cost savings by lowering the transportation, import or export costs of the products without reducing the profit earned and amount of outputs produced (Nestle PPP Strategy, 2010).
2.2 Economies of Scope
Economies of scope is describing the cost advantage that received by a company due to produce a complementary variety of goods rather than specializing in the production or producing a single product. Economies of scope also can achieve when a company can produce a given level of output of each product line more cheaper than separate firms that specify in producing a single product at given level. This can occur from jointly utilization of inputs and lead to reductions in per unit costs. This shows that company has potential cost savings from joint production.
Economies of scope are an important in Nestle’s growth strategy. Nestle rely on its marketing expertise and well-established position to expand its range of products. The economies of scale can achieve by Nestle because its production system shares across many with different product lines (Delios and Singh, 2005). Besides, Nestle also had joint co-operation with others companies to produce more quality with expanding in product lines. For example, Coca-Cola and Nestle formed Coca-Cola Refreshments to expand companies’ position in ready-to-drink tea category. The products that produced by jointly companies of Nestle and Coca-Cola are such as Nestea, Nescafe ready-to-drink products, Tian Yu Di tea and Yang Guang tea. Besides, Nestle has also formed joint venture with US food company General Mills to produce and market breakfast cereal worldwide. With the joint production to other firms, Nestle not only can improve the expertise and quality of products but also save costs to take longer time and costly on R&D development on new products. This strategy can lead Nestle to achieve economies of scope but also economies of scale (Girard, 2005).
In addition, another important reason for Nestle to achieve economies of scope is it used marketing through an umbrella brand. Nestle promotes its products in formed of professional magazines including statements of physicians and professors, official brand label, small flyers, advertising through electronic mechanism and a clear umbrella brand Nestle web page. All of the information that published by Nestle is to convince buyers to purchase its health-wellness and qualified products. Nowadays, Nestle kept on doing is integrating their logo in several brands in supporting advertisements, appearing as a seal of quality and web page. A good example of Nestle used umbrella brand marketing is Maggi, which its advertisement poster consumers first see Maggi as a brand but also can see Nestle as the responsible copyright brand at the bottom left-hand corner. The new flavor of Maggi brand products can easier to introduce to public with well-known brand of Nestle. The reputation of Nestle creates the credibility of customers to purchase the products while Nestle also can save costs to develop and maintain its brands ((Klopping, 2011).
Furthermore, Nestle also used marketing strategy by combining two advertisements to promote certain products. For instance, Maggi instant products and Thomy cooking oil or sauces are complemented each others in used. With combining two advertisements can save costs while if Nestle promoted its own brands separately will cause Nestle to spent more to promote in two different advertisements. Nestle used the strong advertisement marketing to create high brand awareness to itself and make it sell 2.5 billion products a year. This make Nestle achieve economies of scope by reducing of costs in advertising and increase the sales of its products to public (Klopping, 2011).
2.3 Learning Curve
2.3.1 The Boston Consulting Group (BCG)
The BCG Matrix is a business method created by Bruce Henderson for Boston Consulting Group in the late 1960s. This method based on the product life cycle theory that usually used to analyzing their business units or products lines.
This matrix also has significant contribution until today for strategic management used by companies by providing a composite picture of the strategic position of each separate business within a company. Therefore, the management can determine the strengths and the needs of all sectors of the firm. Under this matrix, it has two dimensions, which are market share and market growth. From the 2 dimensions, BCG charts can divide into four types of scenarios: Stars, Cash Cows, Question Marks, and Dogs. The products that categories into BCG Matrix figure can refer to Appendix Figure 1 (Birdi, Kapoor and Sood, n.d.).
The Stars is a market that having high market share with high growth. It is an optimum situation from all scenarios and leader in the business. However, this scenario requires an increased investment to maintain continuous growth because if the market growth decline as the market share maintain at same level will cause it fall to Cash Cows. Nestle beverages are the Stars in Nestle business because of high quality with new designs of products and make it become popular to customers. Most of the customers rather consume high quality product even more expensive due to they pay more consideration on health care nowadays. Through the number of repeat buyers is high in case of Nestle beverages, the rate of increase among the new buyers is also growing (Nestle BCG Matrix, 2010).
The Cash Cows is the situation where the market growth is low and market share is high. This scenario has generated high profit margins and a lot of cash flow but the growth is very slow. Therefore, it only requires low placement and promotion of investments. Baby food products are the Cash Cows under Nestle business because Nestle has quite a long hold in its market share with its sales increasing on a continuous basis. Nestle company has also to promote and to put it forward to become products as stars (Nestle BCG Matrix, 2010).
The Question Marks is the scenario that has high market growth but low shares. It has high demand to generate high growth but low returns due to low market share. The question mark business is more risky because it only have low share. However, it can become a star if it can increase the market share or deliver cash. If fail, the growth stops and will cause the business drop to Dogs. The breakfast cereals are the example product of Nestle under Question Marks. This product has high market growth but low market share, therefore, Nestle has to make decisions on whether which of the product should stay or phase out in market to remain competitive advantage and can successfully improved it (Nestle BCG Matrix, 2010).
The last scenario is Dogs, which the worst situation under BCG matrix due to the market share and growth is low. It has to avoid or eliminate because it only can generate little profit. Delivery cash or liquidate are the solutions to avoid present in this scenario. Pharmaceutical products are one of Nestle product that under Dogs because it only consist low share business with low growth market. The main reason is it never considered competitors by other pharmaceutical product manufacturers. Therefore, Nestle Company needs to think the solutions for improving on this product (Nestle BCG Matrix, 2010).
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