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55 a year, Peter Brabeck, the CEO of the world¶s largest food-maker, Nestle, had different plans. He was too bold to see his company¶s growth shoot up by 5%-6%, and that too excluding acquisitions. In a market scenario, where the demand in the food industry was shifting from convenience food to nutritious food, Nestle decided to focus on becoming a nutrition, health and wellness company. Nestle made nutrition into a full-fledged business division, on par with other food and beverage divisions. This case highlights how Nestle nourished its corporate culture towards innovation through R&D in health and nutrition, and developed strategic tools for consumer information and education, and marketing strategies. Acquiring the weight management company, Jenny Craig, was aimed at reinforcing Nestle in the nutrition segment. However, Nestle faced intense competition not only from other manufacturers such as Unilever, Kraft, Pepsi and Danone, but also from the growing popularity of private label brands of retailers like Wal-Mart, Carrefour and Tesco. Nestlé is one of the oldest of all multinational businesses. The company was founded in Switzerland in 1866, by Heinrich Nestlé, who established Nestlé to distribute "milk food," a type of infant food he had invented that was made from powdered milk, baked food and sugar. From its very early days, the company looked to other countries for growth opportunities, establishing its first foreign offices in London, in 1868. In 1905, the company merged with the Anglo-Swiss Condensed Milk, thereby broadening the company's product line to include both condensed milk and infant formulas. Forced by Switzerland's small size to look outside its borders for growth opportunities, Nestlé established condensed milk and infant food processing plants in the United States and Britain in the late 19th century and in Australia, South America, Africa and Asia, in the first three decades of the 20th century. In 1929, Nestlé moved into the chocolate business when it acquired a Swiss chocolate maker. This was following 1938, by the development of Nestlé's most revolutionary product, Nescafe, the world's first soluble drink. After World War II, Nestlé continued to expand into other areas of the food business, primarily through a series of acquisitions that included Maggie (1947), Cross & Blackwell (1960), Findus (1962), Libby's (1970), Stouffer's (1973), Carnation (1985), Rowntree (1988), and Perrier (1992). By the late 1990s, Nestlé had 500 factories in 76 countries and sold its products in a staggering 193 nations - almost every country in the world. In 1998, the company generated sales of close to SWF 72 billion ($51 billion), only 1 percent of which occurred in its home country. Similarly, only 3 percent of its 210,000 employees were located in Switzerland. Nestlé was the world's biggest maker of infant formula, powdered milk, chocolates, instant coffee, soups and mineral waters. It was number two in ice-cream, breakfast cereals and pet food. Roughly 38 percent of its food sales were made in Europe, 32 percent in the Americas, and 20 percent in Africa and Asia.
two-thirds of Nestlé's growth has come from acquisitions. for specially targetted development programs of two to three weeks' duration. Around 70 percent of the R&D budget is spent on development initiatives. The R&D function comprises 18 different groups that operate in 11 countries throughout the world. The company also has longer-term development projects that focus on developing new technological platforms. in concert with regional and local managers. the company relies on its "expatriate army. which was discussed earlier). as identified by the SBUs. and so on. such as non-animal protein sources or agricultural biotechnology products. the company's international training center in Switzerland. Nestlé also uses management development programs as a strategic tool for creating an esprit de corps among managers. The regional organizations assist in the overall strategy development process and are responsible for developing regional strategies (an example would be Nestlé's strategy in the Middle East. distribution. In recent years. Although Nestlé makes intensive use of local managers to knit its diverse worldwide operations together. however. including acquisitions and market entry strategy. so this is a critical function.Management Structure Nestlé is a decentralized organization. Nestlé instant noodle products were originally developed by the R&D group in response to the perceived needs of local operating companies through the Asian region. . these individuals often work in half-a-dozen natiosn during their careers. such as Europe. Another one focuses on confectionery and ice cream.100 employees dedicated to the function. Responsibility for operating decisions is pushed down to local units. which typically enjoy a high degree of autonomy with regard to decisions involving pricing. drive and willingness to live a quasi-nomadic lifestyle. at different stages in their careers. the company brings together. and to give them access to the company's top management. Nestlé spends approximately 1 percent of its annual sales revenue on R&D and has 3. Selected primarily on the basis of their ability. which is not surprising for a company that was established to commercialize innovative foodstuffs. At the same time. a strategic business unit focuses on coffee and beverages. For example. For example. The objective of these programs is to give the managers a better understanding of Nestlé's culture and strategy. managers from around the world. At Rive-Reine. North America and Asia." This consists of about 700 managers who spend the bulk of their careers on foreign assignments. Running in parallel to this structure is a regional organization that divides the world into five major geographical zones. get involved in local operating or strategic decisions on anything other than an exceptional basis. Neither the SBU nor regional managers. These initiatives focus on developing products and processes that fulfill market needs. marketing. the company is organized into seven worldwide strategic business units (SBUs) that have responsibility for highlevel strategic decisions and business development. These SBUs engage in overall strategy development. moving from one country to the next. The research and development operation has a special place within Nestlé. human resources.
and nutrition and the brain. Nestlé Nutrition Institute For more than 60 years. Switzerland. is an independent advisory panel composed of world-renowned nutrition scientists who review current and developing nutrition issues. At the NNC's annual International Nutrition Symposium. The NNC has examined issues such as diabetes. Read more about the Nestlé International Nutrition Symposium A Growth Strategy for the 21st Century Despite its undisputed success. and identify future research directions. the sixth Symposium explored the theme of Health Economics. In several countries. The Nestlé Nutrition Institute is the world¶s largest private publisher of nutritional information. with around 4000 medical delegates providing doctors. and its website provides access to an online medical and scientific library. The large Western European and North American markets were mature. The Nestlé Nutrition Institute site has more than 65 000 registered members who can access increasingly customized information through chat rooms. products and services to help their patients. cancer. In October 2009. newsletters and forums. This included the opening of the Abidjan Research & Development Centre in Côte d¶Ivoire in April 2009 and the CHF 25 million Chocolate Centre of Excellence in Broc. leading experts debate current issues in human health and physiology. we have also invested CHF 742 million in promising new Nutrition. Nestlé Nutrition has contributed to the continuing nutrition education of scientific and medical professionals.New developments Nestlé invested around CHF 2 billion in research and development last year. with selected scientists and key opinion leaders discussing the effects of existing health and nutrition policies and government programmes. that it faced significant challenges in maintaining its growth rate. population growth had stagnated and in some. and advise senior management on their impact on Nestlé¶s policies and strategy. Read more about the Nestlé Nutrition Institute Nestlé Nutrition Council The Nestlé Nutrition Council (NNC). Health and Wellness businesses. nurses and dieticians with relevant material. which has been in existence for over 30 years. The retail environment in many Western nations had become increasingly challenging and the balance of power was shifting away from the large- . online workshops and information on forthcoming events. childhood obesity. our most recent demonstrations of our commitment to R&D. We also continue to foster innovation partnerships with business partners and have 385 collaborations with universities. Through the Nestlé Growth Fund. there had been a small decline in food consumption. educational tools. Nestlé realized by the early 1990s. and has reviewed Nestlé policies on nutrient fortification and the reduction of public health sensitive ingredients.
such as mineral water. For example. The goal is to build a commanding market position in each of these niches. retailers found themselves in the unfamiliar position of playing off against each other . one response has been to look toward emerging markets in Eastern Europe. The company owns 8. cookies. and concentrate its marketing resources and managerial effort on a limited number of key niches. Particularly in Europe.manufacturers of branded foods. if current economic growth forecasts occur. and only 80 are registered in more than 10 countries.and build a substantial position by selling basic food items that appeal to the local population base. thus bargaining down prices. By pursuing such a strategy. introducing more upscale items. By narrowing its initial market focus to just a handful of strategic brands. this trend was enhanced by the successful introduction of private-label brands by several of Europe's leading supermarket chains. such as cereals. At Nestlé. and toward nationwide supermarket and discount chains. The results included increased price competition in several key segments of the food and beverage market. and prepared foodstuffs. there will be 700 million people in China and India that have income levels approaching those of Spain in the mid-1990s. but only 750 of them are registered in more than one country. but their economies are growing rapidly. Customization rather than globalization is the key to the company's strategy in emerging markets. Increasingly. Executing the Strategy .before competitors . and 70 percent of the markets for soups in Chile.scale manufacturers of branded foods and beverages. Many of these countries are still relatively poor. the company progressively moves out from these niches. Nestlé has taken as much as 85 percent of the market for instant coffee in Mexico. Nestlé claims it can simplify life. noodles and tofu. in the developing world it focuses on trying to optimize ingredients and processing technology to local conditions and then using a brand name that resonates locally. chocolate. 66 percent of the market for powdered milk in the Philippines. As income levels rise. by 2010. it is increasingly likely that consumers in these nations will start to substitute branded food products for basic foodstuffs.a combination of economic and population growth. such as infant formula. Asia and Latin America for growth possibilities. coffee and soft drinks. when coupled with the widespread adoption of marketoriented economic policies by the governments of many developing nations. condensed milk. While the company will use the same "global brands" in multiple developed markets. In general. reduce risk. The logic is simple and obvious . it uses local brands in many markets. makes for attractive business opportunities.500 brands. As income levels rise. creating a large market opportunity for companies such as Nestlé. the company¶s strategy had been to enter emerging markets early . Although the company is known worldwide for several key brands. such as Nescafe.
known as milk roads. Nestlé's strategy is similar to that undertaken by many European and American companies during the first waves of industrialization in those countries. by the Government of Heilongjiang province. 316 tons of powdered milk and infant formula were produced. . in China. Nestlé calculated that the long-term benefits would be substantial. Suddenly the farmers had an incentive to produce milk and many bought a second cow. Collectively. Nestlé's production took off. the company hired local singers to go to towns and villages offering a mix of entertainment and product demonstrations. In anticipation of this development. for example. Nestlé is pursuing a similar long-term bet in the Middle East. In 1990. Once the infrastructure was in place.often on bicycles or carts . After 13 years of talks. Based on this experience. Marketing also poses challenges in Nigeria. the Middle East accounts for only about 2 percent of Nestlé's worldwide sales and the individual markets are very small. Unlike the government. With little opportunity for typical Western-style advertising on television of billboards.to the centres where it was weighed and analysed. Companies often had to invest in infrastructure that we now take for granted to get production off the ground. Nestlé embarked on an ambitious plan to establish its own distribution network. called chilling centres. an area in which most multinational food companies have little presence. and the danger of violence forced the company to re-think its traditional distribution methods. Rather than make do with the local infrastructure. increasing the cow population in the district by 3.000 to 9. between 27 villages in the region and factory collection points. For safety reasons. the country. China provides another interesting example of local adaptation and long-term focus. Nestlé opened a plant to produce powdered milk and infant formula there in 1990. In Nigeria. Although at first glance this might seem to be a very costly solution. Once that happens. thereby realizing scale economies. Nestlé's factories in the Middle East should be able to sell throughout the region. an ability to adapt in often unforeseen ways to local conditions.000 tons and the company decided to triple capacity. Nestlé was formally invited into China in 1987. Nestlé's long-term strategy is based on the assumption that regional conflicts will subside and intra-regional trade will expand as trade barriers between countries in the region come down. as is its preference in most nations. aging trucks. However.Successful execution of the strategy for developing markets requires a degree of flexibility. Nestlé decided to build another two powdered milk factories in China and was aiming to generate sales of $700 million by 2000. Area managers then organized a delivery system that used dedicated vans to deliver the milk to Nestlé's factory. a crumbling road system. output exceeded 10. Farmers brought their milk .000 in 18 months. trucks carrying Nestlé goods are allowed to travel only during the day and frequently under-armed guard. By 1994. Nestlé paid the farmers promptly. and a long-term perspective that puts building a sustainable business before short-term profitability. but quickly realized that the local rail and road infrastructure was inadequate and inhibited the collection of milk and delivery of finished products. Instead of operating a central warehouse.
the market grew by 8 percent a year. Nestlé's local partner at the time. In the 1960s. Coca Cola. which failed to enter the market until the 1980s. Eight companies. income levels in Poland have started to rise and so has chocolate consumption. By leveraging its existing distribution channel. While Nestlé has built businesses from the ground up. for example. Nestlé's instant coffee brand was the dominant coffee product in Japan. competition in the market is intense. which has enabled the unit to gain share from several other chocolate makers in the country. and this has depressed prices and profit margins. Still. by purchasing Goplana. In contrast. was so incensed at Nestlé's refusal to enter the canned coffee market that it broke off its relationship with the company. soups and cereals in Saudi Arabia. it has earned a good rate of return in the region. the country's second largest chocolate manufacturer. The company. which is owned by PepsiCo.and carefully adjusted Goplana's product line to better match local opportunities. which it entered in 1994. The Syrian factory. Coca Cola captured a 40 percent share of the $4 billion a year. currently makes icecream in Dubai. in the hope that each will. are vying for market share. For years. Kirin Beer. rather than revolution. Even if trade barriers don't come down soon. Once a scarce item. in others it will purchase local companies if suitable candidates can be found. supply the entire region with different products. where a failure to adapt its coffee brand to local conditions meant the loss of a significant market opportunity to another Western company. even though the individual markets are small. throughout the 1990s. Nestlé has pursued a strategy of evolution. Like several other Western companies. such as the market leader. The company pursued such a strategy in Poland. a major local agricultural product.as it does in most of its operations around the world . Nestlé dismissed the product as just a coffee-flavoured drink rather than the real thing and declined to enter the market. It has kept the top management of the company staffed with locals . yogurt and bouillon in Egypt. To take advantage of this opportunity. Nestlé. including several foreign-owned enterprises. Wedel. has only a 4 percent share. Despite its successes in places such as China and parts of the Middle East. Syria also produces wheat. market for canned coffee in Japan. such as Nigeria and China. in many emerging markets. By using local inputs and focussing on local consumer needs. Nestlé has had its problems in Japan. despite the healthy volume growth. With the collapse of communism and the opening of the Polish market. not all of Nestlé's moves have worked out so well. relies on products that use tomatoes. cold canned coffee (which can be purchased from soda vending machines) started to gain a following in Japan. At the same time. chocolate in Turkey. Coca Cola entered the market with Georgia. it has pumped money into Goplana's marketing. Nestlé has indicated it will remain committed to the region. and ketchup and instant noodles in Syria. Nestlé can survive in these markets by using local materials and focusing on local demand. someday. a product developed specifically for this segment of the Japanese market. International Strategy .Nestlé has established a network of factories in five countries. For the present. which is the main ingredient in instant noodles.
Nestlé recognizes the profitability possibilities in these high-risk countries. and in time will look to export Indonesian food products to other countries. In Asia. Nestlé entered into an alliance with Coca Cola in ready-to-drink teas and coffees in order to benefit from Coca Cola¶s worldwide bottling system and expertise in prepared beverages. Indonesia¶s largest noodle producer. For example. Nestlé¶s strong cash flow and comfortable debt-equity ratio leave it with ample muscle for takeovers.Nestlé is a global organization. Recently. When operating in a developed market. Therefore. In the developing markets. Nestlé produces soy milk in Indonesia. but pledges not to take unnecessary risks for the sake of growth. Nestlé¶s competitive strategies are associated mainly with foreign direct investment in dairy and other food businesses. Nestlé¶s strategy has been to acquire local companies in order to form a group of autonomous regional managers who know more about the culture of the local markets than Americans or Europeans. Nestlé grows by manipulating ingredients or processing technology for local conditions. Nestlé acquired Indofood. . coffee creamers in Thailand. European and American food markets are seen by Nestlé to be flat and fiercely competitive. Knowing this. all for regional distribution. and employ the appropriate brand. candy in Malaysia. Nestlé aims to balance sales between low risk but low growth countries of the developed world and high risk and potentially high growth markets of Africa and Latin America. and cereal in the Philippines. Recently. This process of hedging keeps growth steady and shareholders happy. Another strategy that has been successful for Nestlé involves striking strategic partnerships with other large companies. soybean flour in Singapore. it is not surprising that international strategy is at the heart of their competitive focus. In the early 1990s. Their focus will be primarily on expanding sales in the Indonesian market. Nestlé strives to grow and gain economies of scale through foreign direct investment in big companies. in many European countries most chilled dairy products contain sometimes two to three times the fat content of American Nestlé products and are released under the Sveltesse brand name. Nestlé has employed a wide-area strategy for Asia that involves producing different products in each country to supply the region with a given product from one country. For example. Nestlé licensed the LC1 brand to Müller (a large German dairy producer) in Germany and Austria. Nestlé is setting is sights on new markets and new business for growth.
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