Analyse the strategic direction and changes that have recently taken or are

currently taking place in Nestle.

INTERNATIONAL BUSINESS STRATEGY ASSIGNMENT – NESTLE

INTRODUCTION.

With employees in excess of a quarter of a million people and over 500 factories

worldwide, Nestlé is the world’s largest food company. They are a truly international

organization and face the challenges that come with this in terms of controlling and

monitoring on the one hand and achieving full market potential on the other. Global

brand management involves “determining communalities and differences in the

business strategy, brand expression and marketing” (Van Gelder, 2003) and being

able to develop an international strategy that incorporates these.

Nestlé’s financial full year results for 2004 were positive. An increase in margin to an

all time high of 12.6% of sales, based on a turnover boosted by 2.9% real internal

growth and 4.5% organic growth, which although below company targets, is

significantly above the industry average (Nestlé.com 2005).

This produced a net profit of CHF 6.1 billion, up by 8.1% on the previous year and

prompting a proposal of an CHF 8 per share dividend and CHF one billion share

buyback programme (Nestlé.com). Debts have been reduced from CHF 14.4 billion in

2003 to CHF 10.2 billion and the operating cash flow is at CHF 10.4 billion

(O’Malley, 2005).

This strong performance was despite what were recognized as difficult trading

conditions, particularly in western Europe, typified by increased raw material costs

and adverse weather conditions. Brabeck-Letmathe, Nestlé’s chief executive officer

highlighted the contribution of Zone Americas, Zone Asia, Oceania and Africa and

Alcon’s (the ophthalmologic manufacturer) strong growth and profit performance as

being key to the previous year’s success (Nestlé.com).

Corporate strategy relates to how an organization plans its future business, its growth

and its relationships with its customers and suppliers.

This paper sets out to examine the international strategy of Nestlé and discuss the

views of several writers on its current success and future robustness.

Centralization

In 1986 Porter identified that multinational corporations faced two main strategic

challenges - configuration ( the location of value chain activities) and coordination

(the organizational structure and systems to support the configuration) (cited in

Faulkner et al p. 160, 2003). For many years Nestlé maintained a position described

by Faulkner et al as “dispersed configuration and low coordination” (Faulkner et al p.

160, 2003). Until recently, despite being a global organization, it operated through a

series of strategic business units based around geography and product. For example,

Europe was Zone 1 and had separate strategic business units for the ice cream product

area and the confectionary product area. This had seemed a logical approach when it

was introduced, as the company has a very diversified product range with specific

regional branding. For example, over 200 varieties of Nescafe coffee exist to cater for

variations in preference around the world (The Economist, 2004). Each strategic

business unit would have functional experts for all the main departments –

production, marketing, research etc. (Lynch, 2003) and, following the annual issuing

of general instructions from the company headquarters, each strategic business unit
would produce their long term plan for the following three years. The three year plans

would cover areas such as “brand positioning, market share and competitive activity,

pricing, capital proposals and new product development” (Lynch p. 649, 2003).

Brabeck-Letmathe’s view was that “the emotional link to local consumers is

extremely important in our business. That is why it remains a fragmented industry and

that is why we try to stay as close as possible to local customers” (cited in Hall,

2000). Conversely, Hall et al argue that it has produced a “strict hierarchy with only a

handful of global brands at the apex, a greater number of regional brands below it,

and a base of hundreds of local products of appeal in only one or two markets” (Hall

et al, 2000). It also meant, however, that the company was unable to react quickly to

changes in the market and produced repetition in some areas e.g. where several

strategic business units would have negotiated different contracts with one supplier.

One of the defining aspects of Nestlé’s organizational strategy in recent years has

been its move from a decentralized hierarchy to one of centralization, by means of

introducing an “additional layer of coordination and control” (Lynch p. 649, 2003) in

2000 with a view to it becoming fully operational within five years. This extra layer

speeds up the decision-making process, although the executive committee still has to

give final approval. To assist in the realization of the benefits of globalization such as

bargaining power and shared research and development activities, Nestlé introduced a

programme known as GLOBE in 2000. The objective of this was “to improve the

performance and operational efficiency of our business worldwide” (Cited in Lynch p.

650) and to “revisit(s) all aspects of our business practices to shape new ways to run

Nestlé” (cited in Lynch p. 650). The GLOBE programme is still being implemented

and is expected to cost US$ 1.9 billion. It has been reported that the resulting

production-costs reduction has been a major reason behind its strong performance for
2004 (Financial Times, 2005). Launched in co-operation with the leading German

software developer, SAP, one of its major features is the integration of the

organization’s regional information technology systems. The conscious decision to

maintain focus on “people and brands” (The Economist p. 64, 2004), rather than

information technology and to continue along the decentralized path, had been seen as

“sacred cows” (The Economist p. 64, 2004) for Brabeck-Letmathe, but the realization

that the company was becoming uncompetitive led the chief financial officer to state

that “management had either to come up with a new model or split the company”

(cited in The Economist, p. 64, 2004). The degree of decentralization can be seen by

examining its information technology structure which shows that the company had

totally different versions of software for planning , accounting and inventory

management for each of its main zones – Zone Europe, Zone Americas and Zone

Asia, Oceania and Africa. They had also failed to consolidate the systems they had

inherited through acquisitions leading to the situation described in The Economist as

one in which “a bag of sugar used to be identified by three different codes within

Nestlé” (The Economist p. 64, 2004). The strategy is already showing some success,

notably at Nestlé’s headquarters in the USA where centrally-controlled raw material

sourcing has reduced the different number of prices paid for vanilla from 20 to one

(The Economist, 2004). Cost savings are also being made in the administration side

through the FitNes programme and Target 2004 made substantial savings in

manufacturing activities (The Economist, 2004). The centralization of the information

technology systems is also being introduced in Asia and Oceania, although the

African market is maintaining its decentralized nature as “these markets function very

differently because of the political realities of the region” (cited in The Economist p.

64, 2004). However, the change in strategic direction has not been welcomed by all
and there have been incidents reported whereby “some senior managers had to be sent

elsewhere in the world (and) others quit” (The Economist p. 64, 2004). Lynch

identifies that “whilst these changes are taking place, the emphasis is still on the

informality of controls” (Lynch, 2003). Hall et al question the benefits of using this

approach across the whole product range. They agree that it provides measurable cost

reductions, but feel that it is a key to Nestlé’s success over its competitors that it had

avoided following them in the process of centralization across brands which are

highly localized in nature. They do, however, feel it is a good strategy for areas such

as pet foods, where the products are standardized across national borders (Hall, 2000).

The Economist believes this approach will also benefit the business in terms of

avoiding what it terms as “reputational risks” (The Economist p. 64, 2004). This

subject is covered in more detail at another point.

Faulkner et al discuss the dichotic nature of the centralization or decentralization

debate, pointing out that decentralization is more about achieving cooperation

between same functional departments across the business rather than amalgamating

them into one (Faulkner et al, 2003). They go on to say that “International strategy

choices by an MNC (multinational corporations) are complex and involve the search

for competitive advantage from global configuration/coordination choices throughout

the entire value chain of the firm” (Faulkner et al p. 160, 2003).

Part of the culture of Nestlé is the encouragement of “direct informal contact” (Lynch

p. 650, 2003). The emphasis for success is seen as “peer pressures, success and

personal promotion” (Lynch p. 650, 2003), rather than “formal reporting against

strategic objectives” (Lynch p. 650, 2003). Lynch sees this as one of the main reasons

for the stability of the management team and encourages its continuation.
Acquisitions and joint ventures

With the increase in competition, Nestlé has had to both acquire other companies and

be prepared to enter into joint ventures. This is not a new strategic direction as, in

1989, they entered into a joint venture with General Mills in a successful attempt to

oust Kellogg from its number one position in the breakfast cereal market. By 1993,

they had alliances with Coca Cola and two Chinese companies (Mead, 2003). They

have continued this strategy with the acquisition of the Powwow Group in 2003. In

the future, Nestlé plans to increase its share in L’Oreal of which it currently holds

48% of the controlling company. Brabeck-Letmathe makes no secret of the fact that

that he would like to see “ a future in which the two groups, global leaders in each of

their industries, were under one roof” (cited in Hall et al, 2000). Strategic investments

such as these have proved to be very successful and are an area that Nestlé intends to

take advantage of where the opportunities are available. Recently they have identified

the role they could play with a non-food, top, fast-moving consumer goods company

– Colgate-Palmolive – and are providing their expertise to develop a nutraceuticals

range (oral care confectionary products) which allows the company to “spread risk,

speed up development and share expertise” (Datamonitor, 2003). Another example is

the decision to increase their share of the ice cream market with the buyout of both

Haagen Dazs and Scholler. The purchase of Dreyer’s Grand Ice Cream would enable

them to take on Unilever who have the largest share of the market. The ice cream

market is a difficult one to penetrate, requiring “efficient production, distribution and

sales facilities” (Hall, 2000), something that would not be possible with a highly

decentralized organizational structure.

On a more diverse scale, it has been reported that Nestlé was working in collaboration

with the Sainsbury's supermarket chain to jointly facilitate the supply of raw material,
labels and packaging of promotional products (Poirier, 2003). Prior or acquired

resources are seen as those that are built on an organization’s existing strength rather

than diversifying into completely new sectors. Any expertise or reputation built over

the company’s development can become a foundation, using what is referred to as

“path dependency” (Lynch, 2003). Nestlé have generally followed this path. Concerns

have been raised, though, regarding the increasing government bureaucracy involved

in navigating large-scale acquisitions and The Economist cites the America’s Federal

Trade Commission’s hesitancy in passing Nestlé’s takeover of Ralston Purina (The

Economist, 2004).

Corporate Social Responsibility

However, Nestlé do face a number of obstacles if they are to maintain or even grow

their current market share, and many of these require strategic solutions. Not the least

of these is the area of corporate social responsibility (CSR). The main thrust of CSR

thinking is that, within the capitalist economy, the only beneficiaries of an

organization’s achievements are its shareholders, and that companies should accept

the responsibility of considering the well-being of society as a whole (Author

unknown, January 22nd 2005). It could be countered that this area is not universally

accepted as a necessary consideration when an organization decides on its strategy.

Lynch highlights the fact that failure to make a specific statement on ethical issues,

does not mean that a company is not fundamentally ethical in the way that it does its

business (Lynch, 2003). Nestlé has suffered what could be deemed as more than their

fair share of bad publicity around CSR issues and is taking specific action to improve

their reputation including introducing The Nestlé Social Research Programme,

becoming a member of CSR Europe, and heavily supporting the International

Federation of Red Cross and Red Crescent Societies’ community health programme,

which focuses on stopping the spread of HIV/Aids in Africa. They now also attach

their Nestlé Sustainability Review to the annual management report. Faulkner et al

refer to this as an attempt to “build company-wide awareness of stakeholder issues,

and to institutionalize humanistic policies and practices around supply chain and

market channel issues respectively” (Faulkner et al p. 82, 2003). Nevertheless, Nestlé

have recently begun to face another challenge which could be called a CSR related

threat - that of childhood obesity, although, as will be demonstrated, their strategy is

more of treating it as an opportunity for product diversification.

Innovation and renovation

Lynch identifies four areas of innovation – “rewriting the rules of the game,

technological innovation, higher levels of service and co-operation (Lynch p. 137,

2003).

Nestlé have a strong strategy in regard to product innovation and renovation based

predominantly around rewriting the rules. This would seem to have been done in a

prescriptive nature, decided on before development, rather than the chaos-controlled

approach which would not seem to sit with Nestlé’s culture. They have recently

expanded their flavoured water market segment through the introduction of new

flavours for products such as Vittel and Perrier and its plans to introduce the Vitalitos

range of flavoured water aimed specifically at the children’s market in Europe

(Nestlé.com). The American market will also see the introduction of the calorie-free

Nestlé Pure Life. They are linking this with a price repositioning strategy which they

believe will help them achieve their move into the value-brand market and reinforce

its market leader position for the Nestlé waters division.

Within their UK food range, Nestlé are planning to introduce clearer labelling on

many of their products as a response to what the CEO of Nestlé UK, Alistair Sykes,

identified as “consumers care about their health and …want clearer, easy to

understand information on associated product benefits” (cited in Just-Food, 2005).

Sykes went on to say that “our long-term focus is on improving the nutritional

qualities of our existing products and launching new, great tasting, healthier products

that people can easily integrate into their diet” (cited in Just-Food, 2005). The

renovation strategy can be seen in its programme of salt, sugar and fat reduction

across its products including the removal of trans-fatty acids from sweets and cereals

(Just-Food, 2005). This is in line with the strategy of Brabeck-Letmathe who said that

“an important goal is to transform Nestlé from a foods company to a food, nutrition,

health and wellness company” (cited in The Economist p. 65, 2004). However, the

accusations of profiteering at the expense of their customers continues, with questions

being asked about the validity of their “Refuel:Pods” vending machines which have

been placed in schools. The analysis of the contents of the products on offer showed

high levels of salt and sugar with only seven of the 46 products being described as

healthy (Foodcomm, 2004). Interestingly, the channel for more healthy foods in North

America is seen as being through the pet-food sector (Nestlé.com).

Increased geographical penetration

As well as new product markets, Nestlé remain keen to realize potential new

geographical markets. In 1997, only 1.5% of their turnover came from China and

India, which account for 40% of the world’s population (Maucher cited in Josephs,

date unknown). The Economist suggests that Iran and Iraq are being targeted with

Nestlé’s only considerations being “the country being a market economy, the size of
the population, the ability to take majority ownership of the business, the state of

technology and whether the firm is welcome” (The Economist p. 65, 2004). Recent

new market successes have been seen in China which experienced organic growth of

11.5%, the Philippines (16.4%) and the Middle East (10.4%) (Nestlé.com). Japan,

however, was a disappointment as Nestlé was unable to see-off the opposition in the

instant coffee market and the brand experienced negative growth of 3.9%

(Nestlé.com).

Reliance on discounters

Nestlé’s current sales success, particularly in its food sector in Europe, has been at the

expense of increasing profits as they, along with their main rivals such as Proctor and

Gamble, have had to rely on the discounters market (Financial Times, 2005). It could

be questioned as to whether this is a sensible strategy for going forward. Nestlé seem

to feel that it is by stating in their full year report that they have “enjoyed a successful

year with hard discounters, with sales up 10%” in Europe (Nestlé full year results,

2005).

Product range

Nestlé continue to face the dilemma of whether to focus on a reduced range of

products and services, or to continue to branch out. Kinni et al discuss this specific

issue and suggest that as Nestlé is unlikely to challenge the market leaders such as

Glaxo Wellcome, in the pharmaceutical market, they should change their strategy and

divest themselves of their interests in Alcon and L’Oreal, whilst continuing to develop

their already diverse range of food brands. They see the difference as being Nestlé’s

position as “middlemen” in dealings with their main customers, the supermarkets,

placing them in an ideal situation to increase their market share. Organizations that

reply on a small number of similar products, such as Coca Cola, find it difficult to

penetrate other markets as they have a direct relationship with their customers. Kinni

et al go on to say that the best strategy would be to increase this influence by

increasing their brands and comment that they feel Nestlé are doing this by

“converting its large number of local and regional brands into … truly global brands”

(Kinni et al p. 396, 2000).

Conclusion

Brabeck-Letmathe is quoted as saying that the 2004 figures have “shown that it (the

Group) can deliver strong growth and better profitability even under challenging

circumstances” (cited in O’Malley, 2005) and he believes this will continue to grow.

Whilst some writers feel that Nestlé’s international strategy can be described as “an

ambitious spending spree and …going into exotic markets” (The Economist, 2004),

they do not deny that the company is now outperforming its main rivals. One broker

has calculated that “Nestlé shares have outperformed the S&P 100 by a factor of more

than three” (cited in The Economist, 2004). However, new rivals continue to appear

on the horizon and Nestlé would be wise to take note of companies such as Danone,

whose aggressive marketing strategy, particularly in the area of health-promoting

dairy products, has allowed them to outperform Nestlé in some sectors. Nestlé’s

history is one of continual re-evaluation of strategy, involving acquisitions and sell-

off, expansion and closure of production facilities and restructuring of the

organizational hierarchy. The overall strategic direction of Nestlé during the early part

of the 21st century – centralization, overhead reduction, innovation and renovation

and movement into new markets - seems to be a successful one.

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