International Strategy

MIDTERM ESSAYS
Student’s name: Carlo Montoya

1. BLOCK 2. AAA Analysis: The Nestlé Case

Current situation and challenges
Starting business since 1866 in two separate Swiss businesses, Nestlé has been advocated the
consumer goods industry for more than 150 years. It is the largest company within this industry
in the market with more than $250 billion of market capitalization 1. It has over 2000 brand in its
portfolio and has a presence in more than 180 countries within the 5 continents. Given its size,
the point that concerns the most to its investors is the company growth, which has remained in
low single-digits levels instead of the range between 5-6% that was expected. To this, Mark
Schneider (Nestlé’s CEO) has proposed a 5-item strategy to be followed for the next three
years2, most of them regarding its portfolio management strategy.
Acquisition path
To achieve such an outstanding global reach, Nestlé has used an M&A strategy since the very
beginning of its operations. In 1905, due to the competition for the same market, the then known
Société Farine Lactée Henri Nestlé and the Anglo-Swiss Condensed Milk Company decided to
merge to become the Nestlé Group. The company until then focused mainly on condensed milk,
milk-based baby food, and chocolate.
Given the economic situation lived in Europe due to the World War I, Nestlé decides to acquire
facilities and operate in the USA and Australia markets, a strategy that paid off well leading the
company to more than double its production. Over the next years, due to new struggles with the
economic situation, the company is pressed to expand its product portfolio by acquiring more
companies, including then milk powder, chocolates, and milk supplements. Nescafe is then born
as a response to the Brazilian government solicitude to better use of its coffee surplus; this
eventually would resolve the economic situation for some years.
Having had before a centralized administration based in Switzerland, given the World War II
situation in Europe, the company decides to open headquarters in the USA and start importing
milk from there to other markets for its processing. This is the first hint to realize that Nestlé is
using an aggregation strategy shifting from a regional focus to a regional portfolio. Over the
next years, the number of M&As rapidly increases, incorporating the Fabrique de Produits
Maggi, Crosse & Blackwell (pickles, sauces, and condiments), Findus (frozen ready meals),
Heudebert-Gervais (ice-creams), just to mention a few. The main criteria have been always to
get the advantage of the market demand in new product categories. This is indeed the main
driver to the company’s current large portfolio, which is now presenting more challenges due to
the variability in the profits generated by each one.
Regional strategy and organizational structure
Nowadays Nestlé has over 400 factories distributed among its three macro-regions: AMS (the
Americas, 38%), EMENA (Europe, Middle-East and North Africa, 35%) and AOA (Asia,
Oceania and sub-Saharan Africa, 27%) all of them producing a variation of the company’s main
products (explained in next section). This is due as well to the fact that most of this factories
were not set up by Nestlé, but acquired from other companies in physical markets (locations) in
which the former wanted to enter.
1
URL: https://www.bloomberg.com/quote/NSRGY:US
2
URL: https://www.youtube.com/watch?v=jTfm3InKSPQ&index=1&list=PLonewKI5UChKuot-
6HTzVByrpG8PNHIza

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The product portfolio is distributed among the following categories:

% change
Product category % of total
vs 2016
Powdered and liquid beverages 22.7% +3.11%
PetCare 17.0% +3.27%
Milk production and Ice cream 15.0% -6.17%
Water 13.9% +0.55%
Prepared dishes and cooking aids 13.3% -1.57%
Confectionery 9.8% -1.45%
Nutrition and Health Science 8.3% +0.12%

In order to tackle the underperforming situation, the company bets on a better portfolio
management to increase the organic growth, which includes some disposals and new
acquisitions, as the sale of U.S. confectionery business to Ferrero in January 2016. Being asked
about the possible necessity to reunify administration back to Switzerland, Schneider stated his
confidence in the managing skills of his regional managers. Indeed, the strategy followed to
each one is adapted to the meet the new challenges that these markets present. As shown in the
last Investor Seminar in September 2017, the focus for each region has been as follows:
 AMS: Improvement of operations
 AOA: Digitalization of distribution channels
 EMENA: Category focus
However, it does not say that these units work independently, but instead, they try to align their
internal strategies to the Nutrition, Health and Wellness corporate strategy. The global
administration is meant to lead the company towards transversal challenges that will allow the
company to sustain growth: cost structure, investment allocation, portfolio optimization, and
procedures simplification. The regional units are then meant to detect specific challenges and
have the capacity to execute decisions that, overall, boosts its individual performance.
Even when their flagship products are distributed across the globe, neither their production nor
its distribution is centralized. This is more clearly portrayed in the following figure:

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Figure 1. Factories distribution in AMS.

Taking the AMS case, one can see that local production and imports coexist in almost all the
countries of the region, the later responding to local conditions. This strategy responds to the
fact that the company attributes its success to the trust built among its customers who
‘increasingly want to know where their foods and beverages come from’. This structure depicts
the company as regionally mandated, with certain locations supplying particular products in
order to achieve economies of specialization.
Adaptation and Arbitrage strategies
As has been described below, Nestlé has mainly focused to respond to local demands by
acquiring and merging with other companies that served these new markets. There are currently
no signs of a likely change in the company’s strategy towards a pure adaptation strategy.
However, one cannot deny the variation between countries due mainly to basic local
differentiations (language, package) rather than radical changes in the operations.

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Figure 2. From right to left: Nestlé milk in Spain (EMENA), Peru (AMS) and China (AOA)

There are no signs of Nestlé being benefited from arbitrage either. Local resources (e.g. raw
materials, human resources) benefit mainly local performance, except for those that are scarce
and need to be imported (Coffee, for example), but there are no hubs from which the company
takes advantage.

2. BLOCK 3. Amazon Inc.: An example of an aggregation strategy

Current situation and challenges
Founded in 1994 by Jeff Bezos, it started as an online bookseller as it was the most promising
business out of five options the founder had in mind. It proved him right shortly after. Two
years later, Amazon went public with a market capitalization at around $300 million 3. Ever
since its sales have boosted year after year with some exceptions due to market conditions (e.g.
the Dot-com bubble). Not only has it mastered the bookselling business across many countries
out of the US, but it has also expanded to other businesses as well. Rather than focusing on
maximizing outstanding profits (as one might think due to the company’s size), its main focus
has been on sales growth and expansion.
This company is deeply aware of the main risks it takes on its way to expansion. As stated in its
last annual report, these risks involve, among others:
 Increasing competition
 Increasing complexity on operations
 Constrained experience due to new ventures
 Difficulty on forecasting growth
Even when they all can be credited for becoming serious threats to the company, most of them
rely on assumptions to external factors. This gives the sense of the company having well tackled
those that are rooted in its decisions. The expansion itself could be considered one example, as
it minimizes the risk that the company faces with a single-market management.
‘Get big fast’ and category breadth/depth
Amazon’s strategy has been described as a ‘flywheel’, which initially is hard to push until
eventually it gains traction and starts turning on its own faster 4. Translated to Amazon
operations, it meant that initial customer gaining would be hard, but based on an excellence in
goods offered and service provided, a sale had the potential to bring more sales, which
represented profits. These profits would be reinvested in increasing the variety of books offered,

3
URL: https://www.benzinga.com/general/education/18/05/11704701/this-day-in-market-history-amazon-goes-
public-at-18-per-share
4
URL: https://www.inc.com/jeff-haden/the-1-principle-jeff-bezos-and-amazon-follow-to-fuel-incredible-growth.html

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that would at the same time bring more customers, creating a vicious circle from which the
company benefited.
After offering the possibility of third-party sellers to be part of the business (currently
accounting for 40% of its sales), the company decided that it would expand its focus to web
storage renting, maximizing the benefits from its physical assets. Amazon has also ventured
successfully in many other categories, from electronics, music to home supplies. Keeping still
all this offer distribution through the same channel (its website) shows how it is following an
aggregation strategy.
Aggregation strategy and the company’s structure
Amazon’s corporate management divides the business into three units: North America (59.7%),
International (30.5%) and AWS (9.8%). The second can be sub-divided in country units, but
even when each of them is being managed by a different partner and has its own website
domain, the global strategy has always been defined by the headquarters in Seattle, as is better-
explained lines below.
M&A has not been the only component of its strategy, which has also consisted of an organic
growth. Given the nature of the business, deployment of this strategy is pictured basically
though a set of warehouses (known as ‘Fulfillment centers’) for the picking, packaging, and
shipping of its products in main hubs (certain locations across the globe). Seeking to leverage
on its fixed costs and reduce its variable costs, the constant investment on expansion has led to
the company low profits these last years. The first component has served the company to
expand its categories, as Amazon does not produce any of the products it sells, except for the
Kindle e-reader.
Amazon has profoundly expanded its operations to these new markets, shifting from the initial
‘Regional focus’ (in the USA) to a more ‘Regional platforms’ strategy, having the website
support as a baseline for the business. Covering 18 geographic areas with 55 Availability
Zones5, this massive structure not only permits the company to deploy its market-targeted
websites, but it also shields the company from some risks related to malfunctioning of servers,
for example. So, it is not that these points work as independent hubs, but are taken more as
shared assets across regions.
Figure 3. AWS global infrastructure

The key to success

As mentioned by Brittain Ladd (former Amazon executive), one of the key success factors, and
actually a major reason to believe in the aggregation strategy, is the so-called ‘six-pager’. New

5
URL: https://aws.amazon.com/about-aws/global-infrastructure/?nc1=h_ls

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projects proposed by collaborators must be presented, using an established format, to managers

and should, at its best, briefly explain and convince them to venture on it.
However, the lonely support to new projects would not result to be a successful factor if they
had not the support of their investors too. Most of the analysts wonder how is it that Bezos gets
to convince them, and his team (at all levels), that the reinvestment of almost all of the
company’s profits will eventually turn to be a successful move, and that these ideas will turn
into profitable businesses benefiting the global portfolio. So far, nonetheless, it has proved to be
a good bet.

3. Bibliography
 Nestlé’s History. URL: https://www.Nestlé.com/about/history/Nestlé-company-history
 Nestlé’s 2017 Annual Review. URL:
https://www.Nestlé.com/asset-library/documents/library/documents/annual_reports/
2017-annual-review-en.pdf
 Nestlé. URL: https://en.wikipedia.org/wiki/Nestl%C3%A9
 Amazon. URL: https://en.wikipedia.org/wiki/Amazon_(company)
 Amazon Annual Report. URL: https://ir.aboutamazon.com/static-files/917130c5-e6bf-
4790-a7bc-cc43ac7fb30a
 List of mergers and acquisitions by Amazon. URL:
https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Amazon
 Amazon’s Retail Revolution Business Boomers BBC Full documentary 2014. URL:
https://www.youtube.com/watch?v=6UhrIEUjtwI
 Amazon Is Successful Because Of These Two Things. URL:
https://www.forbes.com/sites/brittainladd/2018/08/27/these-two-things-are-what-make-
amazon-amazon/#2efc1d035fd5