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GLOBAL INFORMATION

SYSTEMS TO SUPPORT NESTLE'S GLOBAL BUSINESS STRATEGY


wide. Rather, they buy or develop products that fit well in the local market and culture. The proof oftheir commitmsntto this type of strategy can be seen in several startling statistics. Nestle owns about 8000 different brands worldwide, but of these, about 7250 (over 90 percent) are registered in only one country, and only 80 (one percent) are registered in ten or more countries. Second, Nestle is committed to reliance upon local and regional staff to manage its interests. Thus, many national and regional managers in the Nestle organization-at present about lOO-spend their whole careers in their own country and region. Their career paths never require them to do a stint in the home office or in a more "advanced" country to gain experience, as is the custom for so many managers in most American and European firms. Even the exception sometimes proves the case. Austrian-born Alfred Senhauser has risen to become the general manager of Nestle Thailand. However, he has spent 30 years working for Nestle in Thailand and has become a naturalized Thai citizen. He even changed his name to Att Senasarn. The third principle in the strateqv of localization is Nestle's patience and long-term perspective as it builds its presence in a specific national market. For example, in talks with Chinese officials, management persevered for 13 years before they were invited in to actually do business. The fourth principle is Nestle's willingness to evaluate market possibilities on a regional basis. For example, the company looks at Thailand, Vietnam, Laos, Cambodia, and the neighboring Chinese province of Yunnan as a single geographic and cultural region. Since the population of this region is as large as Europe, Nestle is moving geographically and fast. Fifth, Nestle is committed to developing products from the

Can multinational corporation's infora mation systems strategy be designed to supportits global business strategy? In thecase of good and pharmaceutical giantNestle, we will first examine its businessstrategy for the food side of its husiness,and then we will describe its information systems approach in order thatyou may evaluate how well its information systems actually support its globalbusiness strategy. Nestle SA, headquartered in Vesey, Switzerland, is a $43 billion (1993)food and pharmaceutical companythat operates virtually all over the world. The corporation has close to 300 operating companies and includes 80 information technology units to service its approximately 200,000 employees worldwide. This large diverse company even has three official languagesEnglish, French, and Spanish. In the food area, while it is best known for its coffee, chocolate, and milk products, it actually is the manufacturer and/or purveyor of thousands of products virtually all over the world. It has been an enormously successful company, increasing sales in 1993 by 5.5 percent, resulting in a 7 percent increase in earnings, reaching $2.2 billion in 1993. In recent years Nestle's global busirless strategy has changed in response to changillg market conditions in Europe and the United States. These two giant markets have long accounted for a majority of Nestle's sales and profits, and they continue to do so. Nonetheless, they are mature markets, and as is often the case in such markets, Nestle management is watching their profit margins sink as fierce competition cuts into either Nestle's market share or its profit margin (lowered profits in order to maintain market share). For example, in the United States in the first three years of the 1990s manage-

ment watched their coffee business lose a total of $100 million due to fierce price competition from Folgers Coffee (a Procter & Gamble brand). They have had to restructure their coffee operations in the United States and close down four of their seven plants. This is a general trend in the mature markets, causing Salomon Brothersfinancial analyst Les Pugh to comment that "The days ofthe 15 percent operating margin for the U.S. food industry are dead and buried." In Europe Nestle's operating margin has fallen to 10.7 percent, below such major competitors as Kellogg, Heinz, and Hershey. The question facing Nestle management was what business strategy should they follow to compensate for the lower profit margins in the very countries where their major sales and profits have traditionally occurred? In the socalled mature markets, undaunted-or perhaps actually spurred on-by the increasingly tough competition, Nestle management has continued to move ahead with their strategy of acquisitions. In recent years, for example, they have acquired Carnation, Stoufter's. Perrier, Hills Brothers, and Buitoni. Their goal in continued expansion has been to improve their margin of profit through economies of scale. Nonetheless, their major strategy to counteract reduced profits and other market problems in Europe and the United States has been to emphasize accelerating the growth of both sales and profit in the less developed countries. Nestle has long and vigorously pursued a globalization policy. Behind that policy is its strong commitment to a strataqv of localization and regionalization. This localization and regionalization strategy involves at least five principles. First, Nestle leadership does not believe in trying to sell the same product world-

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less developed countries made from ingredients native to those countries, thereby supporting the local economies while keeping costs low. Has Nestle's globalization strategy been successful? By the end of 1993 at least 25 percent of its sales was coming from East and Southeast Asia and Latin America. That 25 percent totals to more than all of General Mills' worldwide sales in the same year. Watinee Khutrakul, a director of Deemar Survey Research in Thailand and the person considered to be the leading market tracker in Asia, says, "As long as big competitors remain tentative about this part of the world, Nestle can sweep up the market in any product category it chooses." To better understand and appreciate how Nestle executes its policies, we need to look at some examples ofthis globalization strategy in practice Nestle is a market leader worldwide in coffee sales. However, coffee is overwhelmingly sold as a hot beverage, which presents special marketing problems in steamy, tropical Thailand. In 1987, Nestle's Nescate coffee sales in Thailand were climbing at a rate of between 7 and 10 percent annually, a solid growth in such a sultry country after being on the market for only 10 years. Nonetheless, the Thai economy was expanding at an extremely rapid rate, and local Nestle management felt they could do better. While coffee has traditionally been advertised on the basis of its aroma and its stimulation power, Senasarn and his staff decided to shift this advertising emphasis. They mapped an advertising campaign they thought would better fit the local culture and climate, selling Nescate as a way to relax from the tensions of the office, from the noisy city traffic and even from romance. Rudolf Tschan, Nestle zone manager for Asia, viewed the first TV ad and angrily rejected the whole approach, but he did not have the authority to overrule the local team's decision-and they remained committed to their new marketing approach They then strayed even further from the traditional coffee marketing when they began to produce and market a cold coffee-based product called Nescale -----------.--_ 748
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Shake. They even designed special plastic containers in which to mix the drink. They then invented a dance, which they called the Shake, to help sell the product. Senasarn even decided to run an annual "talent" contest for "the Shake girl." The result of all this localization? By 1993, the Shake girl contest had become as big as the Miss Thailand event, and Nestle coffee sales have jumped to $100 million, four times its 1987 level. As Khutrakul explained it, Nestle "made coffee into a Thai drink." Nestle's successful entrance into China is <In example of the Nestle management tenacity and their willingness to invest for the long run. It is also another example of their localization policies. While they began talks with China in 1973. It was not until 1987 that they were given their first business opportunity there. The government of Heilongjiang Province (in northeastern China, formerly known as Manchurial asked Nestle to help them boost their powdered milk production. Heilongjiang had neither adequate milk supplies, nor a dependable transportation infrastructure, nor factories to produce the powdered milk. Intent upon success in China, Nestle viewed this as an opportunity and moved ahead vigorously. In 1990 Nestle opened a powdered milk and a baby cereal plant in China. In order to get the milk management needed to their factories, they decided to establish their own, more dependable milk collection network. They established "milk roads" from 27 villages In the region to their collection points (known as chilling centersl where the milk was weighed and analyzed. The farmers used traditional Chinese methods to take their milk down the gravel milk roads-wheelbarrows, bicycles, and feet. As an incentive to increasing production, Nestle decided to pay the farmers promptly for their milk. Within 18 months the number of milk cows in the district climbed from 6000 to 9000. To further aid the farmers, Nestle decided to hire retired government workers and teachers as farm agents, bringing in Swiss experts to train them in animal health and hygiene. These new farm agents were given a commission based on sales to add further incentives for in-

creasing the quantity and quality of ' milk. ., This approach is beginning to'pi off financially for Nestle. Whereas tht powdered milk factory produced on: 316 tons of powdered milk and infan~ formula its first yea r, it turned out 10,000 tons in 1994/ an increase of over 3000' percent in four years, and Nestle j': tripling the capacity of the factory an initiating construction of other factQ!' ries. It has the exclusive right to sell' i products throughout China for 15yearJ~ To improve their sales capacity, the,; area managers have established a van" delivery system exclusively for Nestle';,. products. According to David Sheridan,t of James Cappel in London, NesthL; sales were about $200 million in 1994) and had become profitable, He expects: sales to reach $700 million by the end of ,; the decade, and he thinks Nestle will be all alone in this field. "I haven't found another company willing to pour resources into China like this. The big payoff is still to come, but you can bet it will be solid and ionq-lastinq." he says. In Malaysia, Nestle faced a very different kind of problem, Malaysia ex- .~ ports large quantities of cocoa beans, but Malay beans are of lower quality , than many others due to their being less rich in flavor. Nestle wanted to start selling chocolate bars in Malaysia, but the national market was not large enoughto justify a Malaysian chocolate candy bar plant using higher-quality imported cocoa beans. The solution came from Johnny Santos, the Filipino head of Nestle Singapore. He suggested developing a lower-quality but lower-priced candy bar in Malaysia and exporting it to the Asean countries-Malaysia, Singapore, the Philippines, Indonesia, and Thailand. Asea is a trade group, and the high tariffs of its member countries are significantly reduced if the item is produced within one of its member nations. Nestle decided to develop new versions of two popular Nestle chocolate candy brands, KitKat and Smarties (an M&Ms competitor). Manaqement worked with farmers to increase cocoa bean quality while also developing new formulas for the two candies. The candy, while being less tasty than the
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_._.19 Managing International Information Systems

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imported competition, sells for a 30 percent lower price, while still giving Nestle a 20 percent profit margin. Now,. according to Low Ming Siong, a directoryof Kuala Lurnpur's Crosby Research office, because of its lower price, "KitKat is one of the fastest-growing products in Malaysia in its category." Even in some of the less developed Asian countries, Nestle is beginning to seesome of the market maturation that hastaken place in Europe and the United States,and Nestle's response is an indication of its flexibility in working with local conditions. American-style supermarkets are appearing in large numbers in Taiwan, Malaysia, and Thailand. In Taiwan,for example, the sales of one supermarket chain, Makro, reached about $1 billion in 1994. In Thailand supermarkets accounted for 8 percent of Nestle's urban business five years ago; today [1994) it's 45 percent ofthe business. The problem for Nestle is that supermarkets mean a serious reduction in profit margin. Nestle Thailand's response? It overhauled its sales team. It nicknamed the new team the "Red Hot Sales Force," staffed it with college graduates who were fluent in English, and gave the team members a great deal of training in increasing supermarket product sales and in techniques in building partnerships with supermarket managers. What about Nestle's information systems infrastructure? With 80 different information technology units, its information technology infrastructure has been described as a virtual "Tower of Babel," with all types of hardware and software being used, including equipment from IBM, Hewlett-Packard, and Digital Equipment Corporation (DEC) running both proprietary and open systems. Some ofthese systems are redundant. There has been no way for developers to communicate with each other. Every time Nestle makes another acquisition, this condition is only made worse. Therefore, Nestle has embarked upon a program to standardize and coordinate its information systems. The word standardize does not mean that everyone will do everything the same way. Rather, to Nestle IS, standardization has several goals: First, standard-

ization should promote communication between various units of the company, if for no other reason than that Vesey management needs to be able to communicate with its many units and to monitor and control their activities. Second, Nestle's annual technology budget is more than 500 million Swiss francs or about $340 million, and Manfred Kruger, assistant vice president of management services in Vesey, believes that IT standards will prove to be cost effective by eliminating redundancies and building more effective systems. The company has decided to move to a client/server environment internationally, and to that effect has already established some standards, including UNIX; Oracle RDBMS; R/3 integrated material, distribution, and accounting applications from SAP (see the case at the end of Chapter 12); Powersoft's Powerbuilder application development tools; and Ernst & Young's Navigator for development methodology and CASE tools. However, the work of standardization has barely begun. Nestle still needs to establish standards in many other areas. According to Jean-Claude Dispaux, Nestle senior vice president and Kruger's boss, headquarters does have the power to enforce any standards they institute for all units of this global giant. All Nestle really needs to do is block the IT budget of the noncomplying unit until it accepts the standards. However, this is rarely done. Nestle prefers to push responsibility out to the countries. What Kruger does instead is to recommend standards. This approach reflects Kruger's personal philosophy that "nothing works if you don't get key playersto agree." In addition, Kruger's experience has shown him that the staff in Vesey, Switzerland, is just too far away from most of the Nestle locations to understand their problems. Previously, for example, when his organization had standardized on a specific microcomputer vendor, he heard a large outcry from the operating units. Ultimately his organization listened and replaced the recommended vendor with a list of recommended PCs from which the local units could select.

The heart of Kruger's technology strategy is "a culture of working together" that reflects his belief that key players must agree. To develop a core application (whether in Vesey or elsewhere), IS gathers together a team representing a number of different organizations and the appropriate hardware and software technologies. The team will work to reach consensus on application requirements and development strategies. Once the application has been developed, it is sent to field organizations for adaptation. After modification to meet local needs, the appropriate version is deployed in various countries. For example, when corporate IS wanted to develop a life cycle for corporate microcomputer development, Nestle brought in 20 developers from eight countries. The result was a set of standards that have blended smoothly into different Nestle units.
Sources: Joshua Greenbaum, "Nestle's Global Mix," InformationWeek, April 25, 1994, and "Nestle Makes the Very Be t...Standard?" InformationWeek, August 23,1993; and Carla Rappaport, " esrle's Brand Building Machine," rortune, September 19, 1994.

Case Study Questions


1. What kind of global business strategy is estle pursuing? 2. Do you think Nestle's information systems strategy supports its global business strategy? How is it supportive? In what ways is it not supportive? What changes would you make to this strategy? 3. Do you think Kruger's approach to establishing and enforcing standards fits in well with Nestle's global business strategy? Explain. 4. What management you envision for proach? problems do Kruger's ap-

5. How do you think Nestle should determine which new systems must conform to corporate information systems standards, and which ones need not conform?

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