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Nestlé: Sustaining Growth in Mature Markets Essay

Nestlé was first founded by Henri Nestle in the 1860s by developing and producing food products for babies who could not adapt mother’s milk. Following the success in baby food products, Henri incorporated with an Anglo-Swiss condensed milk company to develop dairy products, especially for government supply in World War I. High sensitive and quick responding to the demand of consumer, Nestle continued to create and develop new product mix to canned food, beverage, pet care products, to maximize its scope of business in the food segment. Nestle had been incurring high success during its operation in food industry, proved by production many creative product portfolio, double sales and tripled profits, globally brand recognition, offices and factories around the world with the management of previous CEO Helmut Maucher. Maucher successfully promoted Nestle to higher position in the market as a global company and has been operating beyond its original Europe boundary. Nestle is presently one of the largest food company in the world. Nestle has been called the most conglomerate companies ever, with more than 400 plants in 77 countries and growing.

Nestle is Switzerland’s largest industrial company and the world’s leading food processor. The food giant ranks as one of the 100 largest companies in the world. Nestlé’s primary products include beverages such as (coffee, chocolate drinks, mineral water, and soft drinks), dairy products, infant formula, culinary products (soups, seasoning, condiments), frozen foods and ice cream, yogurt and chilled desserts, and chocolate. Nestle seems not still happy with what it had obtained. Under leadership of current CEO Peter Brabeck, Nestle is now experiencing a more significant growth and synergies as the top nutrition and Food Company with the strategic management of Brabeck since he took over Nestle in 1997. CEO Brabeck realized the need of Nestle and his first priority was to achieve real internal growth. Strategies were employed to achieve this organic growth and now Nestle is posting CHF $91 billion in sales and CHF $8 billion in profits.

Brabeck’s will hand over the company in 2008 and his successor will be facing the task of maintaining the successful momentum. This uncertainty about the future of the company is left to be seen and is the driving factor to the question: Can Nestle sustain its industrial growth in Mature Markets under the new CEO Paul Bulcke or would the growing competitive pressure shrink its overall growth. To answer this question, an in-depth analysis must be undertaken to understand the external environment that Nestle is operating in by looking at the General, Industry, and Competitor environment and also a microscopic look into Nestle internal environment. The general environment of Nestle looks at the demographic trend. Nestle international operations are in 77 countries with over 400 plus plants and their products are sold on all six continents. The world population is increasing on a daily basis and the geographic distribution of populations is shifting.

The world population is also aging quickly and the ethnic mixes in developed countries are changing rapidly. The average household incomes are increasing and Nestle could take advantage of these trends. The demographic environment presents both opportunities and threats for Nestle. The increases in population size and household incomes would help to expand the market in which Nestle operates. However, changes in the geographic distribution of populations, due to technological advances in communications, may cause difficulties for nestle in determining profitable locations for new plants. The economic trend shows that the average market growth of a mature global food industry is 2 percent. Nestle first achieve a four percent internal growth target in 2000 and consistently repeated performance in subsequent years.

This growth might be contributed by the economic global trend. The U.S economy decline into recession in 2001 and in order to stimulate the economy, interest rates in United States were cut to near record lows. Many nations around the world are affected by the U.S economy and Nestle Global companies are no exceptions. The economic trend showed in 2005 that there was significant economic growth due to very low interest rates in the United States, resulting in substantial growth in global trade. This growth was slow down by high oil prices. The economic environment presents both threats and opportunities for Nestle. The growth in global trade presents opportunities for Nestle in innovation and renovation of new and old products to offer to its customers. However, the increase in oil prices would cause an increase in the cost of transportation for goods destined for Nestle plants which would threaten Nestle profitability. Operating in all six continents in over 77 countries, the political/legal environment presents a threat for Nestle.

The differences in the political/legal environment across regions would make it difficult, and sometimes costly, for Nestle to comply with government regulations. Political risk in some countries remains comparatively high as does the threat of lawsuits from competitors, distributors, and consumers. The socio culture presents opportunities for Nestle. Nestle is often referred to as a role model company that thinks globally but acts locally (p. N 261). Creating a unit that is concerned with adapting global products to local taste and requirements. Nestle would take advantage of the consumer by proving what the consumer wants in that culture. Whether it would be the color, shape, form or taste of the product, Nestle would adapt to those local culture. The technological environment presents opportunities and threats for Nestle. When GLOBE has been introduce in the most relevant markets, all inter-market systems will communicate much better with each other than they do now (p. N 263).

Improvements in technology will allow Nestle to perform better analysis of data related to existing and future customer bases. The improvements will also allow Nestlé to continue to improve its supply chain, which is vital in enabling Nestlé to offer better prices to its customers. These technological improvements, however, may also be readily available to competitors. Competitors can easily mimic Nestlé’s processes through advances in technology. The global environment presents opportunities for Nestlé. The company enjoys being in the leading position in the global food industry. The rapid globalization of business markets presents opportunities to Nestlé as countries relax regulations that hinder trade and foreign entry into domestic markets. The increased importance of environmentally friendly business operations may also increase costs of operation.

However, Nestlé has established itself as an environmental leader; and the result is shown by the increased in sales and profitability. An industry is a group of firms producing products that are close in substitutes (Hitt, Ireland & Hoskisson, 2009). In reference to Nestlé, an analysis of threats to new entrants, the bargaining powers of the suppliers and buyers, the threat to substitute products and rivalry amongst competing firms would be carefully examined. Nestlé is the oldest and most truly global companies in the food industry (p. N 261). Nestlé boast over 130 years of industry knowledge in all markets over the world and the awareness to adapt its products to local taste. Acquisitions of Dreyer, Ralston Purina and Jenny Craig made Nestlé to become the market leader in ice cream, global leader in pet food and the world largest nutrition and weight management market respectively.

The threat of new entrants in Nestlé industry looks at the barriers of entry. Product differentiation is very high to imitate. The company produces over 127,000 products under six strategic brands: Nestlé, Buitoni, Maggie, Nescafe, Nestea and Purina. Nestlé products are produce to offer characteristics such as quality, taste and safety. Economies of scale is another barrier to entry for Nestle and this is showed through the operations of 400 plants in 77 countries and employed more than 250,000 people. Nestle drive for acquisition was to gain critical mass in terms of market share in businesses in which scale is vital for success (p. N265). Size provides considerable economies of scale in the food industry. Nestlé’s operations are massive and global in scope. Barriers to entry for new entrants are increased by high economies of scale. The switching costs are high because Nestle production is based on innovation and renovation of its well branded product.

Nestle works on improving their products especially in mature markets where Nestle generates the bulk of its sale. Continuous upgrading of existing product is an important source of internal growth. Nestle controls its distribution channel and provide assistance to Distribution Company to carry their products. Having access to distribution channels can be a strong entry barrier for new entrants, especially in industries like Nestle. Whenever industry growth is slow and constrained there will be expected retaliation. Nestle was increasingly facing fierce competition as many food producing rivals had achieved significant improvements in their operating efficiency (p. N 262). Nestle weak profitability, whose root causes could be traced to Nestlé’s various acquisition that slowed down the overall growth of the companies and open the doors for competitors to take advantage.

Bargaining power of suppliers with the food industry shows that Nestle manufactured over 127,000 products and purchase of raw materials such as coffee and milk. The company utilized the expansion strategy to help with dependency of coffee from its suppliers. The Power of suppliers is low. The supplier groups are less concentrated and not dominated by a few large companies. Bargaining power of the buyers is very high because Nestle is high on quality, taste, and safety. They have modified more than 700 of their products by adding nutritional functionalities for its buyers. Whereby, the buyers are demanding high quality, taste, and safety products and Nestle is providing it. Nestle was facing fierce competitive pressure and the threat was due to the slow growth of the company that was caused by acquisitions.

Although the number of truly global competitors was limited, the most notable being Kraft, Masterfoods, and Unilever, Nestle was also facing strong competition at the national and regional level (p. N 262). The return on shares decrease from 44% in 97 to 15% in 2001 but increase tremendously in 2005, whereby its rival, Hersey have seen a constant shareholders return over the ten years. Note in particular was the 88% in 2001 to 306% in 2005. In fact, all competitors yield positive shareholders return between the years of 2001 to 2005, possible due to the low interest rate that created a global increase in trade. The competitive environment in the external environment is fierce on the local and regional level but limited on the global level. Globally, Nestle competitors are Kraft, Masterfoods and Unilever. In 1997, the company was ranked eight among the world’s top 12 packaged food companies in terms of returns on capital.

Its net margin was only half of its major rival Unilever (p. N 262). Today, Nestle employs over 250,000 employees, manufactures approximately 127,000 products in 77 countries under six major brands: Nestle, Maggie, Nescafe, Purina, Buitoni, and Nescafe. Nestle basically doubled its competitor industry growth and is far ahead of its closest competitor. The internal organization of Nestle focuses on the internal strengths and weaknesses of the organization. Between 1982 and 1997, under CEO Maucher, the company showed a great deal of strength and also major weaknesses, but CEO Brabeck, during 1997 and 2005, utilized effective strategy to move the company forward. The borrowing capacity of the company was evident in 2005, where Nestle generated total sales of CHF $91 billion and net income of CHF $8 billion and was the leading food manufacturing industry.

Nestle also have the ability to generate internal funds and from 1997 to 2005, Nestle continued its expansion through a combination of organic growth and acquisitions. Once the feasibility study is conclusive, Nestle will focus on selecting the format best suited to the particular market and adapting that format to local needs. Nestle physical resource includes over 400 plants in 77 countries, on the six continent all over the world and employed more than 250,000 people of which 3,500 are scientist in the research and development section. The technological resources utilized by Nestle were the GLOBE program that is designed to improve operational efficiency by integrating the company’s businesses on a global scale. The objectives are to establish best practices in business processes, to align data standard, and to install common information system. GLOBE will allow all inter market systems to communicate better with each other.

Intangible resources such as knowledge and trust were seen in Nestle. The company knowledge was displayed in its 140 years of profound knowledge of markets all over the world, and the ability to adapt its product to local taste. Nestle trust its workers and the organization structure is a decentralized one. Whenever there was an acquisition, Nestle would promote managers from the acquired company. This promotion displayed trust building measures hoping that those managers would be effective and efficient with their new roles and responsibilities. Nestle also utilized innovation resources for its success. Nestle is considered the innovation leader in the global food and nutrition sector (p. N 264). The company created a research and development section and invested CHF $1.5 billion for renovation and innovation of old and new products. They hired 3,500 scientists with the quest to this achieve internal growth. Business level strategy of Nestle was to seek ways in which the company can grow internally because the external growth strategy has been reached.

The company was ranked first in all the product segments in which it operated (p. N 261). However, with all this acquisition and external growth, the company’s market growth was only 2 percent. The CEO Brabeck goal was to achieve real internal growth. The company had many challenges and weaknesses. The most important of these challenges when the company generated more than 70 percent of its sales in mature markets with a limited potential for organic growth (p. N 262). The company was also challenge with slow market growth due to the amount of acquisitions over the years and had portfolio that included several low margin product segments that negatively affected profitability. This led to company being ranks eight among the top twelve packaged food companies in terms of return on capital.

Brabeck business strategy was focus specifically on Nestle organic growth. Organic growth in mature markets could only be reached by strengthening Nestlé’s innovative capacity. His strategy was to force the businesses to become more efficient by cutting back on their investment budget (p. N 262). The first task was to achieve Nestlé’s operational efficiency. Nestle launched a manufacturing efficiency programs MH97, Target 2004+, and Operation excellence 2007. Other strategic initiatives were FitNes, GLOBE, and the reduction of the marketing expenditure by exploiting synergies brand. These efficiency strategies saved Nestle over CHF $12 billion and the savings were invested into internal growth. Organic Growth was evident when Nestle was transformed from a food company into a food, nutrition, health, and wellness company. This was accomplished by creating units such as Corporate Wellness and Nestle Nutrition units.

The company strengthens its innovation by focusing on the research and development and investing heavily in innovation and renovation and organizational changes to improve research and development’s connection with market Nestle operates. They created the Product Technology Centers, Local Application Centers and Clusters. Nestle also used external growth as a platform for organic growth by the acquisition of Dreyer, Ralston Purina and Jenny Craig. All these strategies yielded Nestle in 2005 CHF $91 billion in Sales, $8 billion in profits and 4 percent market growth. In conclusion, the new CEO Paul Bulcke of Nestle is taking over an organization that is already a global giant and the strategies that his predecessor was able to establish in the span of ten years are fostered for continuity.

The new CEO Paul Bulcke would be able to maintain and at some point, increase sales and profits for the next five years. Although the competition is fierce, Nestle economies of scales, financial capabilities, 140 years of knowledge and experience, external and now internal growth would make it difficult for the competition to shrink Nestle industry growth. With the sizeable investment of CHF $1.5 billion in research and development, the new CEO would have a unit that is created for new innovations and also to renovate the old products. The new CEO Paul Bulcke could build on the abundance of strengths Nestle acquire over the years, overcome the few weaknesses the global giant has, take advantage of the tremendous opportunities for nestle, and avoid the external threats that could cause the company to lose market share.

CASE RELATED QUESTIONS
Preparing to hand over the CEO position to Mr. Paul Bulcke on April 10, 2008, you decide to summarize the lessons and successes of your tenure in that position. Your first step will be to outline the environmental forces that you faced in 1997 (Nestlé’s internal strengths and weaknesses and the external opportunities and threats facing the company at that time). You have a meeting scheduled later this month to give Bulcke direction on taking the company forward. You’ve outlined the following agenda for the meeting. Characteristics of the Current Competitive Landscape: Globalization, Technology, Knowledge, Strategic Flexibility, Quality, Profit Pool Vision and Mission

Stakeholders
Acquisition Strategy
Organizational Structure
Strategic Leadership
Strategic Entrepreneurship
Your assignment is to give a full assessment of the agenda items to prepare Bulcke for leading the company in the years ahead keeping in mind that Nestle needs to maintain its strong growth momentum in the developing and emerging world.

Since I took over the Nestle Organization from 1997 to 2007, many environmental forces were created during the past decade. The company went through environment opportunities and threats from outside and also established internal strengths and in process was exposed to a few weaknesses. Nestle had tremendous opportunities because of the numerous acquisitions by my previous predecessor. The company had the potential for organic growth, further expansion to other countries, and increase in shareholders capital. During that time, Nestle was threaten by fierce competition locally, regionally and a little on the global scene. This threat was due to the numerous acquisitions that slowed the industry growth and gave these companies the opportunities to compete.

However, during the decade, numerous strengths were created whereby Nestle implemented manufacturing efficiency programs by cutting down on wild spending and channel that savings into innovation and renovation. That strategy grew the organization from a 2 percent growth to 4 percent. The company also boasts of 140 years of experience and knowledge, operating in all six continents, well liquidated, and has the ability to create what the consumer wants through its research and development unit. The limited weaknesses were evident such as the inability to identify that the productions of canned food, tomato, oil, dry pasta that would be slow in growth. However those items were divested in the past decade. Characteristics of the current competitive landscape of Nestle look at the fierce competitive environment on the local and regional level but limited on the global level. Globally, Nestle competitors are Kraft, Masterfoods and Unilever.

In 1997, the company was ranked eight among the world’s top 12 packaged food companies in terms of returns on capital. Its net margin was only half of its major rival Unilever (p. N 262). Nestle employs over 250,000 employees, manufactures approximately 127,000 products in 77 countries under six major brands: Nestle, Maggie, Nescafe, Purina, Buitoni, and Nescafe. The profit is on the rise and would make strategic flexibility for the new CEO. Nestle basically doubled its competitor industry growth and is far ahead of its closest competitor. Nestle vision states that “each day we strive to make our products tastier and healthier choices that help consumers care for themselves and their families” and its mission is to “positively influence the social environment in which we operate as responsible corporate citizens, with due regard for those environmental standards and societal aspirations which improve quality of life.” Stakeholders are an important part of Nestle organization and the bottom line is to ensure that the shareholders are satisfied.

Shareholders were not satisfied with CEO Maucher due to the fact that shareholders were accustomed to getting 17 percent annually when the organization was growing through acquisition but when the limit of the external growth had been reached, shareholders return decreased. This decrease in shareholders return led to the firing of CEO Maucher. During the decade, Nestle acquisition strategy was used as a platform for organic growth. The concept behind acquisition was to gain a critical mass in terms of market share in businesses in which scale is vital for success. External growth was used to gain expect knowledge for further expansion into new product segments.

The Nestle Organizational structure is one that is decentralized, and changes were made to improve the research and development’s connection with the markets in which Nestle operates. The organizational measures were the creation of Product Technology Centers, Local Application Centers, and Clusters Within the Nestle organization there must be strategic leadership to move the company forward and also strategic entrepreneurship. This leadership must be able to identify specific areas where Nestle can grow, maintain, and sustain its global dominance.

References
Raisch, S., Ferlic, Flora. (2006). Nestle: Sustaining Growth in Mature Markets. INSEAD. Hitt, Ireland, Hoskisson. (2009). Strategic Management: Competitiveness and Globalization (Concepts and Cases). (8th ed.) Mason, OH

Hitt, M. H., Ireland, R. D., & Hoskisson, R. E. (2009). Strategic Management: Competitiveness and Globalization. (8th ed.). South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA.

(n.d.). Retrieved from http://www.Nestlé .com


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