Nestle International Business Strategy Essay
Nestle International Business Strategy
Nestle is one of the world’s largest and most known companies. It is a Swiss company with its headquarters located in Vevey, Switzerland. The company was inaugurated in 1866 (Nestle 2012) and since its inception has grown through leaps and bounds to become the world’s largest food and nutrition company (Cnn money 2011). The company is also a major stakeholder in the cosmetic company, L’Oreal. For a company to start from a small domestic town and then expand internationally, the strategic vision of the company plays a central and key role. The subsequent chapters shall discuss the company’s internal goals and strategy and how that strategy paves way for Nestle to build its competitive advantage in all the markets it operates in.
Vision and Values:
The vision of Nestle reflects ideas of fairness, honesty and long-term thinking. These ideas are reflected in the company’s corporate business principles that have shaped the company culture and strategy for the past nearly 140 years. The core values that the company has are its people, the quality of its people and brand, the company’s brand portfolio, their consumers, their customers and the company’s sustainable performance. (Nestle, 2012)
The main objective of Nestle can be appropriately summed up by the phrase ‘Creating Shared Value’ (Nestle, 2012) This principle at Nestle can be described as having a conviction to build long term and beneficial relationships with their stakeholders, comply with all legal requirements and ensure all activities that the business undertakes are sustainable and result in value creation for both the company and the society at large.
A strategy that the company has developed to mark their achievements is that they would like to become the benchmark of (Nestle, 2012)
1. Nutrition, Health and Wellness
2. Sustainable Financial Performance
3. Trust by all stakeholders.
In order to achieve these benchmarks Nestle underwent heavy expenditure in Research and Development and relies greatly on new research and innovation, both in terms of food production and processes.Strategic Analysis:
The Pestel analysis is a tool made for analyzing the Political scenario, the Environmental scenario, Socio political scenario, technological scenario and legal scenario of a the macro environment of a business. This is a management method that examines the effect that events or influences from outside may have on the performance of a company or organization (CambridgeDictionary 2012). Pestel analysis is usually conducted keeping in mind the situation of a particular region. For the sake of this marketing plan, the pestel analysis of Nestle will be conducted keeping in mind the market of Great Britain.
Political: England is a member of the European Union as well as being a senior member of the United Nations. Because the country is part of two big political blocks, it allows it the freedom to trade efficiently both domestically and internationally. Despite having both a monarchy and a parliamentary form of government, the governmental system is well balanced and the common law is practiced. Nestle being a Swedish country; also belonging to the European Union has a great relationship with the government of Great Britain (EuropeanUnion 2012). Economic: UK is the third largest economy in Europe after Germany and France however Economists within the UK market predict a mild slip back into recession for the country in the year 2012 (bbc.co.uk 2012). Due to the economy presently being in a low growth stage it is very essential for Nestle to understand the market and come up with products and processes where it could continue to offer the same high standard of products that it offers and yet try and minimalise costs.
United Kingdom was also hit by the recession of the year 2007 and there was a fair amount of job loss. Keeping this in mind If Nestle were to set up more production plans and hired local population, it would contribute to value creation. Social: Around 66.2% of the Population of UK lies between the age brackets of 15-64 years. This means that there is a large labor force available however a majority of population is also aging. For Nestle this could be an opportunity if it decides to introduce a line of products that are compatible with its competitor’s products such as high fiber cereal offered by Kellogg’s or protein bars. With a large young population, nestle can introduce new flavors of its chocolate line with added health benefits as well (Hill, T. & R. Westbrook, 1997). Technological: The UK is a technologically advanced country with heavy focus on research and development and computed aided simulations and designs This is a positive point for Nestle as Research and Development is a key competitive advantage for the company.
Without heavy expense incurred in this department, the company would not have been able to reach the global number one position that it has acquired today. With a technologically friendly environment in UK, Nestle has the options of introducing new technology and conducting better research without the fear or incurring too high costs or the consumers finding it difficult to adapt (bbc.co.uk 2012). Environmental: The government of the United Kingdom pays stress on companies doing their operations on environmental friendly principles. Because Nestle is a company that is within the food and nutrition industry therefore the environmental compliance is extremely essential for it to cater to.
These include the correct and green processes through which the company manufactures (Environment protection act, 1990), as well as ensuring that all the edible products meet the health standards as set by the government of the United Kingdom. Legal: With regards to the legal situation of United Kingdom the company needs to pay attention to various kinds of laws that are prevalent. These include health and safety laws, consumer laws, and employee laws as well discrimination laws. For operations within the united Kingdom it is essential for companies to not only align their processes with the legal standing of the government but also their management style and organizational culture to ensure that all employees are treated equally and fairly, there are no reported cases of harassment of any kind and that the products have a health and safety assurance otherwise the company is liable to be sued.
The swot Analysis is part of a strategic planning process for small and medium sized organizations mostly (Houben, 1999). The analysis measures the company on two fronts; internal and external. In the internal area the strengths of the business and the weaknesses it posses in its own operations are analyzed while in the external analysis, the opportunities and threats faced by the business in its macro environment are analyzed. Strengths: One of the biggest strengths of Nestle is the brand image that it has. Its brands such as Kitkat, Nescafe, Nesquick are almost synonymous with the brand name. The company also has the heavy financial muscle to invest in its research and development which can further enhance its product line as well as invest in marketing. It also has a very strong global presence both in terms of production capacities as well as market share.
Weaknesses: One weakness of the company is that it has had to recall many of its products due to bad quality and that has greatly hampered its brand image. For a company as big as Nestle the customers do not expect such a dangerous mistake to be made especially since it operates in the food industry. The company also is the target of being boycotted because of media pressures and environmentalists for engaging in non-green practices and usage of child labor (ILRF, 2005). Opportunities: The fact that Nestle has gone from being merely a food brand to being nutrition and well being brand is a good opportunity for the company as it opens many new areas for product line extension.
Entering into emerging markets and establishing manufacturing plants also helps the company in reducing its costs. Threats: The food industry is probably one of the most saturated industries in the world. Keeping this in mind Nestle faces the very strong threat of competition. This competition can emerge both from international brands as well as local brands of the market in which Nestle enters and tries to operate. The rising prices of raw materials, fuel as well as the political instability in many third world countries where nestle has set up their production plants also threatens to cause unreliability in the supply line (Lin, 2007).
Porters 5 forces:
Michael Porter (1979) gave a framework by virtue of which the competitive advantage of companies can be assessed in the market in which they operate in. The framework includes an analysis of five concurrent forces that affect a business’ ability to compete (Michael Porter 1979). Keeping in mind the global market in which Nestle operates in, the Porters five forces analysis will be carried out keeping a general view of the entire world as the potential market for Nestle. Threat of New Entrants: Nestle despite being in a food and nutrition industry faces the serious threat of new entrants in the market. Weather this threat is domestic or from international firms, it exists because it is an industry where the barriers to entry are very low. If we discuss Nestle in India for example there are low barriers to entry and many small domestic players can enter the market and challenge the market of nestle through their pricing or product offering which is tailored to the local culture and tastes.
Bargaining Power of Suppliers: The bargaining power of suppliers of Nestle is very low especially in regions where the countries are economically backwards such as Pakistan or Bangladesh. That is because Nestle being such a giant in the market has the ability to bring lots of new business to the suppliers and therefore the suppliers have to produce the raw materials according to the outlines set by the company or they can be replaced. Bargaining Power of consumers: The bargaining power of the customers of Nestle is high. That is because it is a brand which greatly relies on consumer appreciation for the product. If a product is launched in any part of the world where the consumers do not like the taste, they will refuse to buy it. Similarly in third world countries the consumer base is very price sensitive.
This raises their bargaining power if Nestle wants to penetrate, then it will have to reduce its prices to their affordability level. Threat of Substitutes: Threat of substitutes for Nestle is also very high. In all areas of its operations there are multiple other firms that are offering either similar products or substitute products. For this purpose Nestle has to ensure that it offers a product experience that cannot be imitated and is demanded by its consumers. Industry Rivalry: Industry rivalry for Nestle is very high in no matter what part of the world it operates in. In United Kingdom it faces threat of competition from brands like Kellogs, in India it faces competition from local brands and brands such as Knorr which are starting to venture into the food industry.
Porter’s diamond and competitive advantage:
Michael Porter presented his theory about the competitive advantage of Nations through the use of this self designed diamond model. According to his theory, nations can create a sustainable competitive advantage for themselves if they use the following four factors efficiently. It is called a diamond model because the effect of one variable causes a change in the other variable. According to Porter, a country can create competitive advantage for itself rather than merely relying on natural endowments. Keeping Nestle in mind, Switzerland has created a global recognition for itself based on this huge multinational giant’s image (Economics-papers 2012).
Factor conditions talk about the country creating its own factors of production. Japan for instance does not have any local metal or steel however it has become synonymous with the manufacturing of metal cars. Similarly, factor conditions include building up on a country’s skilled resources and putting them to best use such as Nestle has done by acquiring raw materials from other parts of the world and treating them through innovative processes to suit its own needs (Nestle, 2012). Demand conditions mean that when the demand of a certain product is high locally, the company can focus on it and build that as its competitive advantage.
The demand for healthy food was very high In Switzerland and taking that demand Nestle build its company and has now succeeded in creating such a global giant. Because Nestles related and supporting industries are also thriving and are competition with each other, this gives Nestle the opportunity to build on its cost advantage and focus on its innovation so that it can continue its differentiation strategy in the market. The local conditions affect the firm strategy and culture. Within Switzerland there was high focus on doing things after thorough research and therefore the same Ideas were inherent since the inception of Nestle. (NestleCompanyStrategy, 2012).
Nestle operates in a multitude of different markets. Keeping each market in mind it develops different strategies. The Ansoff matrix shows four different kinds of strategies that companies can follow in order to achieve their goals. The first is the market penetration. In this strategy companies lower their prices so that they can enter into the market more quickly. In the case of Pakistan it was seen that when Nestle entered Pakistan, they introduced their existing product Milo at very affordable rates, even in smaller sub sizes so that the market can readily accept the product. In Market development strategy, the company takes an existing product into a new market.
This can be seen as when Nestle took Kitkat to foreign markets or when it launched Nescafe coffee in China. Product development is when a company remains in the same market it is presently operating but starts to expand its product line. Nestle was seen using product development when it remained in the European market but started venturing into health and nutritional products and expanding its product line. Nestle also has a diversified portfolio as it invested in the cosmetic company L’Oreal and is also the stakeholder in a number of pharmaceutical companies worldwide (Bonn, I. 2001).
Nestle is a house of brands. It consists of over a hundred different products and each product is at a different stage in the market depending upon the region in which it is being sold. Generally the product lines of nestle can be divided into big sub categories such as baby foods, which includes Cerelac and Nestum. Cereals and Bottled water, chocolate items, Dairy products, drinks, ice cream etc. Each product from each of these different categories is places on a different point in the BCG matrix. For the sake of simplicity of the project we will only discuss a few of the known and flagship products of Nestle (Boston Consulting Group, 2011). The cash cows of Nestle are very easily most of its chocolate brands and baby food items. Cerelac is a universal cash cow as well as Kit Kat that has a very strong brand presence worldwide (Reuters, 2012). Nido is fast growing nutritional milk that is gaining popularly in the Asian region and in the year 2010 (New York Times, 2012), a new Kit Kat manufacturing plant was set up in United Kingdom that was to produce over 1 billion bars of the chocolate each year.
The Stars are those products which have potential in the market and Nestlé’s lines of frozen product are quick to capture a declining cooking market within the United States. Nestle with its brand Stouffer, is turning its attention to frozen pizza in an effort to capture more of the market share (Bryson, 2011). Dogs are those product lines which do not bring in too much of revenue and are difficult to turn around. These products are those that should be discarded or sold off so that they do not squeeze the company profits.
For Nestle, many attribute its investments in the pharmaceutical business to be a dog and that the company should pull out and focus more on its nutritional products. Question marks are those products whose future is somewhat uncertain. They can be turned out into positive cash cows or could reduce to the dog stature for the company. With regards to the Indian market, the breakfast cereals of nestle are question marks. Keeping in mind the culture of India, the breakfast is a wholesome meal and the culture of cereals is very low (New York Times, 2012). The particular products in the Indian markets are still struggling to figure out their future.
Value Chain Analysis:
A value chain analysis is a specific set of activities that are linked together and through their use the firm can produce a competitive advantage for itself. This value chain analysis was also developed by Michael Porter and can be summed up by the following representation (Porter, 1985):
If we conduct the value chain analysis for Nestle we can see that it has a very good supply chain and integration of all operational business units otherwise it would be very difficult for the company to achieve global dominance. The inbound logistics include warehousing and inventory control. In Nestle it is a computerized and automated system of inventory control that is different for each country. This is why the supply of Nestle products is hardly ever scarce in the market.
The operations of nestle are very successful as they transform a lot of raw material into very nutritional products and create value for their customers. Outbound logistics is the process by which finished goods are transferred to the sellers. For this purpose Nestle has started to set up distribution channels in each country where its production plant is set up so ensure timely delivery. Marketing and Sales of nestle help in creating the brand that Nestle has evolved into today. The service area is that which responds to concerns and after sale service and Nestle tries its best to provide good customer service to any customers that may be dissatisfied by the product (Bonn, I. 2001).
Nestle has a very established setup of both its operations and marketing. What the company should however invest in is building its public image as a corporately responsible company as well. As it has already been pointed out above Nestle is one of the world’s most boycotted companies because of a certain perception that it commits corporate crimes when coming to environmental practices. The company needs to make sure that that particular image is altered. Also, the products of Nestle which are not doing so well in certain markets should be pulled out rather than constantly spending more on them to turn their value around. Some products are difficult to sail because of the culture of the market that Nestle operates in and therefore should be avoided to ensure sunk costs do not occur.
Evaluation & Conclusion:
In conclusion it is safe to say that Nestle has a lot of positive attributes backing its larger than life product portfolio and therefore the company has managed to sustain its position in the list of the fortune five hundred companies. The company through the use of efficient management procedures, innovation, capital infusion and research and development continues to expand its portfolio and also serves as an example of not just a an exceptional food and nutrition providing company but also a real multinational corporation. There are many lawsuits against the company and it is also generally considered to be one of the world’s most boycotted companies and despite all off that the revenues of the company have hardly slumped since its inception. That is a testament to their value chain creation and streamlined processes that ensure that nestle becomes a part of the livelihood of the people of the 130 countries it serves.
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University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 20 September 2016
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