Case Nestle

NESTLE CASE turn everywhere snuggle is 1 of the oldest of all multinational businesses. The play along was founded in Switzerland in 1866 by Heinrich draw close, who completed nuzzle to distribute milk food, a type of baby food he had invented that was made from fine-grained milk, parched food, and sugar. From its very early days, the company looked to separate countries for addition opportunities, attaining its first foreign offices in London in 1868. In 1905, the company merged with the Anglo-Swiss Condensed Milk, thereby broadening the companys product line to accommodate both condensed milk and infant formulas.Forced by Switzerlands small size to look outside its borders for growth opportunities, go up established condensed milk and infant food serveing plants in the United States and Britain in the later(a) 19th century and in Australia, South America, Africa, and Asia in the first three decades of the 20th century. In 1929, go up moved into the chocolate busin ess when it acquired a Swiss chocolate maker. This was followed in 1938 by the growing of clutchs most revolutionary product, Nescafe, the worlds first soluble coffee drink. later on World contend 11, Nestle continued to expand into other atomic number 18as of the food business, primarily through a series of acquisitions that include Maggi (1947), Cross & Blackwell (1960), Findus (1962), Libbys (1970), Stouffers (1973), Carnation (1985), Rowntree (1988), and Perrier (1992). By the late 1990s, Nestle had 500 factories in 76 countries and sold its products in a staggering 193 nations-almost every country in the world. In 1998, the company generated gross revenue of close to SWF 72 billion ($51 billion), solo 1 pct of which occurred in its home country.Similarly, provided 3 percent of its- 210,000 employees were located in Switzerland. Nestle was the worlds biggest maker of infant formula, powdered milk, chocolates, instant coffee, soups, and mineral waters. It was number two in ice cream, breakfast cereals, and pet food. Roughly 38 percent of its food gross sales were made in Europe, 32 percent in the Americas, and 20 percent in Africa and Asia. Management Structure Nestle is a decentralized organization. Responsibility for operating decisions is pushed down to topical anesthetic anaesthetic anaesthetic units, which exemplaryly enjoy a high degree f autonomy with see to it to decisions involving pricing, dispersal, foodstuffing, human resources, and so on. At the same time, the company is organized into seven ecumenic strategical business units (SBUs) that comport indebtedness for high- aim strategic decisions and business development. For example, a strategic business unit foc phthisiss on coffee and beverages. another(prenominal) one foc expenditures on confectionery and ice cream. These SBUs engage in overall schema development, including acquisitions and commercialize intromission dodge. In recent years, two-thirds of Nestles growth has come from acquisitions, so this is a critical function.Running in parallel to this structure is a regional organization that divides the world into five major geographical zones, much(prenominal) as Europe, North America and Asia. The regional organizations assist in the overall dodging development process and are responsible for developing regional strategies (an example would be Nestles strategy in the spirit East, which was discussed earlier). Neither the SBU nor regional managers, however, get involved in topical anaesthetic operating or strategic decisions on anything other than an exceptional basis.Although Nestle makes intensive use of local managers to knit its diverse worldwide trading operations together, the company relies on its expatriate army. This consists of about 700 managers who spend the bulk of their careers on foreign assignments, pitiable from one country to the next. Selected primarily on the basis of their ability, drive and go forthingness to live a quasi-nomadic lifestyle, these individuals very much bet in half-a-dozen natiosn during their careers. Nestle also uses management development programs as a strategic tool for creating anesprit de corpsamong managers.At Rive-Reine, the companys international training c record in Switzerland, the company brings together, managers from around the world, at different stages in their careers, for specially targetted development programs of two to three weeks duration. The objective of these programs is to give the managers a better instinct of Nestles culture and strategy, and to give them access to the companys top management. The research and development operation has a special place within Nestle, which is not surprising for a company that was established to commercialize innovative foodstuffs.The R&D function comprises 18 different groups that operate in 11 countries throughout the world. Nestle spends approximately 1 percent of its annual sales revenue on R&D and has 3,100 em ployees dedicated to the function. Around 70 percent of the R&D budget is spent on development initiatives. These initiatives focus on developing products and processes that fulfill food market needs, as identified by the SBUs, in concert with regional and local managers. For example, Nestle instant noodle products were originally developed by the R&D group in result to the perceived needs of local operating companies through the Asiatic region.The company also has longer-term development projects that focus on developing new technological platforms, such as non-animal protein sources or agricultural biotechnology products. A Growth Strategy for the 21stCentury Despite its unchallenged success, Nestle realized by the early 1990s, that it faced significant challenges in maintaining its growth rate. The large occidental European and North American markets were mature. In some(prenominal) countries, population growth had stagnated and in some, there had been a small decline in fo od consumption.The retail environment in legion(predicate) Western nations had live increasingly challenging and the balance of power was shifting away from the large-scale manufacturers of branded foods and beverages, and toward nationwide supermarket and reject chains. Increasingly, retailers found themselves in the unfamiliar side of playing off against individually other manufacturers of branded foods, hence bargaining down prices. Particularly in Europe, this trend was enhanced by the successful introduction of private-label brands by some(prenominal) of Europes leading supermarket chains.The results included increased price competition in several key segments of the food and beverage market, such as cereals, coffee and soft drinks. At Nestle, one response has been to look toward emerging markets in Eastern Europe, Asia and Latin America for growth possibilities. The logic is simple and limpid a combination of economic and population growth, when coupled with the wide spread adoption of market-oriented economic policies by the governments of many developing nations, makes for attractive business opportunities.Many of these countries are still relatively poor, but their economies are growing rapidly. For example, if stream economic growth forecasts occur, by 2010, there will be 700 million people in mainland China and India that have income levels approaching those of Spain in the mid-1990s. As income levels rise, it is increasingly likely that consumers in these nations will start to championship branded food products for basic foodstuffs, creating a large market opportunity for companies such as Nestle.In general, the companys strategy had been to enter emerging markets early before competitors and build a substantial position by selling basic food items that appeal to the local population base, such as infant formula, condensed milk, noodles and tofu. By narrowing its initial market focus to just a handful of strategic brands, Nestle claims it can simplify life, reduce risk, and concentrate its marketing resources and managerial effort on a bound number of key niches. The goal is to build a commanding market position in each of these niches.By pursuing such a strategy, Nestle has taken as much as 85 percent of the market for instant coffee in Mexico, 66 percent of the market for powdered milk in the Philippines, and 70 percent of the markets for soups in Chile. As income levels rise, the company progressively moves out from these niches, introducing more upscale items, such as mineral water, chocolate, cookies, and prepared foodstuffs. Although the company is known worldwide for several key brands, such as Nescafe, it uses local brands in many markets.The company owns 8,500 brands, but only 750 of them are registered in more than one country, and only 80 are registered in more than 10 countries. while the company will use the same global brands in multiple developed markets, in the developing world it focuses on ess ay to optimize ingredients and processing technology to local conditions and then using a brand name that resonates locally. Customization sort of than globalization is the key to the companys strategy in emerging markets. Executing the StrategySuccessful execution of the strategy for developing markets requires a degree of flexibility, an ability to adapt in often unforeseen ways to local conditions, and a long-term perspective that puts building a sustainable business before short-term profitability. In Nigeria, for example, a crumbling road frame, aging trucks, and the danger of violence forced the company to re-think its traditional distribution methods. kinda of operating a central warehouse, as is its preference in most nations, the country.For safety reasons, trucks carrying Nestle goods are allowed to travel only during the day and frequently under-armed guard. Marketing also poses challenges in Nigeria. With little opportunity for typical Western-style advertising on tel evision of billboards, the company hired local singers to go to towns and villages offering a flow of entertainment and product demonstrations. China provides another interesting example of local adaptation and long-term focus. After 13 years of talks, Nestle was formally invited into China in 1987, by the Government of Heilongjiang province.Nestle opened a plant to produce powdered milk and infant formula there in 1990, but readily realized that the local rail and road infrastructure was inadequate and inhibited the collection of milk and manner of speaking of finished products. Rather than make do with the local infrastructure, Nestle embarked on an ambitious plan to establish its own distribution network, known as milk roads, between 27 villages in the region and pulverization collection points, called chilling centres.Farmers brought their milk often on bicycles or carts to the centres where it was weighed and analysed. Unlike the government, Nestle paid the farmers prompt ly. on the spur of the moment the farmers had an incentive to produce milk and many bought a second cow, increasing the cow population in the district by 3,000 to 9,000 in 18 months. Area managers then organized a delivery system that used dedicated vans to deliver the milk to Nestles factory. Although at first glance this power seem to be a very costly solution, Nestle calculated that the long-term benefits would be substantial.Nestles strategy is similar to that undertaken by many European and American companies during the first waves of industrialization in those countries. Companies often had to invest in infrastructure that we now take for granted to get production off the ground. at a time the infrastructure was in place, in China, Nestles production took off. In 1990, 316 tons of powdered milk and infant formula were produced. By 1994, output exceeded 10,000 tons and the company decided to triple capacity.Based on this experience, Nestle decided to build another two powdered milk factories in China and was aiming to generate sales of $700 million by 2000. Nestle is pursuing a similar long-term bet in the Middle East, an area in which most multinational food companies have little presence. Collectively, the Middle East accounts for only about 2 percent of Nestles worldwide sales and the individual markets are very small. However, Nestles long-term strategy is based on the assumption that regional conflicts will diminish and intra-regional trade ill expand as trade barriers between countries in the region come down. in one case that happens, Nestles factories in the Middle East should be able to sell throughout the region, thereby realizing scale economies. In anticipation of this development, Nestle has established a network of factories in five countries, in the hope that each will, someday, supply the entire region with different products. The company, currently makes ice-cream in Dubai, soups and cereals in Saudi-Arabian Arabia, yogurt and bouillon in Egypt, chocolate in Turkey, and ketchup and instant noodles in Syria.For the present, Nestle can stretch forth in these markets by using local materials and focusing on local demand. The Syrian factory, for example, relies on products that use tomatoes, a major local agricultural product. Syria also produces wheat, which is the main ingredient in instant noodles. regular if trade barriers dont come down soon, Nestle has indicated it will remain committed to the region. By using local inputs and focussing on local consumer needs, it has earned a good rate of show in the region, even though the individual markets are small.Despite its successes in places such as China and move of the Middle East, not all of Nestles moves have worked out so well. Like several other Western companies, Nestle has had its problems in Japan, where a failure to adapt its coffee brand to local conditions meant the loss of a significant market opportunity to another Western company, Coca Cola. For year s, Nestles instant coffee brand was the dominant coffee product in Japan. In the 1960s, cold preserve coffee (which can be purchased from soda vending machines) started to gain a following in Japan.Nestle disregard the product as just a coffee-flavoured drink rather than the real thing and declined to enter the market. Nestles local partner at the time, Kirin Beer, was so incensed at Nestles refusal to enter the canned coffee market that it broke off its relationship with the company. In contrast, Coca Cola entered the market with Georgia, a product developed specifically for this segment of the Japanese market. By leveraging its existing distribution channel, Coca Cola captured a 40 percent share of the $4 billion a year, market for canned coffee in Japan.Nestle, which failed to enter the market until the 1980s, has only a 4 percent share. While Nestle has built businesses from the ground up, in many emerging markets, such as Nigeria and China, in others it will purchase local co mpanies if suitable candidates can be found. The company pursued such a strategy in Poland, which it entered in 1994, by purchasing Goplana, the countrys second largest chocolate manufacturer. With the collapse of communism and the opening of the Polish market, income levels in Poland have started to rise and so has chocolate consumption.Once a scarce item, the market grew by 8 percent a year, throughout the 1990s. To take advantage of this opportunity, Nestle has pursued a strategy of evolution, rather than revolution. It has kept the top management of the company staffed with locals as it does in most of its operations around the world and carefully adjusted Goplanas product line to better match local opportunities. At the same time, it has pumped money into Goplanas marketing, which has enabled the unit to gain share from several other chocolate makers in the country. Still, competition in the market is intense.Eight companies, including several foreign- possess enterprises, s uch as the market leader, Wedel, which is owned by PepsiCo, are vying for market share, and this has depressed prices and profit margins, despite the healthy volume growth. Discussions 1. Does it make intellect for Nestle to focus its growth efforts on emerging markets? why? 2. What is the companys strategy with regard to business development in emerging markets? Does this strategy make sense? From an organizational perspective, what is required for this strategy to work effectively? 3. Through your own research on NESTLE, identify appropriate performance indicators.Once you have gathered relevant data on these, undertake a performance analysis of the company over the last five years. What does the analysis tell you about the success or otherwise of the strategy espouse by the company? 4. How would you describe Nestles strategic posture at the corporate level is it pursuing a global strategy, a multidomestic strategy an international strategy or a international strategy? 5. Does this overall strategic posture make sense given the markets and countries that Nestle participates in? Why? 6. Is Nestles management structure and philosophy aligned with its overall strategic posture?