Nestles Growth Strategy free essay sample

Nestle is one of the oldest multinational businesses in the world. It was founded by Heinrich Nestle in 1866 in Switzerland. At first they distributed â€Å"milk food† which comprised of powdered milk, baked food and sugar. Due to the size of Switzerland and the limited opportunities, Nestle was forced to look at other countries for growth opportunities. In 1905 they merged with Anglo Swiss and added condensed milk and baby formulas to their product line. Nestle’s long term investment policy became evident when they built milk and infant food processing plants in the USA and Britain in the late 19th century and in Australia, South America, Africa and Asia in the first 3 decades of the 20th century. In 1929 they acquired a Swiss chocolate maker and expanded into the chocolate business. Nestle then developed Nescafe, the world’s first soluble coffee drink which revolutionised the food and beverage industry. After World War 2, further acquisitions were made in the food business which cemented Nestle as a major player in the food production industry. They have 500 factories in 76 countries and their products are sold in 194 countries which is nearly every country in the world. In 1998 Nestle sales were at SWF 72 billion ($ 51 billion), but only 1% occurred in Switzerland and similarly only 3% of its 210 000 employees are located in Switzerland. Nestle was the leading manufacturer of infant formula, powdered milk, chocolates, instant coffee, soups and mineral waters and number two in ice-cream, breakfast cereals and pet food. Although Nestle had achieved fantastic growth and profitability through the acquisitions of other companies and also through the development of innovative products via its Research and Development (RD) division, they realized that in order for the company to continue to grow, other strategies would have to be explored. New markets needed to found and more innovative products needed to be developed to suit these markets. Nestle also employed novel approaches in their staffing policy and management structure and elevated the importance of its sustainability priorities. The following pages will describe the journey taken by Nestle and more importantly whether, the new strategies and innovations have been successful. Introduction Although Nestle was successful, they were concerned with maintaining their growth rates. The developed markets of Europe and North America were saturated and Nestle knew that they would soon lose their market share due to increased competition from other multi-nationals with diverse but similar product lines such as Heinz, Kraft and ConAgra. Price wars would diminish profits as retailers would play manufactures off against one another thus driving prices down. Consumers were also moving away from larger scale manufactured brands and moving towards nationwide supermarkets and discount stores who introduced their own private brands. In response Nestle began to focus on the emerging markets of Eastern Europe, Asia and Latin America to sustain and increase their growth rates. The governments of these developing nations adopted market oriented policies which presented attractive business opportunities which a multinational company like Nestle could not ignore. There was also an economic and population growth in these developing nations that Nestle could exploit. Although these countries were still poor their economies were growing rapidly, which in turn would increase consumer income. Historical precedence has shown that once consumers start to earn more they tend to substitute their basic foodstuffs for branded items such as those manufactured by Nestle. This was the market opportunity that Nestle was interested in. Nestle also decided that long term investments with innovative advertising were worth the effort and financial outlay as the rewards were going to be substantial. They also decided to use local skills and ingredients to customize products for their local markets. Their RD was producing innovative items to suit the countries that they were targeting. Their management structure was also innovative as they focused on a decentralized organisation where the local units were responsible for most of the day to day decision making. Nestle supplemented these local units by sending experienced managers to provide operational assistance. The company is further organised into 7 strategic business units (SBU) that are responsible for certain products and all the high level strategic decisions and business developments for that product. Nestle also has 5 regional organisations representing five major geographical zones that assist with the overall development process. In addition Nestle’s integration of sustainability considerations in their core operations both locally and globally was a strategic and successful manoeuvre. The responses in the following pages, to the 4 posed questions, illustrate that the strategy used by Nestle was indeed successful for its growth. Question 1 Does it make sense for Nestle to focus its growth on emerging markets? Why Yes it does make sense for the reasons listed below. Firstly Nestle faced a growing challenge in maintaining its growth rate in the current markets that it was involved in. The population growth had stagnated whilst the population growth was predicted and expected in the emerging markets. The current developed markets were becoming saturated and there was increased competition from rival companies. The emergence of nationwide supermarkets and chain stores allowed for the emergence of private label brands, which only increased the price competition. This resulted in retailers bargaining down the price of goods which meant smaller profit margins for the manufactures and also lower rate of production. The emerging markets in Eastern Europe, Asia and Latin America presented the opportunity for growth for Nestle. Although these countries are poor, their economies were growing rapidly. Nestle saw this as an opportunity to achieve higher growth returns and a bigger market share in the long term. Another reason that the emerging markets looked so promising was the governments of these countries were pursuing market-oriented economic policies resulting in attractive business opportunities. If we take into consideration that if the current economic growth occurs, income levels will rise and consumers will want to use branded foodstuff instead of local items thus creating huge opportunities for companies such as Nestle. Another reason why this strategy makes sense is that by entering the markets before their competitors, Nestle could build a brand name and reputation and be in a favourable position. They also concentrated on selling basic food items and focused on a few strategic brands. This narrow market focus allowed Nestle to be the brand leader in the markets of emerging economies. As the consumer income and brand confidence levels increased Nestle began introducing their more upscale products and thus cementing their brands in the markets. Nestle did not want their â€Å"global brands† in the emerging markets. Instead they concentrated their efforts on optimizing the local market for their ingredients and processing technology and also a brand name that locals were comfortable with. The amount of local content in their products, I believe made Nestle so successful in emerging markets. Question 2 What is the company’s strategy with regard to business development in emerging markets? Does this strategy make sense? Yes, the strategy used by Nestle makes sense and judging by their success worldwide this strategy works. They use their RD division to great advantage and their focus on long term investments is very successful. The customizing of products to suit local markets is a great strategy that benefits both Nestle and the local market. Nestle strategy was to enter the emerging markets early and build a substantial and commanding position before their competitors. This was a calculated risk as consumers could easily reject their product in favour of local ones. However Nestle ingrained themselves into the market by using local ingredients and local processing technology. Nestle customized a product for the local market rather than introducing a global brand. They also offered affordable products of high quality to meet the emerging market needs. Another business strategy that Nestle employed was to initially focus on a limited number of products in the markets. Once they had developed a strong position with these products in the market and the spending power of the locals increased, Nestle than introduced their more upscale products like mineral water and prepared foods. Nestle also puts sustainability before profitability by investing in infrastructure that is required, like in China and Nigeria. Although it may seem like a costly undertaking the long term benefits will be sustainable and substantial. Once again this type of investment benefits both the local market and Nestle. People in the local market remember these actions and Nestle has created brand loyalty within this market. Nestle’s strategy of investing early in emerging economies, building sustainable business, improving infrastructure and customizing products to suit local needs with a strong emphasis on local ingredients and local processing methods is proving to be a great success. Question 3 From an organizational perspective, what is required for this strategy to work effectively? Nestle needs to continue to focus on long term investments, where sustainability rather than profitability if the focus. Long term investments may seem expensive but by creating a sustainable product, Nestle profits are guaranteed. When there is long term investment in an economy, the local population tend to remember the investing company and thus product and brand loyalty is created. The other requirement needed for this strategy to work is Nestle needs to continue to invest in its RD division. Nestle needs to ensure that they stay ahead of their competitors by producing innovative products to suit the emerging market’s needs. They also need to ensure that their productions of these products are both fast and efficient as well as of a high quality. Nestle must also continue to customize products to suit the emerging market rather than introducing global brands. The continued use of local ingredients and processing methods is also critical to the success of this strategy. Another requirement for this strategy to work effectively is for Nestle to continue to keep local staff when an acquisition is made. The locals tend to have a better understanding of the market and Nestle can send in their senior managers who have the experience and knowledge to assist the local teams with production planning and other aspects that the locals may need assistance with. Nestle can also continue to train the local managers at their facility in Switzerland where the Nestle culture and strategy is shared with them. Question 4 Is Nestle’s management structure and philosophy aligned with its overall strategic posture? Nestle management structure is aligned with its overall strategic posture. Just as Nestle tends to customize products to suit local markets, they also make the local units responsible for operating, pricing marketing and distribution decisions. Staffing and human resources are also left to the responsibility of the local units. The company is also organized into seven worldwide strategic business units (SBU) that focus on high level strategic decisions and business developments. The SBU are also responsible for acquisitions and market entry strategy. Each SBU has its own product or products to focus on. For example while one SBU focuses on coffee and beverages another one will focus on ice cream and confectionery. This strategy allows for all the products under the Nestle umbrella to be equally developed. The importance of the SBU is underlined by the fact that in the past two year nearly two thirds of Nestle’s growth has come from acquisitions. Running in parallel to the SBU structure Nestle has divided the world into five major geographical sites like Europe, Asia and North America. The regional teams focus is on the overall development process. We can thus say Nestle is a decentralized organisation with the local, SBU and regional teams all having their own focus area to expand and develop but all integrating into the overall Nestle strategy. At times this sort of segregated management structure fails, like it did in Japan. The SBU was not convinced that the cold canned coffee was worth the investment and did not allow for their RD team to develop a product to suit the local market. Nestle at that time was the dominant instant coffee brand in Japan. This mistake allowed Coca Cola to enter the market and capture 40% of a $4 billion a year market. Nestle only entered the market in 1980 and hold only 4 % of the cold canned coffee market in Japan. This is one instance where the SBU did not take the advice of Nestle’s local partner, but these mistakes are the exception rather than the rule. For the most part the decentralized management structure that Nestle employs works very successfully for them. To ensure that its worldwide operations are in synergy, Nestle makes use of what it calls its â€Å"expatriate army†. This army consists of 700 managers who spend their time on foreign assignments. They assist local teams with their various abilities, be it planning, finance etc. and their drive. They also tend to propagate the Nestle culture and strategy. Nestle also uses management development programs to create managers that pull people together consistently and persistently in the pursuit of Nestle strategies and culture. For managers to have a better understand of the Nestle’s way, they are brought in various stages of their career to be developed. This is the type of long term investment that Nestle has for its people, which is similar to the long term investment that Nestle employs in emerging markets. Just as Nestle decided that investment in emerging markets is critical for its growth, investment in its people is just as critical. Although the local, SBU and regional teams tend to focus on their own responsibilities and goals, the management development program ingrains the Nestle culture and strategy. In addition, Nestle realised the importance of sustainable practices to drive its growth. It identified three areas of priority: accessible and affordable nutrition, water management and resource protection and supporting rural development, recognising that their growth strategy became redundant without elevating these areas. Nestle then focussed its operation in ensuring that these priorities are achieved in a number of initiatives through their Nestle Health Science institute and other joint ventures to ensure that they integrated a holistic consumer-centric approach in relation to health and nutrition. This reinforces the company’s corporate culture that in addition to complying with legal requirements, they have to ensure their activities are sustainable and create significant value for society. This is referred to as Creating Share Value in-house. Conclusion Nestle’s growth strategy underpinned by its innovative and sustainability priorities is a fantastic success. Their foray into the emerging market and economies has grown and continues to grow the company. The benefits are not only for Nestle, but the country that they invest in. Nestle also invests in local people and provide vital skills and training. Nestle’s focus on developing sustainable products with sustainable practices in the emerging markets has endeared themselves to the local market ensuring support where it counts most – the bottom line. Although there were certain â€Å"failures† like in Japan, where a SBU did not heed the advice of the local unit, the success Nestle achieved in other countries out-weighs these hiccups. I believe that Nestle has learned from this mistake and moved on. Their training programmes are second to none and the Nestle culture and strategy is shared with managers to pass on. In my opinion Nestle can be used as a blue print for other companies to use, if they want to succeed. The focus on the emerging market coupled with an innovative management structure as well world class training methods together with a cutting edge RD division has allowed Nestle in my opinion to be the leaders in their field.