Case Study
Strategy Concepts and Applications: Nestle

Introduction

In this assignment, various issues regarding corporate strategies at Nestle are discussed. In the following sections, four main areas in this context are discussed. Firstly, the cross business strategies within Nestle are discussed. Secondly, a brief discussion on corporate growth strategies and directions of Nestle is presented. Besides, how Nestle utilize several corporate management mechanism to leverage on it synergies are also discussed. Lastly, the possible future corporate level strategy is also suggested.

The Cross-Business Synergies within Nestle

Nestle is a huge conglomerate with various strategic business units. This enables the company to enjoy several cross-business synergies within the organization. Figure 1 below shows the several types of cross-business synergies that can be achieve through well-planned and organized strategic business units under a corporate center. According to De Wit and Meyer (2010), three forms of synergies that can be achieved through various SBUs include: (a) opportunity to leverage on resources, (b) opportunity to integrate various activities in value chain, and (c) opportunity to align the positioning of various product offering. Based on this framework, the various cross-business synergies within Nestle can be identified.

 

Figure 1: Three Forms of Multi-Business Synergy

1

Source: De Wit & Meyer (2010)

 

Nestle is a company that successfully engage in several merger and acquisition exercises and reap significant synergies from the exercises. The company started off with a single product and expands rapidly through a series of merger and acquisition corporate exercises because the company able to reap significant beneficial synergies between the several businesses acquired by Nestle. Firstly, with such corporate exercises, the company able to expands fast to other geographical region. For example, the company able to immediately tap into new marketplace by acquiring an existing company. Secondly, Nestle able to achieve synergy through mergers as the company able to secure an established route to new products categories. By acquiring a company in the similar industry, Nestle able to enhance its product portfolio and derive extra revenue stream from the new product offering. Not only that, the earning stream for Nestle can also become more stable as the earnings base is significantly diversified (across a large portfolio of different products). This reduces the earnings or profitability volatility in Nestle.

From the resources-base perspective (refer to Figure 1 above), Nestle can also achieve significant synergies when the various SBUs share resources. For example, by sharing of resources, the company can enhance the bargaining power as a buyer. Besides, the company can save in overhead costs, where the various back-end departments, such as human resources, administration, accounting as well as finance related costs can be optimized. Not only that, the storage costs, logistic costs and other operational related expenses may also be reduced with detail planning, enabling the various strategic business units to share resources effectively. All of these not only enable Nestle to achieve economies of scale, but also enable the firm to reduce its expenses significantly.

Apart from that, another cross-business synergies reap by Nestle is through the implementation of GLOBE (i.e., Global Business Excellence) system – which is a comprehensive information system that ultimately would tie all of the Nestle’s businesses together under a common technology infrastructure. Under this system, GLOBE is supposed to capture standardized data and through a systematic management of information, to create knowledge that can be shared among the company’s various strategic business units. Through this system, an online real-time report will bring along important insights into both the production and the selling sides of the company’s business. This enables the management to calculate total worldwide purchases of raw materials and the distribution of spending amongst suppliers. Apart from that, with the system, the Nestle can also measure total worldwide revenues to individual accounts, to enable the company to manage the customers better. Not only have that, the GLOBE system also enabled synchronization of data between manufacturers and retailers – to improve the order fulfillment system for Nestle. With such an advance system, the cooperative retailers can then add new products to their store inventories with just a click on the mouse.

 

The Historical Corporate Growth Directions of Nestle

Nestle is a company that able to achieve sustainable growth over a long period of time. However, the growth strategies and directions employed by the firm are complicated and constantly adapting to fit itself with the business environment. In the following paragraphs, the various corporate growth directions of Nestle in the past will be discussed.

Growth through merger and acquisition. The company started with a single product – namely the Nestle Milk Cereal. The product is designed for mothers as well as babies that are unable to breastfeed. The company is started in Switzerland. In the early stage, the company has a successful product and then engages in geographical expansion strategy to enter the other European countries. After successful geographical expansion into the other European countries, it is observed that the company started to engage in a series of mergers and acquisition corporate exercises to enhance growth prospects of the company. By engaging in a series of successful merger and acquisition corporate exercise, Nestle able to further expand through three methods as follow: (a) geographical expansion, and (b) diversifying into new product categories (i.e., product expansion strategy). Historically speaking, Nestle is obviously engage in such kind of growth direction, i.e., through merger and acquisition, to expand geographically and enlarge product portfolio.

Growth by going global, but acting locally. While Nestle engage seriously in global expansion, Nestle often form strong collaboration and partnerships with local suppliers in the respective countries. For example, when Nestle entered into a new market, the company will establish local supply chains, from activities such as organizing of basic agricultural capabilities all the way to farm level. As early as 1870s, the company’s ‘milk district model’ is referring to such kind of localize supply chain management philosophy.

Growth by concentrating on products with high profit margin. Throughout the long corporate growth story of Nestle, it is obvious that Nestle has been slashing inefficiencies in the company, primarily by selling out or stopping products with low profit margin, and to concentrate the efforts to enhance the branding of products with high profit margin in the marketplace. One obvious example is as follow: in 1980s, CEO Helmut Maucher undertook a radical change program to improve the bureaucratic organization. Maucher had actually close down underperforming brands, emphasize more on quality, constantly enhance the Nestle brand, and channel all the management efforts towards the leading brands in the company. In fact, Nestle even implement a ‘60/40’ preference rating system to evaluate the products in the company. Under the system, all the products in Nestle should obtain more the preferences of more than 60% by survey participants in blind tests, or else the products should be reformulated, discontinued or sold. This is proven again as the CFO of Nestle; James Singh commented that the company will sell away businesses where they cannot add value.

Growth towards constantly innovating, developing, adapting and improving new products to suit consumers’ tastes. To constantly sustain and protect the profit margin of Nestle products, the company has been continuously engage in renovating and innovating production lines as well as in innovating new products for the company. Figure 2 below shows the constant improvement combined with constant innovation approach used by Nestle in growing the company. For example, Nestle is found to be constantly updating its product’s quality, including removing salt, sugar and fat from the food being produced. Besides, Nestle is also found to be continuously finding way to enhance the process efficiency to reduce the daily operational expenses.

 

Figure 2: Combination of Kaizen (i.e., Continuous Improvement) & Innovation

2
Source: De Wit & Meyer (2010)

 

Growth with creation of a new industry. As the traditional industry becoming more and more competitive, the board of directors in Nestle had been planning and carrying out strategies to create new industry. As Nestle recognized that the consumers were increasingly aware of the linkages between food, health and personal well-being, Nestle then concentrate its efforts to create the nutrition, health and wellness products for the marketplace.

 

Nestle’s Corporate Management Mechanisms to Leverage its Synergies

There are various methods in which the management in Nestle utilizes to leverage its synergies effects from a combination of various strategic business units. The various ways used by the company to leverage on the synergies between various cross-businesses are discussed as follow.

Sharing of information and knowledge by capitalizing on the power of information technology and system. Through the implementation of GLOBE (i.e., Global Business Excellence) system – it is a comprehensive information system that ultimately would tie all of the Nestle’s businesses together under a common technology infrastructure. Under this system, GLOBE is supposed to capture standardized data and through a systematic management of information, to create knowledge that can be shared among the company’s various strategic business units. Through this system, an online real-time report will bring along important insights into both the production and the selling sides of the company’s business. This enables the management to calculate total worldwide purchases of raw materials and the distribution of spending amongst suppliers. Apart from that, with the system, the Nestle can also measure total worldwide revenues to individual accounts, to enable the company to manage the customers better. Not only have that, the GLOBE system also enabled synchronization of data between manufacturers and retailers – to improve the order fulfillment system for Nestle. With such an advance system, the cooperative retailers can then add new products to their store inventories with just a click on the mouse.

Apart from that, in order to encourage information sharing, Nestle also organized several R&D strategy conferences every year. With such a strategy, the firm able to create a network of experts around the world, and enhance the innovation process of Nestle significantly. This is not surprising as most of the growth in Nestle comes from renovation and innovation in the past few decades.

Creation of Nestle’s ‘open-innovation’ model. The Nestle model of ‘open-innovation’ is in fact a system encompassed from more than 300 external research entities; a collaboration on a global scale. In such a network, more than 5000 scientists and technologists in top ranking universities, research establishments and private firms are brought together. By combining the efforts, expertise and knowledge of both external and internal researchers, Nestle able to enhance the synergies created from such an ‘open-innovation’ network.

Creation of ‘innovation acceleration team’ to fasten product innovation and introduction stage. As many of the new innovations or products delivered by the R&D team in Nestle have global applications, an ‘innovation acceleration team’ was created to enable fast and effective product introduction to the marketplace. The team is actually consisting of several R&D and supply chain management experts, and is given the duties and responsibilities to overseeing, enhancing and fasten the new product launches to various marketplaces.

To manage customers’ perception and confidence level on new or existing products by associating all of the products to the strong ‘Nestle’ brand name. Nestle has a total of 29 billionaire brands, and many of them are marketed in relation o the umbrella Nestle brands.

To use the headquarters as a platform for shaping, planning and thinking while delegating the daily operational task to the local subsidiaries in an effective manner. The job of Nestle headquarters is to act as the platform for shaping, defining and thinking. This enable the group of companies to be able to act efficiently, whereby the big direction is stipulated by the headquarters while the various decentralized business units can adapt to local culture and context in making the daily business decisions. In such a structure, Nestle headquarter able to concentrate all of its efforts in making sure that the energy from various business units are aligned in the right direction, with the right tools and strategies.

 

Future Corporate Level Strategy for Nestle

Strategy formulation for Nestle is complex. In fact, the strategy formulation in most of the big organization faces two tensions of opposite direction. As shown in Figure 3, De Wit and Meyer (2010) argued that there is a compromise between the optimal level of synergy (in terms of economies of scale, i.e., benefits due to shared of resources in marketing, centralized, common HRM or financial policies, standardized ICT and products and etc.) and the optimal level of responsiveness (i.e., referring to the flexibility to response to local demands, react to differences in the local markets and etc.). The two strategic tensions require a firm to find an optimal compromise between synergy and responsiveness, and this often can be done by keeping the interactions between headquarter and the local strategic business units manageable (De Wit & Meyer, 2010).

 

Figure 3: Portfolio Perspective vs. Integrated Perspective

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Source: De Wit & Meyer (2010)

 

The corporate level strategy for Nestle can be formulated from either a portfolio or integrated perspective. Both of these methods can have the respective advantages or disadvantages. The different scenario under each of the respective perspectives will be discussed as follow.

Portfolio perspective. Under the portfolio perspective, Nestle should choose to implement strategy that enhances the responsiveness of the company, instead of achieving the synergies between different strategic business units. The various business units are viewed and analyzed as if they are a collection of business shareholdings. Thus, when that is the case, acquisition of new businesses into the holding company should consider factors such as: diversification effects between the various business units, cash flow optimization among the businesses, and the profitability of the business unit. From this view, Nestle should scout for high performing businesses around the globe and buy these smaller businesses to include them into Nestle business portfolio.

Integrated perspective. From an integrated perspective however, each and every businesses under the holding company is treated as part of the organization. The synergies between strategic business units are being placed attention, whereby top management should integrate the resources, activities and positions of the various subsidiaries to produce synergetic benefits for the organization as a whole. From the historical perspective, Nestle is relying on such kind of management philosophy in its business expansion, acquisition and corporate directions. Often, the new strategic business units being acquired are complementary to the existing strategic business unit. By careful and strategic planning and integration, the coordination and collaboration between strategic business units in Nestle is enhanced and optimized. For Nestle, the company has been operating from the integrated perspective for the past decades, and most importantly, they are doing it successfully. Thus, it is not unreasonable to expect that the company will continue to replying its strategy formulation, planning and execution from the integrated perspective.

Conclusion

To conclude, Nestle is a successful corporation in implementing effective corporate strategies. The various strategic business units are managed well, and serve as the key growth driver for the corporation. Through the strong collaboration of the various business units, synergies between the divisions are generated – enabling Nestle to achieve competitive advantages in the marketplace. In the future, it is still best for Nestle to focus on its success strategies – to manage the various SBU from an integrated perspectives.

References

De Witt, B. and Meyer, R. (2010) Strategy: Process, Content, Context. Oxford: International Thompson Business Press.

Mintzberg, H. (1987) Crafting Strategy, Harvard Business Review, November-December, pp.21-25.

Pearce, J. and Robinson, R. (2005) Strategic Management, 9th Edition, New York: McGraw-Hill.

Thompson, J. (2002) Strategic Management, 4th Edition, London: Thomson.

 

 

 

 

 

 

 

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