Analyse the strategic direction and changes that have recently taken or are

currently taking place in Nestle.

INTERNATIONAL BUSINESS STRATEGY ASSIGNMENT NESTLE

INTRODUCTION.
With employees in excess of a quarter of a million people and over 500 factories
worldwide, Nestl is the worlds largest food company. They are a truly international
organization and face the challenges that come with this in terms of controlling and
monitoring on the one hand and achieving full market potential on the other. Global
brand management involves determining communalities and differences in the
business strategy, brand expression and marketing (Van Gelder, 2003) and being
able to develop an international strategy that incorporates these.
Nestls financial full year results for 2004 were positive. An increase in margin to an
all time high of 12.6% of sales, based on a turnover boosted by 2.9% real internal
growth and 4.5% organic growth, which although below company targets, is
significantly above the industry average (Nestl.com 2005).
This produced a net profit of CHF 6.1 billion, up by 8.1% on the previous year and
prompting a proposal of an CHF 8 per share dividend and CHF one billion share
buyback programme (Nestl.com). Debts have been reduced from CHF 14.4 billion in
2003 to CHF 10.2 billion and the operating cash flow is at CHF 10.4 billion
(OMalley, 2005).
This strong performance was despite what were recognized as difficult trading
conditions, particularly in western Europe, typified by increased raw material costs
and adverse weather conditions. Brabeck-Letmathe, Nestls chief executive officer

highlighted the contribution of Zone Americas, Zone Asia, Oceania and Africa and
Alcons (the ophthalmologic manufacturer) strong growth and profit performance as
being key to the previous years success (Nestl.com).

Corporate strategy relates to how an organization plans its future business, its growth
and its relationships with its customers and suppliers.
This paper sets out to examine the international strategy of Nestl and discuss the
views of several writers on its current success and future robustness.

Centralization
In 1986 Porter identified that multinational corporations faced two main strategic
challenges - configuration ( the location of value chain activities) and coordination
(the organizational structure and systems to support the configuration) (cited in
Faulkner et al p. 160, 2003). For many years Nestl maintained a position described
by Faulkner et al as dispersed configuration and low coordination (Faulkner et al p.
160, 2003). Until recently, despite being a global organization, it operated through a
series of strategic business units based around geography and product. For example,
Europe was Zone 1 and had separate strategic business units for the ice cream product
area and the confectionary product area. This had seemed a logical approach when it
was introduced, as the company has a very diversified product range with specific
regional branding. For example, over 200 varieties of Nescafe coffee exist to cater for
variations in preference around the world (The Economist, 2004). Each strategic
business unit would have functional experts for all the main departments
production, marketing, research etc. (Lynch, 2003) and, following the annual issuing
of general instructions from the company headquarters, each strategic business unit

would produce their long term plan for the following three years. The three year plans
would cover areas such as brand positioning, market share and competitive activity,
pricing, capital proposals and new product development (Lynch p. 649, 2003).
Brabeck-Letmathes view was that the emotional link to local consumers is
extremely important in our business. That is why it remains a fragmented industry and
that is why we try to stay as close as possible to local customers (cited in Hall,
2000). Conversely, Hall et al argue that it has produced a strict hierarchy with only a
handful of global brands at the apex, a greater number of regional brands below it,
and a base of hundreds of local products of appeal in only one or two markets (Hall
et al, 2000). It also meant, however, that the company was unable to react quickly to
changes in the market and produced repetition in some areas e.g. where several
strategic business units would have negotiated different contracts with one supplier.
One of the defining aspects of Nestls organizational strategy in recent years has
been its move from a decentralized hierarchy to one of centralization, by means of
introducing an additional layer of coordination and control (Lynch p. 649, 2003) in
2000 with a view to it becoming fully operational within five years. This extra layer
speeds up the decision-making process, although the executive committee still has to
give final approval. To assist in the realization of the benefits of globalization such as
bargaining power and shared research and development activities, Nestl introduced a
programme known as GLOBE in 2000. The objective of this was to improve the
performance and operational efficiency of our business worldwide (Cited in Lynch p.
650) and to revisit(s) all aspects of our business practices to shape new ways to run
Nestl (cited in Lynch p. 650). The GLOBE programme is still being implemented
and is expected to cost US$ 1.9 billion. It has been reported that the resulting
production-costs reduction has been a major reason behind its strong performance for

2004 (Financial Times, 2005). Launched in co-operation with the leading German
software developer, SAP, one of its major features is the integration of the
organizations regional information technology systems. The conscious decision to
maintain focus on people and brands (The Economist p. 64, 2004), rather than
information technology and to continue along the decentralized path, had been seen as
sacred cows (The Economist p. 64, 2004) for Brabeck-Letmathe, but the realization
that the company was becoming uncompetitive led the chief financial officer to state
that management had either to come up with a new model or split the company
(cited in The Economist, p. 64, 2004). The degree of decentralization can be seen by
examining its information technology structure which shows that the company had
totally different versions of software for planning , accounting and inventory
management for each of its main zones Zone Europe, Zone Americas and Zone
Asia, Oceania and Africa. They had also failed to consolidate the systems they had
inherited through acquisitions leading to the situation described in The Economist as
one in which a bag of sugar used to be identified by three different codes within
Nestl (The Economist p. 64, 2004). The strategy is already showing some success,
notably at Nestls headquarters in the USA where centrally-controlled raw material
sourcing has reduced the different number of prices paid for vanilla from 20 to one
(The Economist, 2004). Cost savings are also being made in the administration side
through the FitNes programme and Target 2004 made substantial savings in
manufacturing activities (The Economist, 2004). The centralization of the information
technology systems is also being introduced in Asia and Oceania, although the
African market is maintaining its decentralized nature as these markets function very
differently because of the political realities of the region (cited in The Economist p.
64, 2004). However, the change in strategic direction has not been welcomed by all

and there have been incidents reported whereby some senior managers had to be sent
elsewhere in the world (and) others quit (The Economist p. 64, 2004). Lynch
identifies that whilst these changes are taking place, the emphasis is still on the
informality of controls (Lynch, 2003). Hall et al question the benefits of using this
approach across the whole product range. They agree that it provides measurable cost
reductions, but feel that it is a key to Nestls success over its competitors that it had
avoided following them in the process of centralization across brands which are
highly localized in nature. They do, however, feel it is a good strategy for areas such
as pet foods, where the products are standardized across national borders (Hall, 2000).
The Economist believes this approach will also benefit the business in terms of
avoiding what it terms as reputational risks (The Economist p. 64, 2004). This
subject is covered in more detail at another point.
Faulkner et al discuss the dichotic nature of the centralization or decentralization
debate, pointing out that decentralization is more about achieving cooperation
between same functional departments across the business rather than amalgamating
them into one (Faulkner et al, 2003). They go on to say that International strategy
choices by an MNC (multinational corporations) are complex and involve the search
for competitive advantage from global configuration/coordination choices throughout
the entire value chain of the firm (Faulkner et al p. 160, 2003).
Part of the culture of Nestl is the encouragement of direct informal contact (Lynch
p. 650, 2003). The emphasis for success is seen as peer pressures, success and
personal promotion (Lynch p. 650, 2003), rather than formal reporting against
strategic objectives (Lynch p. 650, 2003). Lynch sees this as one of the main reasons
for the stability of the management team and encourages its continuation.

Acquisitions and joint ventures

With the increase in competition, Nestl has had to both acquire other companies and
be prepared to enter into joint ventures. This is not a new strategic direction as, in
1989, they entered into a joint venture with General Mills in a successful attempt to
oust Kellogg from its number one position in the breakfast cereal market. By 1993,
they had alliances with Coca Cola and two Chinese companies (Mead, 2003). They
have continued this strategy with the acquisition of the Powwow Group in 2003. In
the future, Nestl plans to increase its share in LOreal of which it currently holds
48% of the controlling company. Brabeck-Letmathe makes no secret of the fact that
that he would like to see a future in which the two groups, global leaders in each of
their industries, were under one roof (cited in Hall et al, 2000). Strategic investments
such as these have proved to be very successful and are an area that Nestl intends to
take advantage of where the opportunities are available. Recently they have identified
the role they could play with a non-food, top, fast-moving consumer goods company
Colgate-Palmolive and are providing their expertise to develop a nutraceuticals
range (oral care confectionary products) which allows the company to spread risk,
speed up development and share expertise (Datamonitor, 2003). Another example is
the decision to increase their share of the ice cream market with the buyout of both
Haagen Dazs and Scholler. The purchase of Dreyers Grand Ice Cream would enable
them to take on Unilever who have the largest share of the market. The ice cream
market is a difficult one to penetrate, requiring efficient production, distribution and
sales facilities (Hall, 2000), something that would not be possible with a highly
decentralized organizational structure.
On a more diverse scale, it has been reported that Nestl was working in collaboration
with the Sainsbury's supermarket chain to jointly facilitate the supply of raw material,

labels and packaging of promotional products (Poirier, 2003). Prior or acquired

resources are seen as those that are built on an organizations existing strength rather
than diversifying into completely new sectors. Any expertise or reputation built over
the companys development can become a foundation, using what is referred to as
path dependency (Lynch, 2003). Nestl have generally followed this path. Concerns
have been raised, though, regarding the increasing government bureaucracy involved
in navigating large-scale acquisitions and The Economist cites the Americas Federal
Trade Commissions hesitancy in passing Nestls takeover of Ralston Purina (The
Economist, 2004).

Corporate Social Responsibility

However, Nestl do face a number of obstacles if they are to maintain or even grow
their current market share, and many of these require strategic solutions. Not the least
of these is the area of corporate social responsibility (CSR). The main thrust of CSR
thinking is that, within the capitalist economy, the only beneficiaries of an
organizations achievements are its shareholders, and that companies should accept
the responsibility of considering the well-being of society as a whole (Author
unknown, January 22nd 2005). It could be countered that this area is not universally
accepted as a necessary consideration when an organization decides on its strategy.
Lynch highlights the fact that failure to make a specific statement on ethical issues,
does not mean that a company is not fundamentally ethical in the way that it does its
business (Lynch, 2003). Nestl has suffered what could be deemed as more than their
fair share of bad publicity around CSR issues and is taking specific action to improve
their reputation including introducing The Nestl Social Research Programme,
becoming a member of CSR Europe, and heavily supporting the International

Federation of Red Cross and Red Crescent Societies community health programme,
which focuses on stopping the spread of HIV/Aids in Africa. They now also attach
their Nestl Sustainability Review to the annual management report. Faulkner et al
refer to this as an attempt to build company-wide awareness of stakeholder issues,
and to institutionalize humanistic policies and practices around supply chain and
market channel issues respectively (Faulkner et al p. 82, 2003). Nevertheless, Nestl
have recently begun to face another challenge which could be called a CSR related
threat - that of childhood obesity, although, as will be demonstrated, their strategy is
more of treating it as an opportunity for product diversification.

Innovation and renovation

Lynch identifies four areas of innovation rewriting the rules of the game,
technological innovation, higher levels of service and co-operation (Lynch p. 137,
2003).
Nestl have a strong strategy in regard to product innovation and renovation based
predominantly around rewriting the rules. This would seem to have been done in a
prescriptive nature, decided on before development, rather than the chaos-controlled
approach which would not seem to sit with Nestls culture. They have recently
expanded their flavoured water market segment through the introduction of new
flavours for products such as Vittel and Perrier and its plans to introduce the Vitalitos
range of flavoured water aimed specifically at the childrens market in Europe
(Nestl.com). The American market will also see the introduction of the calorie-free
Nestl Pure Life. They are linking this with a price repositioning strategy which they
believe will help them achieve their move into the value-brand market and reinforce
its market leader position for the Nestl waters division.

Within their UK food range, Nestl are planning to introduce clearer labelling on
many of their products as a response to what the CEO of Nestl UK, Alistair Sykes,
identified as consumers care about their health and want clearer, easy to
understand information on associated product benefits (cited in Just-Food, 2005).
Sykes went on to say that our long-term focus is on improving the nutritional
qualities of our existing products and launching new, great tasting, healthier products
that people can easily integrate into their diet (cited in Just-Food, 2005). The
renovation strategy can be seen in its programme of salt, sugar and fat reduction
across its products including the removal of trans-fatty acids from sweets and cereals
(Just-Food, 2005). This is in line with the strategy of Brabeck-Letmathe who said that
an important goal is to transform Nestl from a foods company to a food, nutrition,
health and wellness company (cited in The Economist p. 65, 2004). However, the
accusations of profiteering at the expense of their customers continues, with questions
being asked about the validity of their Refuel:Pods vending machines which have
been placed in schools. The analysis of the contents of the products on offer showed
high levels of salt and sugar with only seven of the 46 products being described as
healthy (Foodcomm, 2004). Interestingly, the channel for more healthy foods in North
America is seen as being through the pet-food sector (Nestl.com).

Increased geographical penetration

As well as new product markets, Nestl remain keen to realize potential new
geographical markets. In 1997, only 1.5% of their turnover came from China and
India, which account for 40% of the worlds population (Maucher cited in Josephs,
date unknown). The Economist suggests that Iran and Iraq are being targeted with
Nestls only considerations being the country being a market economy, the size of

the population, the ability to take majority ownership of the business, the state of
technology and whether the firm is welcome (The Economist p. 65, 2004). Recent
new market successes have been seen in China which experienced organic growth of
11.5%, the Philippines (16.4%) and the Middle East (10.4%) (Nestl.com). Japan,
however, was a disappointment as Nestl was unable to see-off the opposition in the
instant coffee market and the brand experienced negative growth of 3.9%
(Nestl.com).

Reliance on discounters
Nestls current sales success, particularly in its food sector in Europe, has been at the
expense of increasing profits as they, along with their main rivals such as Proctor and
Gamble, have had to rely on the discounters market (Financial Times, 2005). It could
be questioned as to whether this is a sensible strategy for going forward. Nestl seem
to feel that it is by stating in their full year report that they have enjoyed a successful
year with hard discounters, with sales up 10% in Europe (Nestl full year results,
2005).

Product range
Nestl continue to face the dilemma of whether to focus on a reduced range of
products and services, or to continue to branch out. Kinni et al discuss this specific
issue and suggest that as Nestl is unlikely to challenge the market leaders such as
Glaxo Wellcome, in the pharmaceutical market, they should change their strategy and
divest themselves of their interests in Alcon and LOreal, whilst continuing to develop
their already diverse range of food brands. They see the difference as being Nestls
position as middlemen in dealings with their main customers, the supermarkets,

placing them in an ideal situation to increase their market share. Organizations that
reply on a small number of similar products, such as Coca Cola, find it difficult to
penetrate other markets as they have a direct relationship with their customers. Kinni
et al go on to say that the best strategy would be to increase this influence by
increasing their brands and comment that they feel Nestl are doing this by
converting its large number of local and regional brands into truly global brands
(Kinni et al p. 396, 2000).

Conclusion
Brabeck-Letmathe is quoted as saying that the 2004 figures have shown that it (the
Group) can deliver strong growth and better profitability even under challenging
circumstances (cited in OMalley, 2005) and he believes this will continue to grow.
Whilst some writers feel that Nestls international strategy can be described as an
ambitious spending spree and going into exotic markets (The Economist, 2004),
they do not deny that the company is now outperforming its main rivals. One broker
has calculated that Nestl shares have outperformed the S&P 100 by a factor of more
than three (cited in The Economist, 2004). However, new rivals continue to appear
on the horizon and Nestl would be wise to take note of companies such as Danone,
whose aggressive marketing strategy, particularly in the area of health-promoting
dairy products, has allowed them to outperform Nestl in some sectors. Nestls
history is one of continual re-evaluation of strategy, involving acquisitions and selloff, expansion and closure of production facilities and restructuring of the
organizational hierarchy. The overall strategic direction of Nestl during the early part
of the 21st century centralization, overhead reduction, innovation and renovation
and movement into new markets - seems to be a successful one.

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