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Case Study Analysis - 1

Case Study Analysis 8 Nestl: Sustaining Growth in Mature Markets

Nicole Nguyen July 16, 2011

BUAD 5312 Strategic Management

Instructor Dr. David J. Rambow Associate Professor of Management Summer Term 2011

Anchorage Campus Wayland Baptist University

Case Study Analysis - 2

Nestl: Sustaining Growth in Mature Markets Introduction Dated back to 1866, the Nestl company had acquired profound knowledge of markets all over the world over the previous 130 years. Nestl is the leading position in the global food industry with operated factories in 77 countries and sells its products on all six continents. Nestl has a broadly diversified business portfolio and with leading global market shares in numerous product categories including coffee, mineral water, dairy products, nutrition and baby food, ice cream, confectionary, pet food, and chocolate. Nestl is also committed to providing quality brands and products that are essential to good health. In doing so, Nestl incorporated nutritional elements into vast array of product categories to promote food that are safe of high quality (Raisch & Ferlic, 2006). Peter Brabeck-Letmathe took the job as CEO of Nestl in June 1997; he faced the challenge of having to improve the companys profitability. In order to generate the financial means required to invest in growth initiatives, Brabeck launched a suite of process innovation initiative in an effort to maximizing existing assets, maximizing capacity utilization, and maximizing distribution logistics. Brabecks goals were invested strongly in product innovation and in speeding up product development processes. He also identified new growth opportunities in the organic growth in the mature market, which could only be reached by strengthening Nestls innovation capacity. Brabecks approach required significant investments in the Research and Development (R&D) group and marketing capabilities. Nestls R&D department was the key factor of Nestls successful growth and it provided the platforms for further organic growth (Raisch & Ferlic, 2006).

Case Study Analysis - 3

Case Study Assignment Questions and Analyses Question 1: First, what type of diversification corporate-level strategy (chapter 6) does Nestl use? Second, is Nestls corporate strategy more shareholder or management favored? Question 2: From Nestls corporate strategy identified above, which multidivisional structure defines Nestl structure? Related Constrained Diversification Corporate-Level Strategy Related constrained diversification corporate-level strategy is utilized by a firm that receive less than 70% from one single business. Firms with a related constrained strategy also shares resources and activities between its businesses (Hitt, Ireland, & Hoskisson, 2011). Nestl corporate-level strategy consists of moderate-high levels of diversification. Nestl generated most of revenue through related constrained diversification from major business such as all business share product, technological, and distribution linkages (Hitt et al., 2011). Helmut Maucher, the CEO of Nestl between 1982 through 1997, had transformed Nestl from a manufacturer into a truly diversified global food company. Its product portfolio consists of 19 categories such as coffee, milk, confectionary pet food, clinical nutrition, and mineral water. Nestls top five product categories, coffee, milk products, confectionary, ophthalmic, and dehydrated cooking aids account for 60% in-group sales and 75% in operating profit. Nestls core food and beverage business contributes to more than 95% of the companys 1996 sales, and during Mauchers 16 years reign, sales has doubled, and profits has triple with a 17% total return to shareholders. Despite Nestls success, it has faced the lowest growth rate in mature market with a limited potential for organic growth. The company generated more than

Case Study Analysis - 4 70% of its sale in the mature markets also showed low growth rate in countries such as the United States, Russia, and Japan (Raisch & Ferlic, 2006). When Brabeck took control as CEO in 1997, he realized the limits of external growth strategy which Nestl had failed to reach the dominant position, has largely been divested. Brabeck was well aware of the need for strategic reorientation. His first priority was to achieve real internal growth, by moving Nestls goals of 2% in the mature global market to 4% internal growth as one of the top of the companys strategic agenda. Brabeck stated that internal growth reflects the companys performance and competitiveness better, even more so than acquiring another companys turnover (Raisch & Ferlic, 2006, p. 1). Brabeck took the initiatives necessary to improve the company profitability by generating the massive cash flow required for a large-scale growth to improve the companys capital efficiency. Brabecks strategy was to focus the business to become more efficient by cutting back on their investment budget, which would allow the company to maximizing existing assets, maximizing capacity utilization, and maximizing distribution logistics. Brabeck launched a suite of process innovation initiative to spur general growth (Raisch & Ferlic, 2006). Brabeck launched a manufacturing efficiency program called MH97 with the objective of reducing raw material costs and optimizing production processes. The program generated saving in excess of CHF 4 billion (Raisch & Ferlic, 2006). Global Business Excellence (GLOBE) was launched in 2000 to improve operational efficiency by integrating the companys businesses on a global scale. The program will enable total saving of CHF 3 billion by the end of 2005 (Raisch & Ferlic, 2006). FitNes 2002 focused to drive efficiency in the groups administrative processes. The program incurred saving in excess of CHF 1 billion (Raisch & Ferlic, 2006).

Case Study Analysis - 5 Target 2004 focused on improving operating performance by creating a regional manufacturing network. The program generated savings of more than CHF 3 billion (Raisch & Ferlic, 2006). These programs were directed to increase Nestls operational performance and to better exploiting the synergies between brands. Brand strategies were the most important strategic initiative that allocate as many of the companys 127, 000 products as possible to six strategic brands such as Nestl, Buitoni, Maggi, Nescafe, Nestea, and Purina. By 2005, more than 70% of the company portfolio belonged to one of these six bands. Brabecks efficiency initiative outcome was impressive; its margin rose 8.7% in 2005 compared to 5.7% in 1997. The various cost incurred total saving of CHF 12 billion and cash flow has reached 8 billion in 2005 compared to 1997 (Raisch & Ferlic , 2006). Shareholders optimal level of diversified position was between the dominant business and related constrained diversification strategies. Nestls corporate strategy is in favor of delivering shareholders value through profitable long-term growth, which focused more on diversification portfolio of equity investment (Hitt et al., 2011). Nestl has a brand value of nearly CHF 15 billion and a name recognition of almost 100% in the worlds leading markets. It was clear that some of Nestls low growth products such as tomato paste, oil, and dry pasta were not going to create value in the long term. Brabeck identified area from which new growth could come by shifting Nestl toward new sources of growth for the companys future expansion. He sensed the growing demand for wellness and nutritional products that could sustain growth in Nestls mature markets. Brabeck aimed at two main strategic goals; the first objective was to develop nutrition and wellness as a value-added feature in food and beverage business, and the second objective was to reinforce the companys

Case Study Analysis - 6 leading position specializing in nutritional products. Nestl has modified more than 700 products by adding nutritional functionalities ranging from ice cream, frozen foods, and confectionaries to pet food. These nutritional products focused on providing consumers whose primary purchasing are based on nutritional value (Raisch & Ferlic , 2006). Nestl did not only diversify into other markets in the food industry, but also into the cosmetics area. Nestl joint ventured with LOreal who expertise in beauty products. The products are aimed at improving the quality of skin, hair, and nails. Nestls nutrition business has contributed significantly to the company success, which grew from CHF 200 million in 1998 to CHF 3 billion in 2005 (Raisch & Ferlic , 2006). Not only was Nestl considered the innovation leader in the global food and nutrition sector, the driving force behind the innovation was the companys extensive research and development network. Two-third of the companys R&D activities is dedicated to renovation of existing products, and the remaining one-third is reserved for more radical products innovation. Brabecks development of global business strategies was focused on long-term capital growth and having clearly set annual profit targets (Raisch & Ferlic, 2006). Cooperative Multidivisional Structure Nestl uses the cooperative form of the multidivisional structure to implement the related constrained strategy. The cooperative form is an M-form structure horizontal integration which is used to bring about interdivisional cooperation (Hitt et al., 2011). Decentralizing has always been one of the pillars of Nestls way of doing business; it runs multiple versions of accounting, planning, and inventory software making it difficult to share information between departments. Brabeck launched Globe Business Excellent to improve operational efficiency by integrating the company businesses on a global scale and allowing

Case Study Analysis - 7 inter-market systems to communicate more effectively with each other. In addition, its creation of Product Technology Center, Local Application Centers and Clusters was to transform research concepts provided by Nestls fundamental research center into consumer products. These centers are closely linked to the companys strategic business units and are located in key consumer markets. This clearly indicated that Nestl has transformed to a cooperative multidivisional structure, has close cooperation with the markets and R&D, and the strategic business unit has lead Nestls innovation process and ensured cooperation and communication between the companys disparate units (Raisch & Ferlic, 2006).

Case Study Analysis - 8 References Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2011). Strategic management: Competitiveness and globalization: Concepts and cases (9th ed.). Mason, OH: South-Western Cengage Learning. Raisch, S. & Ferlic, F. (2006). Nestl: Sustaining growth in mature markets. Mason, OH: South-Western Cengage Learning.