Executive Summary
This paper provides a case analysis and case solution to a Harvard Business School strategic management case study on Swiss-based Nestle, the world’s largest food and beverage company with 2007 sales exceeding CHF100 billion or about US$112 billion(Bell & Shelman, 2009, p. 1). While extensive background information dating to Nestle’s 1867 founding is provided, the primary time setting for the case is April 2008, shortly after 29-year Nestle veteran Paul Bulcke advances to the position of CEO, replacing Brabeck, who retired after a highly successful 12 year reign as CEO. The case focuses on Bulcke’s efforts to formulate plans for advancing his strategic vision at Nestle.
Nestle is a huge, highly successful, cash-rich global corporation with hundreds of “billionaire brands”, a strong culture, and a history of producing innovative products and customizing products and services to meet local tastes. Looking around at Nestle, scanning the environment, and appraising the future, new CEO Bulcke sees little room for alarm. Looking towards the future, Bulcke’s only worry is “that we become complacent” (Bell & Shelman, 2009, p. 1).
Bulcke’s predecessor, Brabeck, had set Nestle on the path of achieving worldwide sustainable competitiveness through four strategic pillars: 1) low-cost, highly efficient operations; 2) renovation and innovation of the Nestle product line; 3) universal availability; and 4) improved communication with consumers through better branding (Bell & Shelman, 2009, p. 3). Brabeck believed – and indeed was proven – that adherence to these four strategic pillars would allow achievement of the “Nestle Model”, a term which referred to Nestle’s long term objectives of “organic growth between 4% and 6% each year; continued year-after-hear improvements in earnings before interest and tax – EBIT margin; and improved capital management” (Bell & Shelman, 2009, p. 3).
Brabeck launched a number of important initiatives during his twelve year tenure, including restructuring of the R&D department to be more responsive to consumers, drive renovation and innovation and support organic growth; launching a 60/40 preference rating system for products; and developing GLOBE (Global Business Excellence), a comprehensive information system designed to tie all of Nestle’s businesses together under a common technology infrastructure. Brabeck, who saw sales grow 78% and EBIT grow 142% during his tenure, also made several critical acquisitions in bottled water, pet food, coffee, and ice cream; championed Nestle’s culture as the critical glue of the corporation; and pioneering the way for the beginning of Nestle’s shift from being a technology and processing-driven food and beverage company “toward a broader vision of nutrition, health, and wellness” (Bell & Shelman, 2009, p. 4).
Bulcke succeeded Brabeck as Nestle’s CEO in April of 2008, following two years of careful succession planning. Bulcke appears to share Brabeck’s basic philosophy of leadership (which emphasizes empowerment) as well as his views on the importance of culture in Nestle’s long term performance. Bulcke has also reaffirmed Brabeck’s commitment to GLOBE (which Bulcke sees as an important vehicle for continuous improvement (Bell & Shelman, 2009, p. 10). Despite these basic commonalities, Bulcke has made it clear that his vision for Nestle is not identical to that of his predecessor’s. Bulcke wants all of Nestle’s future growth to come as a result of internal growth, not acquisition. Bulcke strongly supports a rapid transition to the health, nutrition and wellness strategy and indeed, envisions this strategy as one leg of four complementary platforms which Bulcke believes could double the company’s sales over the next ten years. Besides health, nutrition and wellness, the three other platforms are “emerging markets”; “out of home consumption” and “premiumization of existing products” (developing exclusive, high-quality versions of existing products and appealing to higher income customers (Bell & Shelman, 2009, p. 10). Problem Statement
Nestle must formulate and implement the optimal strategy which will allow it to meet the growth and performance goals related to the Nestle Model while at the same time achieving a sustainable competitive advantage within the global food giant’s broader vision of transitioning to a health, nutrition and wellness company, and responding to threats and opportunities in the external environment.
Problem Analysis
An analysis of the problem and an appraisal of Nestle is provided below with the assistance of three analytical tools: a pest analysis, a Porter’s Five Forces analysis, and a S.W.O.T. (strengths-weaknesses-opportunities-threats) analysis.
P.E.S.T. Analysis
Political. Globalization is unquestionably one of the most important political factors in the food and beverage industry. Nestle is clearly a global business, and in recent years as globalization has become a reality, it has learned that globalization means a lot more than just access to emerging markets. As Jose Lopez, Nestle’s Vice President of operations observed, “the impact of globalization has been different than we thought it would be. For those of us in the West, globalization meant developing countries opening their markets for us to sell to. Yet that’s not how it turned out…instead of being globalized we are learning to react to global markets” (Bell & Shelman, 2009, p. 10). Nestle’s status as a global corporation makes it a target for anti-globalists (Conlin, 2008). Regulatory issues are an important issue in the global food and beverage industry. Nestle, for example, operates in many highly regulated sectors, with multiple tiers of regulation affecting its products in many cases (related to food and beverage safety, production regulations, environmental regulations, cross-border trade, etc.) (Nestle’s environmental impact, 2008).
Economic. Demand for basic food supplies persists even in times of economic downturn. However, the patterns of eating and drinking changes, with full meals more likely to be prepared and consumed at home. With operations around the globe, Nestle had to make adjustments for variations in demand fluctuations and price sensitivities in different countries and geographic regions. Although Nestle was based in Switzerland and most of its key leaders were from the United States and the European continent, one third of 2007 sales came from the developing world and analysts projected that by 2010, 90% of the world’s population would live in developing and emerging countries.
Social. As a food and beverage company operating with the global food industry, Nestle was well aware of the fact that patterns of food and beverage consumption tend to be culturally-bound or at least culturally linked.
Technological. Throughout the industry, technologies are vital to defining recipes, producing food and beverages, locating and purifying water (Nestle is one of the world’s biggest bottled water companies). As the company’s own GLOBE initiative demonstrates, internal technologies are vital to coordinating operations.
Five Forces Analysis
Threat of New Entrants (Low-Medium). Even though food and beverage is in many ways analogous to a commodity business, barriers to entry as a result of supply-side economies of scale, demand side benefits of scale, capital requirements, incumbency advantages and unequal access to distribution channels keep the threat of new entrants relatively low (Porter, 2008).
Power of Suppliers (Medium) Porter (2008) notes that “powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants” (p. 6). For most major firms in the food and beverage industry, the power of suppliers is medium to medium high. For Nestle, the power of suppliers is quite low as a result of extensive vertical integration by Nestle.
Power of buyers (low). For Nestle and most other buyers in the industry, the power of suppliers has been kept quite low because of the fact that buyers are numerous and cannot credibly threaten to integrate forward and assume their business.
Threat of Substitute Products (High). It would be difficult to name or think of a food or beverage product which did not have a near or identical substitute. Rivalry of existing competitors (Medium High to High). Porter (2008) notes that the intensity of rivalry is greatest when competitors are numerous or roughly equal in size and power, industry growth is slow; exit barriers are high and firms cannot read each other’s signals very well (p. 9). Many of these conditions have been met, thus the intensity of rivalry would be assessed as fairly intense. S.W.O.T. Analysis
Strengths
1. Financial strengths – a decade-plus of strong financial results; available cash for launching new operations and/or making acquisitions.
2. Strong corporate culture.
3. History of strong, capable leadership.
4. Effective R&D Department
5. Strong portfolio of products
6. Stable of blockbuster brands
7. Huge physical infrastructure with locations around the world 8. Well-developed supply chain
9. Integrated management
10. Good relations with suppliers and farmers
11. Ability to customize and localize products
Weaknesses
1. History of product recalls
2. History of questionable reputation and shady deal-making (Datamonitor, 2008). 3. Allegations of unethical conduct.
4. Product concentration in many areas which might be viewed as unhealthy. 5. Few to no organic profiles in its portfolio.
Opportunities
1. Growth in emerging and developing markets
2. Changing tastes worldwide
3. Opportunity to make positive contributions to people’s health and nutrition 4. Opportunity to develop new products
5. Opportunity to further expand into new markets (geographic and product) 6. Opportunity to acquire complementary firms and/or firms to mitigate weaknesses Threats
1. Threat of competition from major global food rivals
2. Threat of competition from smaller, local companies who are more in touch with the needs of the local market.
3. Threat of competition from large discounters such as Wal-Mart, Sam’s Club and Costco. 4. Threat of backlash based on political opposition
5. Threat of regulation
6. Threat of changing consumer tastes
7. Threat of environmental degradation
Alternatives
Any potential alternative strategies must aim at achieving the Nestle Model and its associated long-term objectives (of 5-6% annual organic growth, continued year-to-year improvement in EBIT margin, and improved capital management) as well as be consistent with CEO Bulcke’s stated mandates of stressing internal growth as the primary source of future growth, using GLOBE as a vehicle for continuous improvement, and making the health, nutrition and wellness strategy the mainstream of Nestle’s business. With these caveats in mind, the following alternative strategic variations have been identified. 1. Adhere rigidly to Bulcke’s basic outline with the 4 Complementary Platforms for growth. This alternative would follow CEO Buckle’s rationale that Nestle’s top strength is its product and brand portfolio, that growth should be generated internally, and that strategy should focus on Bulcke’s four identified platforms for growth:
1) health, nutrition and wellness (to be the centerpiece), 2) emerging markets; 4) out of home consumption; and 4) premiumization of existing products. An obvious advantage of this alternative is that it will have the full support of Nestle’s CEO who will no doubt work hard to ensure support for the program from Nestle’s board, its management, and its rank-and-file employees. Another advantage of this alternative is that it provides a moderate degree of consistency with the previous strategy under CEO Brabeck (particularly in terms of its embrace of the Nestle Model and its desire to continue moving Nestle beyond food to nutrition, health and wellness. A third advantage is that it clearly builds on some of Nestle’s major strengths, including its broad product and brand portfolio and its strong international presence.
At the same time, there are a number of disadvantages with this strategy. First of all, by restricting growth to internal growth, this alternative forgoes possible benefits accrued through judicious acquisition. Nestle has some weaknesses in areas where it intends to growth (e.g., health and nutrition) and acquisitions might be able to counteract those weaknesses more quickly than internal growth. Secondly, Bulcke’s insistence on giving the health, nutrition, and wellness strategy priority above all else and working to quickly make it the mainstream of Nestle’s business may not reflect a realistic goal. Nestle will face many challenges as it tries to make health, nutrition and wellness a mainstream characteristic of key divisions like confectionary, powdered and liquid beverages, ice cream, and many of the prepared foods. Another potential disadvantage to Bulcke’s planned strategy is that the selected “four complementary growth platforms” are not yet proven to be complementary and at face value, seem to be on some levels contradictory (e.g., it may be difficult to reconcile efforts to “premiumize” existing productions with efforts to build a portfolio of “popularly positioned products” in emerging markets. In addition, it may be difficult to maintain growth and EBIT goals across these new, as yet untested platforms. Another consideration is that over the next few years, it may become apparent that one or more of these 4 platforms has more growth and profit potential than the others; if so, it would be disadvantages to continue a more or less equal emphasis on all three.
2. Build greater flexibility into the model, allowing for a slower transition to the company-wide health, nutrition and wellness model, and allowing for the possibility of modification and/or elimination of one or more of the other three growth platforms (as well as the possible addition of a different growth platform). Also maintain a flexible approach with regard to acquisitions versus internal growth. This alternative would have the advantage of increasing the potential of meeting growth and profitability goals. Another advantage in a flexible approach is that it would allow for the possibility of “discovering” another potential growth platform. Yet another advantage would be the possibility of speeding growth and/or progress towards the goal of transitioning to the “health and nutrition” model via judicious acquisitions as opposed to a sole reliance on internal growth. A major disadvantage of this strategy is that CEO Buckle may be disinclined to give it his full support because it is not fully consistent with his plan. Another disadvantage is that this flexible approach may delay Nestle’s progress towards the health and nutrition model.
Another potential disadvantage is that in encouraging flexibility, Nestle may inadvertently foster inconsistencies in its business strategies and objectives and create confusion, conflicts and/or contradictions between product areas/business units. Yet another disadvantage is that it provides Nestle with an opportunity to back away from its health and nutrition strategy if it should prove difficult to execute. 3. Add a program of acquisition and divestiture to Bulcke’s basic model. Rather than relying solely on internal growth, this alternative would allow for the use of judicious (yet frequent and widespread if deemed necessary) acquisitions, particularly in areas targeted for growth where Nestle is weak (e.g. organic foods). Coupled with the acquisition strategy would be a targeted divestiture strategy, aimed at gradually exiting those businesses and dropping those products which are fundamentally at odds with Nestle’s commitment to health, nutrition and wellness.
For example, this may require Nestle to exit most of its confectionary business. Likewise, the company would want to review whether or not food products loaded with salt, sugar, and artificial preservatives and flavorings really belong in the portfolio of a company which has pledged to transform itself into a unified health, wellness and nutrition company. The acquisition portion of this modification to the strategy has the advantages of allowing for the addition of new resources, including new resources and businesses which may complement existing businesses and lead to synergies. The divestiture strategy has the advantage of allowing Nestle to exit those business which simply do not meet its overall guidelines and strategic objectives and to do so in a way which is likely to contribute favorably to both its financial objectives and its objective of building an integrated health, wellness and nutrition company. As with alternative #2, this alternative carries the risk of failing to attract support from core employees as well as the risk that the CEO will oppose it. Recommendations & Implementation
It is strongly recommended that Nestle combine the above suggested alternatives #2 and #3, building flexibility into the strategy overall, slowing the planned transition time for moving to a unified health, wellness and nutrition company, and allowing the firm to focus on its core resources and business opportunities by using the tools of acquisition (adding
strength in selected areas and/or counteracting weaknesses in some areas) and divestiture (shedding unprofitable businesses and products, getting rid of businesses which do not fit into the profile of a unified health, wellness and nutrition company. Such a combination, flexible approach will be best suited to tailoring to the specific resources and capabilities of Nestle and the opportunities and threats in the external environment. Moreover, it is more likely that Nestle will meet its performance and financial goals through this flexible approach than through Bulcke’s more rigid approach.
To begin implementation of this option, it is recommended that Nestle top leadership and management planners use the resource-based view of the firm (Barney, 1991) and in particular, Grant’s (1991) practical framework of a resource-based approach to strategy analysis as a guide to strategy formulation and implementation. This will involve the following five-step process (Grant, 1991, p. 115): 1. Identifying and classifying Nestle’s resources within the three primary categories of physical capital, human capital, and organizational capital. Both tangible and intangible resources should be identified. After resources are identified and classified, Nestle management should appraise the firm’s strengths and weaknesses, relative to key competitors Unilever, Kraft, Group Danone and General Mills. The next component of this step is to identify opportunities for better utilization of resources. 2. Identify Nestle’s capabilities – what can Nestle do more effectively than its key rivals? Once capabilities have been identified, it is necessary to identify the resource inputs to each capability, as well as the complexity (e.g., does it involve several resources?) 3. The strategy team should then appraise the rent-generating potential of resources and capacities in terms of: a) their potential for sustainable competitive advantage [in order to have this potential, a resource/capacity must be valuable, rare, imperfectly imitable, and non-substitutable] (Barney, 1991, p. 106); and b) the appropriability of their returns.
4. Based on the preceding work, the Nestle strategy team should then select a strategy or collection of strategies which best exploits the firm’s resources and capabilities relative to external opportunities. 5. Finally, Nestle strategy managers should identify resource gaps which need to be filled, as well as invest in replenishing, augmenting and upgrading the firm’s resource base. It recommended that Nestle managers complete this initial strategic analysis within six months. Once this initial assessment/strategy formulation is completed, the strategy team should: 1. Survey and assess the identified resources and capabilities in terms of their level of fit with Nestle’s goal of transitioning from a food company to a health, nutrition and wellness company. 2. Target non-producing or inappropriate (those which don’t fit with the rest of the portfolio or the strategic objects) for divestiture and develop a timetable and plan for such divestiture. 3. Examine the identified “resource gap” areas and determine if these gaps can be filled through internal development (e.g., R&D, internal growth) and/or strategic acquisition. If acquisition, begin scanning the environment for likely acquisition targets.
