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Strategic Management in Nestle

Strategic Management in Nestle



How Nestle Icecream Strategy was Built up!

How Nestle Icecream Strategy was Built up!
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    Strategic Management in Nestle Strategic Management in Nestle Document Transcript

    • TALLINN UNIVERSITY OF TECHNOLOGYSchool of Economics and Business AdministrationDepartment of Business AdministrationChair of Organization and Management WORLDWIDE NESTLÈ WORLDWIDE – TIME FOR ICE- ICE-CREAM ART Erge Kalbus, Katrin Põldmets, Nele Järve Advisor: lecturer Alar Kolk Tallinn 2011
    • CONTENTSIntroduction ...................................................................................................................... 31. Corporation history and development ....................................................................... 51.1 Nestlé’s beginnings in Switzerland in 1866 .............................................................. 51.2 World War I’s influences on Nestlé .......................................................................... 61.3 How Nestlé kept up business during World War II .................................................. 71.4 Period of diversification from 1944 to 1975 ............................................................. 81.5 Diversifying outside of the food sector ..................................................................... 81.6 Changes and expansion continue .............................................................................. 92. Nestlé corporate strategies and competitive positions ............................................ 122.1 Competitive advantages .......................................................................................... 142.1.1 People, culture, values and attitude ................................................................. 142.1.2 Unmatched geographic presence ..................................................................... 162.1.3 Unmatched product and brand portfolio .......................................................... 162.1.4 Unmatched research and development capability............................................ 182.2 Operational pillars ................................................................................................... 192.2.1 Innovation & renovation and operational efficiency ....................................... 192.2.2 Whenever, wherever, however and consumer communication ....................... 213. Nestlé ice-cream strategy ........................................................................................ 233.1 Value propositions................................................................................................... 243.2 Distribution channels............................................................................................... 243.3 Partnerships, Activities and Resources ................................................................... 253.4 Cost structure and revenue streams ......................................................................... 284. Competitive strategy ............................................................................................... 33Summary......................................................................................................................... 35 2
    • INTRODUCTIONStarting business in 1866 Henri Nestlé already understood the importance ofcollaboration and branding. Nowadays his company has grown into the worlds leadingNutrition, Health and Wellness Company and its mission statement is "Good Food,Good Life", which means providing consumers with the best-tasting, most nutritiouschoices in a wide range of food and beverage categories to suit any occasion. Nestlé is present in 117 countries all over the world. This research paperdescribes how the Nestlé corporation has developed and grown into a global companyover the past 145 years. Food and eating habits vary from country to country and region to region, as doflavour preferences. As they say, "food is local". Nestlé has several successful products,notably Nescafé and Nespresso. In this paper, we will closely examine the strategywhich Nestlé took towards ice-cream which enabled them to become a global marketleader in this category. This strategy was chosen as its main strength lies in the choiceof products and brands and it provides a framework for quickly gaining success in newmarkets. The first chapter of this report describes Nestlé’s development over the years sothat we may gain a better understanding of which experiences led them to develop thatstrategy. The second chapter provides an overview of Nestlé’s approach to business towhich all of the strategies throughout the corporation must adhere. The third chapter isabout how Nestlé decided in 1991 that ice-cream would be a product with fast and widegrowth potential and how they set themselves a goal to become the gobal market leaderin this category. The chapter gives an overview of how exactly Nestlé were able toachieve this. Information regarding the history of the Nestlé coporation and its strategies hasbeen acquired from the official website – www.nestle.com – which will not be furtherreferenced in this paper. One of the authors of this paper has had the opportunity to visitthe Nestlé ice-cream factory in January 2011 and based on the information gained from 3
    • this visit has written the overview of Nestlé’s global ice-cream strategy. The visit to thefactory provided information about a successful approach to entering a market, to takingover a market and about product development. Because this information is confidential,it is not possible to directly reference the names of sources due to the lack of Nestlé’sapproval. However, all this can be read in chapter 3, which discusses their strategy fortaking over the gobal ice-cream market. In chapter 4, the authors propose their ideas forhow to sell ice-cream in the future in a cost-effective manner and for quick entry into allmarkets. 4
    • 1. CORPORATION HISTORY AND DEVELOPMENTTo get a better understanding of Nestlé Corporation’s knowledge and competences itwould be useful to look at how this corporation started business and how it hasdeveloped over the past 145 years. In the following chapters you will find some keydevelopments during this period, which help us to better appreciate their strategy whichkick-started the growth of the ice-cream market and how this food giant used theirinternal strengths and competences.1.1 Nestlé’s beginnings in Switzerland in 1866The key factor which drove the early history of the enterprise that would become theNestlé Company was Henri Nestlés search for a healthy, economical alternative tobreastfeeding for mothers who could not do so. In the mid-1860s, Nestlé, a trained pharmacist, began experimenting withvarious combinations of cows milk, wheat, flour and sugar in an attempt to develop analternative source of infant nutrition for mothers who were unable to breast feed. Hisultimate goal was to help combat the problem of infant mortality due to malnutrition. Henri Nestlé also showed an early understanding of the power of branding. Headopted his own coat of arms as a trademark; in his German dialect, Nestlé means littlenest. One of his agents suggested that the nest could be exchanged for the white crossof the Swiss flag. His response was firm: "I regret that I cannot allow you to change mynest for a Swiss cross .... I cannot have a different trademark in every country; anyonecan make use of a cross, but no-one else may use my coat of arms." Meanwhile, the Anglo-Swiss Condensed Milk Company, founded in 1866 byAmericans Charles and George Page, broadened its product line in the mid-1870s toinclude cheese and baby formulas. The Nestlé Company, which had been purchasedfrom Henri Nestlé by Jules Monnerat in 1874, responded by launching a condensed 5
    • milk product of its own. The two companies remained fierce competitors until theirmerger in 1905. Some other important firsts occurred during those years. In 1875 Vevey residentDaniel Peter figured out how to combine milk and cocoa powder to create milkchocolate. Peter, a friend and neighbour of Henri Nestlé, started a company that quicklybecame the worlds leading maker of chocolate and later merged with Nestlé. In 1882Swiss miller Julius Maggi created a food product utilizing legumes which was quick toprepare and easy on digestion. His instant pea and bean soups helped launch Maggi &Company. By the turn of the century, his company was producing not only powderedsoups, but also bouillon cubes, and sauces and flavourings.1.2 World War I’s influences on NestléThe Corporation formed by the 1905 merger was called the Nestlé and Anglo-SwissMilk Company. By the early 1900s, the Corporation was operating factories in theUnited States, Britain, Germany and Spain. In 1904, Nestlé added chocolate to its rangeof food products after reaching an agreement with the Swiss General ChocolateCompany. Condensed milk exports increased rapidly as the Corporation replaced salesagents with local subsidiary companies. In 1907, the Corporation began full-scalemanufacturing in Australia, its second-largest export market. Warehouses were built inSingapore, Hong Kong, and Bombay to supply the rapidly-growing Asian markets. Most production facilities remained in Europe, however, and the onset of WorldWar I caused severe disruptions. Acquiring raw materials and distributing productsbecame increasingly difficult. Fresh milk shortages throughout Europe forced factoriesto sell almost all their supplies to meet the needs of local towns. Nevertheless, the war created tremendous new demand for dairy products,largely in the form of government contracts. To keep up, Nestlé purchased severalexisting factories in the United States. By the end of the war, the Corporation had 40factories, and its world production had more than doubled since 1914. The end of World War I brought with it a crisis for Nestlé. Governmentcontracts dried up following the cessation of hostilities, and civilian consumers who had 6
    • grown accustomed to condensed and powdered milk during the war switched back tofresh milk when it became available again. In 1921, the Corporation recorded its firstloss. Rising prices for raw materials, the worldwide post-war economic depression anddeteriorating exchange rates deepened the gloom. Nestlés management responded quickly, bringing in Swiss banking expert LouisDapples to re-organise the Corporation. He streamlined operations to bring productionin line with sales and reduced the Corporations outstanding debt. The 1920s also saw Nestlés first expansion beyond its traditional product line.The manufacture of chocolate became the Corporations second most important activity.New products appeared steadily: malted milk, a powdered beverage called Milo,powdered buttermilk for infants, and, in 1938, Nescafé. The Brazilian Coffee Institute first approached Louis Dapples in 1930, seekingnew products to reduce Brazils large coffee surplus. Eight years of research produced asoluble powder that revolutionised coffee-drinking habits worldwide. Nescafé becamean instant success and was followed in the early 1940s by Nestea.1.3 How Nestlé kept up business during World War IIThe effects caused by the onset of World War II were felt immediately by Nestlé.Profits dropped from $20 million in 1938 to $6 million in 1939. Neutral Switzerlandbecame increasingly isolated in a Europe at war, and the Corporation transferred manyof its executives to offices in Stamford, Connecticut. The first truly global conflict put an end to the traditional Company structure. Toovercome distribution problems in Europe and Asia, factories were established indeveloping countries, particularly in Latin America. Ironically, World War II helped speed up the introduction of the Corporationsnewest product, Nescafé. After the United States entered the war, Nescafé became astaple beverage of American servicemen serving in Europe and Asia. Annual productionlevels reached one million cases by 1943. As in World War I, production and sales rose in the wartime economy: Nestléstotal sales jumped from $100 million in 1938 to $225 million in 1945. As the end of thewar approached, Nestlé executives found themselves unexpectedly heading up a 7
    • worldwide coffee corporation, as well a company built upon Nestlés more traditionalbusinesses.1.4 Period of diversification from 1944 to 1975The end of World War II marked the beginning of the most dynamic phase of Nestléshistory. Throughout this period, Nestlés growth was based on its policy of diversifyingwithin the food sector to meet the needs of consumers. Dozens of new products wereadded as growth within the Corporation accelerated and outside companies wereacquired. In 1947, Nestlé merged with Alimentana S.A., the manufacturer of Maggiseasonings and soups, becoming Nestlé Alimentana Company. The acquisition ofCrosse & Blackwell, the British manufacturer of preserves and canned foods, followedin 1960, as did the purchase of Findus frozen foods (1963), Libbys fruit juices (1971)and Stouffers frozen foods (1973). Meanwhile, Nescafé continued its astonishing success. From 1950 to 1959, salesof instant coffee nearly tripled, and from 1960 to 1974, they quadrupled. TheCorporations total sales doubled twice in the 15 years following World War II. Thedevelopment of freeze-drying led to the introduction of Tasters Choice instant coffee in1966.1.5 Diversifying outside of the food sectorFinally, Nestlé’s management made the decision to diversify for the first time outside ofthe food industry. In 1974, the Corporation became a major shareholder in LOréal, oneof the worlds leading makers of cosmetics. After the agreement with LOréal in 1974, Nestlés overall position changedrapidly. For the first time since the 1920s, the Corporations financial situationdeteriorated as the price of oil rose and growth in industrialised nations relented. Inaddition, foreign exchange rates deteriorated with the French Franc, Dollar, PoundSterling, and Mark all losing value relative to the Swiss Franc. Finally, between 1975 8
    • and 1977, the price of coffee beans quadrupled, and the price of cocoa tripled. As in1921, the Corporation was forced to respond quickly to a radically changedmarketplace. Nestlés rapid growth in the developing world partially offset a decline in theCorporations traditional markets, but it also carried with it the risks associated withunstable political and economic conditions. To maintain a balance, Nestlé made itssecond venture outside the food industry by acquiring Alcon Laboratories, Inc., a U.S.manufacturer of pharmaceutical and ophthalmic products. Taking such a step in a time of increased competition and shrinking profitmargins required boldness and vision. Even more-so than the LOréal move, Alconrepresented a leap into unknown waters for Nestlé. But, as Group Chairman PierreLiotard-Vogt noted, "Today we find ourselves with a very wide range of activities, allof which have one thing in common: they all contribute to satisfying the requirementsof the human body in various ways."1.6 Changes and expansion continueUnder the new Chief Executive Officer, Helmut Maucher, Nestlé approached the 1980swith a renewed flexibility and determination to evolve. The Corporations strategy forthis period was twofold: improve its financial situation through internal adjustments anddivestments, and continue its policy of strategic acquisitions. Thus, between 1980 and 1984, the Corporation divested a number of non-strategic or unprofitable businesses. At the same time, Nestlé managed to put an end toa serious controversy over its marketing of infant formula in the Third World. Thisdebate had led to a boycott of Nestlé products by certain civil and religiousorganisations. This issue is still alive in some quarters, but there is no longer anysignificant boycotting. In 1984, Nestlés improved bottom line allowed the Corporation to launch a newround of acquisitions, including a public offer of $3 billion for the American food giantCarnation. At the time, the takeover, sealed in 1985, was one of the largest in the historyof the food industry. 9
    • The first half of the 1990s proved to be a favourable time for Nestlé: tradebarriers opened and world economic markets developed into a series of more or lessintegrated trading areas. The opening up of trade in Central and Eastern Europe, as wellas China, and a general trend towards liberalisation of direct foreign investment wasgood news for a company with interests as far-flung and diverse as Nestlé. Whileprogress since then has not been as encouraging, the overall trends remain positive. In July 2000, Nestlé launched a Group-wide initiative called GLOBE (GlobalBusiness Excellence), aimed at harmonising and simplifying their business processarchitecture; enabling Nestlé to realise the advantages of a global leader whileminimising the drawbacks of their size. There were two major acquisitions in North America in 2002: in July, Nestléannounced that the U.S. ice-cream business was to be merged into Dreyers, and inAugust, a 2.6bn USD acquisition of Chef America Inc. was announced, which was aleading U.S.-based hand-held frozen food business. Also in 2002, the joint venture Dairy Partners Americas was set up withFonterra; and Laboratoires innéov was set up, another joint venture, this time withLOréal. The year 2003 started well with the acquisition of Mövenpick Ice Cream,enhancing Nestlés position as one of the world market leaders in the super premiumcategory. In 2006, Jenny Craig and Uncle Tobys were added to the Nestlé portfolio and2007 saw Novartis Medical Nutrition, Gerber and Henniez join the Corporation. Nestlé entered into a strategic alliance with the Belgian chocolatier PierreMarcolini at the end of that year. In 2008, Nestlé began a process of selling Alcon bydivesting 24.8% to Novartis. In 2009, Nestlé opened the Chocolate Centre of Excellence in Broc,Switzerland, with Pierre Marcolini, one of the master chocolatiers. The new decade began with Nestlé announcing the finalisation of the sale ofAlcon to Novartis which was completed mid-year. This represented a remarkableinvestment on behalf of Nestlé’s shareholders. Immediately following the Alconannouncement, Nestlé bought Kraft’s frozen pizza business. 10
    • Further highlights were the launch of the Special. T tea machine system and thecompletion of the 25bn Swiss Francs share buyback programme – and theannouncement of a new 10bn Swiss Francs programme. 11
    • 2. NESTLÉ CORPORATE STRATEGIES AND COMPETITIVE POSITIONSNestlé’s objectives are to be recognised as the world leader in Nutrition, Health andWellness, trusted by all its stakeholders, and to be the reference for financialperformance in its industry. The Corporation believes that leadership is not just about size; it is also aboutbehaviour. Trust, too, is about behaviour; and they recognise that trust is earned onlyover a long period of time by consistently delivering on their promises. These objectivesand behaviours are encapsulated in the simple phrase, “Good Food, Good Life”, aphrase that sums up the Corporation’s corporate ambition. The Nestlé Roadmap is intended to create alignment for workers behind acohesive set of strategic priorities that will accelerate the achievement of companyobjectives. These objectives demand from workers a blend of long-term inspirationneeded to build for the future and short-term entrepreneurial actions, delivering thenecessary level of performance. The Nestlé model is securing progress today and ensuring success in the future: • achieving simplicity; • investment for growth; • scale benefits; • driving performance. The Nestle Roadmap includes three main parts: • competitive advantages; • growth drivers; • operational pillars. All this may be described with one clear and simple chart as in Figure 1. 12
    • Figure 1 Nestlé has its own local companies in most countries. The Head Office inSwitzerland works very closely with them, and sets the overall strategy which ismanaged through Management and the Strategic Business Units. Geographically,Nestlé’s three Zones (Europe; the Americas; Asia, Oceania, Africa and the Middle East)work closely with the local markets and the Strategic Business Units. Their primary roleis that of enablers, acting as the voice of the headquarters to the markets, and the voiceof the markets to the headquarters. All Zones and Units share Nestlé’s vision so thateveryone around the world understands the direction to take and how to get there withcommon tools, common strategies and common values. This ensures that people around 13
    • the world know how to act, and that there is a very strong framework of values and aclear reference point for fast and efficient decision-making. The Strategic Business Units specialise in a given category, for example Coffeeand Beverages, or Pet Care, or Chocolate and Confectionery. Corporation works withResearch and Development (R&D) to ensure that everything the Corporation producesis led by consumer insights and relevant innovation; and they help the markets toachieve their business and brand objectives. To make it all happen, Nestlé has just under500 factories in 80 countries, and 17 Research Centres. There are a number of separate companies within the Group such as NestléWaters and Nestlé Nutrition. Nestlé also owns Alcon, a pharmaceutical company that isthe world leader in eye care, preventing loss of vision from glaucoma, treating eyeinfections and restoring vision through cataract surgery. Nestlé also has a significantshare of L’Oréal, the world leader in cosmetics.2.1 Competitive advantagesThe Nestlé Corporation use principles, not rules, which have been translated into morethan 40 languages and distributed worldwide. The Corporation is built on key beliefsthat include Nestlé’s business objective to manufacture and market its products in a waythat creates value that can be sustained over the long term for shareholders, employees,consumers, business partners and the national economies in which Nestlé operates.Nestlé does not favour short-term profit at the expense of successful long-term businessdevelopment.2.1.1 People, culture, values and attitudeNestlé is a multi-cultural business. The Nestlé Management and Leadership Principlesare based on the many experiences that have led to the Corporation’s successthroughout its long history. Most are mainly related to the human aspects ofmanagement and employees, and emphasise the multi-cultural nature of theCorporation. Together with Corporate Business Principles, the Management andLeadership Principles form the foundation of their approach to business. It’s an 14
    • approach that has been recognised by top Harvard academics as having generated realbenefits both for Nestlé and for society over many decades. Harvard Business School Professors Michael Porter and Mark Kramer havestated that this puts Nestlé in the top ranking of companies who create real shared valuefor themselves and society at every step of their business process or “value chain”.Porter and Kramer argue that Nestlé’s approach has already stood the test of time; andwill continue to do so precisely because there are winners on all sides. Production always has a big influence on the environment. Nestlé is a globalcompany which looks after the environment. The Corporation invests an average of 100million Swiss Francs each year for the protection of the environment around factories.The aim is to maximise the production of goods while minimising consumption ofresources… and at the same time reducing waste and emissions. Over many years, theseinvestments – and also employees’ efforts – have led to continuous improvements. Nestlé was the first company in Europe to introduce a new bio-degradablealternative to plastic packaging for manufactured food products. Made from renewableresources, it dissolves when it comes into contact with water, and disintegrates withinthree months. Nestle sources agricultural raw materials – principally milk, coffee, cocoa,cereals, vegetables, fruit, herbs, sugar and spices – either through trade channels ordirectly from farmers. The Corporation supports sustainability in the supply of agricultural rawmaterials and agricultural best practices. The Corporation has over 800 of its ownagronomists, technical advisors and field technicians. Their job is to provide technicalassistance to more than 400,000 farmers throughout the world to improve theirproduction quality as well as their output and efficiency. They do this on a daily basis inas many as 40 countries including Inner Mongolia, China, Pakistan, Ethiopia andColombia. The work that Nestlé is doing with farmers, especially in remote rural areas andin developing countries, not only results in better quality raw materials, and thereforebetter products, but also helps farmers by providing them with a steady and reliableincome. In this way, Nestlé is able to contribute to improving their standard of living. 15
    • 2.1.2 Unmatched geographic presenceNestlé’s priority is to be a local company in each of the 130 countries where theymarket their products. In many of them, the Corporation has been present for more than100 years. Local Nestlé units work within a global framework based on the Nestléprinciple: “centralise what you must, but decentralise what you can”. In this way, theCorporation combines the advantages of a global company with the advantages ofsmaller, local businesses. Although Nestlé is very global, essentially it is a company made up of smallerlocal units. Wherever Nestlé is, it is not an anonymous giant. Global sales are simplythe result of adding together the sales of each local company. Around the world theaverage number of employees in factories is 270. The average number of employees inany single country is around 3,000. Investments have to be good for the country as well as good for the Corporation.This has been a fundamental Nestlé belief since its founding. The Company has alwaysfound that creating long-term value for the countries in which it operates also createslong-term value for shareholders. By taking a forward-thinking view of businessdevelopment – especially in developing countries – and managing responsibly, it ispossible to make reasonable profits and at the same time stimulate significant local,social, environmental and economic development. Long-term investment, transfer of technology, and training in agriculture are justthree ways in which Nestlé is a force for good around the world. An example is Nestléin China. In 1987, the first joint-venture company, Nestlé Shuangcheng Ltd, wasestablished in Heilongjiang Province. Applying the expertise in nutrition and foodprocessing, the first local production in mainland China started in 1990.2.1.3 Unmatched product and brand portfolioNestlé has the largest range of foods and beverages of any food company. Its productsare consumed by all ages, from babies to old people and by people from many cultures.Many of the brands are market leaders or a close second, and have built a powerfulconsumer loyalty. These brands are extremely well-established and have become part ofpeople’s everyday life. Over the years, Nestlé has therefore built a solid foundation for 16
    • future growth. Around 70% of their total Food and Beverages sales come from brandsthat generate over 1 billion Swiss Francs each in sales.Baby foods Cerelac, Gerber, Gerber Graduates, NaturNes, NestumBottled water Nestlé Pure Life, Perrier, Poland Spring, S.Pellegrino Chocapic, Cini Minis, Cookie Crisp, Estrelitas, Fitness,Cereals Nesquik Cereal Aero, Butterfinger, Cailler, Crunch, Kit Kat, Orion,Chocolate & confectionery Smarties, Wonka Nescafé, Nescafé 3 in 1, Nescafé Cappuccino, Nescafé Classic,Coffee Nescafé Decaff, Nescafé Dolce Gusto, Nescafé Gold, NespressoCulinary, chilled and frozen Buitoni, Herta, Hot Pockets, Lean Cuisine, Maggi, Stouffers, ThomyfoodDairy Carnation, Coffee-Mate, La Laitière, NidoDrinks Juicy Juice, Milo, Nesquik, Nestea Chef, Chef-Mate, Maggi, Milo, Minor’s, Nescafé, Nestea,Food service Sjora, Lean Cuisine, StouffersHealthcare nutrition Boost, Nutren Junior, Peptamen, ResourceIce cream Dreyer’s, Extrême, Häagen-Dazs, Mövenpick, Nestlé Ice Cream Alpo, Bakers Complete, Beneful, Cat Chow,Pet care Chef Michael’s Canine Creations, Dog Chow, Fancy Feast, Felix, Friskies, Gourmet, Purina, Purina ONE, Pro PlanSports nutrition PowerBarWeight management Jenny CraigTable 1 17
    • Growth is based on the Nestlé Model of strong organic growth – between 5%and 6% – combined with consistent improvement in EBIT margin. Nestlé’s policy ofdecentralisation has been fundamental to their growth strategy. Wherever possible theyuse locally-sourced raw materials and produce products locally. In this way Nestlécontributes to local economies, not only as a tax payer, but also as a purchaser andemployer. Nestlé does not own farms or retail outlets. The Corporation focuses on theircore competence of transforming raw materials into high quality, safe food andbeverage products. The Corporation invests a lot of effort in long-term mutually beneficialpartnerships with suppliers and retail trade customers. The Corporation’s growth is builtfrom this excellent relationship – from farm to shop.2.1.4 Unmatched research and development capabilityInnovation is one of Nestlés key competitive advantages. The Corporation has morethan 140 years of research, development and scientific know-how at its disposal. Whilethere is a great deal of pure and applied scientific research that takes place in globalR&D centres, Nestlé ensures that the consumer, and the consumer benefit, remains atthe core of all our activities. It is the task of R&D to apply nutritional science and expertise to create productsthat combine great taste with nutritional benefits. The Nestlé Group invests around 1.5 billion Swiss Francs in R&D every year.It’s more than any other food company. Around 3,500 people from over 50 countrieswork in Nestlé’s worldwide network of 17 research, development and product testingcentres. The Nestlé Research Centre in Switzerland is a major think-tank. It is a constantsource of new ideas and scientific knowledge that feeds the pipeline for all Nestléproducts. It covers over 100 different professional areas – including nutritional science,the life sciences, raw materials, ingredients and production processes. 18
    • Beyond sound nutrition, the future of foods will increasingly be driven byscience. Nestlé scientists are looking ahead to the foods of the future. Nestlé R&D istransforming nutrition and food science in two ways: • from consumer needs into research priorities; • from emerging science into consumer benefits, and services. The last years of the 20th century saw a change in Nestlé’s business strategy.The Corporation moved from being a technology-led company that producedconvenient, tasty foods and beverages for sustenance, to being a science driven,nutrition, health and wellness company.2.2 Operational pillarsFood and beverages play an increasingly important role in people’s lives – not onlybecause of the enjoyment and social pleasure of eating together, but more and more interms of personal health and nutrition. Nutrition has always been at the core of Nestlé’sbusiness. People are living longer. Living standards have improved. Lifestyles havechanged. These, and other social factors, have had a considerable influence on Nestlé –both in terms of making the products and the way of running the business. Nestlé todayis at the forefront of providing consumers with food and beverage solutions that supporta long, healthy life. Although it is important, nutrition is only one aspect of “Good Food, GoodLife”. Consistent quality and safety, as well as value-for-money and convenience, allplay a part.2.2.1 Innovation & renovation and operational efficiencyNestlé further strengthens its R&D capability through Innovation Partnerships at eachstage of the product development process – from early-stage collaborations with start-upand biotech companies to late-stage partnerships with its key suppliers. 19
    • Nestlé R&D addresses three areas of benefits for consumers: • Safety and Quality - this underpins all Nestlé products • Nutrition and Health • Taste, Texture and Convenience By bringing together all of its global R&D resources, Nestlé is able to providehigh quality, safe food solutions to consumers worldwide – whether this is in terms ofnutrition, health, wellness, taste, texture or convenience. Above all, Nestlé brings toconsumers products that are of the highest quality. And safety is non-negotiable. R&D is also critical in ensuring regulatory compliance of all Nestlé products.Nestlé is able to launch new products quickly and efficiently, in countries all over theworld, by integrating regulatory affairs in all its R&D activities, from start to finish. Nestlé scientists also play their part in communicating the health and wellnessbenefits of products to consumers. Nestlé nutritionists world-wide work to ensure thatall nutritional information, both on and off the pack, is locally relevant, as well asscientifically sound. Nestlé’s beverage R&D capabilities cover all aspects from farm to cup,including raw materials, flavour extraction, systems and packaging. The personalisedconsumer experience is at the heart of the Nespresso offer, with more than 200boutiques, whilst Nescafé Dolce Gusto provides a fun and exciting experience forconsumers who want café-quality coffee at home. These systems enjoyed double-digitgrowth in 2010 and will continue to do so in 2011 The Nestlé Corporate Wellness Unit, together with business units, is helping theCorporation to be the leader in nutrition, health and wellness. In nutrition, for example,the Corporation is pioneering the use of probiotics in our products to reducegastrointestinal diseases. They are also working on scientific innovations to addressobesity and diabetes. Other personalised nutrition initiatives address the specialnutritional needs of patients with Alzheimer’s disease and illness related to ageing. Inspecialised areas such as genomics, proteomics and metabolomics, the Corporation isinvestigating the unknown territories of genes and proteins with the aim of adaptingfoods to meet very individual needs. There is still much to explore. 20
    • Nestlé is a very human company and cares about our people. People not onlymove from country to country, often with a spell in Head Office as well, but alsobetween disciplines. That is one reason why so many people make a career at Nestlé forlife. The future success of Nestlé is dependent on its ability to attract, motivate andretain good employees. Among the various programmes to support this ambition is acompetitive remuneration policy. Nestlé believes in a performance culture as well asgood corporate governance and corporate social responsibility.2.2.2 Whenever, wherever, however and consumer communicationNestlé sells products in all four corners of the world at millions of different points ofsale. These include big retail superstores, supermarkets and chain stores. But they alsoinclude small family-run neighbourhood shops, stalls in markets, vending machines,mobile vendors and even door-to-door sales of chilled products in special cooler bags.People can buy Nestlé products in schools, offices, hotels and airports. In ice-creamparlours and fast food outlets, on planes, trains and boats. In veterinary practices,service stations and fitness centres. Different formats, in all shapes and sizes, meet theneeds of consumers whenever and however they want to consume a Nestlé product.Consumers eat and drink on the go more and more. Nestlé offers products for anyoccasion and any place. The whole company is dependent on the consumer choosing Nestlé productsover competitors’ products. That is why Nestle is wholeheartedly dedicated to theconsumer and focused on meeting his or her needs. For success and growth, theCorporation has to build the greatest possible consumer trust in both the Corporationand its products. One way is to get as close to the consumer as possible. Nestlé’s success is based firmly on the concept that "food is local". Products areavailable in virtually every corner of the world, they do not believe in a standardworldwide taste. Different cultures, different locations, different needs, tastes, flavoursand habits all influence what consumers eat and drink. It is vital that the Corporationhas local knowledge and local experience. For example, Nestlé employees spent three days living with people in thesuburbs of Lima in Peru to understand their motivations, routines, purchasing habits, 21
    • decision-making and everyday aspects of their life. Based on what they learnt, Nestlécreated the NutriMóvil advisory service, a mobile exhibition van that goes into the busyback streets. Nestlé nutritionists can talk one-to-one with mothers. Relevant Nestléproducts are sold in local markets and stalls. 22
    • 3. NESTLÉ ICE-CREAM STRATEGYThe Nestlé Corporation has much experience in the food processing industry. In the1990s they decided that starting production of ice-cream would provide a goodopportunity for expansion. Ice-cream is one of the world’s largest and fast growing foodcategories. Today we saw that in Turkey 1991 ice-cream consumption was 0,3 l percapita and 2010 2,8 litres per capita. For example, in Australia and New-Zealand, 23litres of ice-cream is consumed per person per year. In the USA, it is 13 litres. Ourneighbours in Finland, despite their cold climate, consume 15 litres and in Estonia, weconsume 8 litres of ice-cream per person per year. Nestlé’s aim was to become theworld’s biggest ice-cream producer. This task was complicated by the fact that “food islocal”. That is to say that people’s taste preferences vary from country to country and insome cases from region to region. Nestlé had an advantage in that they were alreadywell-established in most food categories such as chocolate, baby food and coffee inmany countries all over the world. Thusly the Corporation was already armed with theinformation of the consumer’s preferences in different regions. From 1991, they puttheir plan in motion with the goal to secure Nestlé a considerable global market share. This chapter will describe the strategy through which Nestlé planned to achievethe aforementioned goal. In December 2005, after purchasing the Greek company DeltaIce-Cream, they achieved a global market share of 17.5%, which put them ahead ofUnilever, a major competitor. Nestlé is actively working to maintain this position. Theirstrategy for taking over the ice-cream market is based on corporation strategy, whichhas been modified to fit their specific goals, as described in chapter two. 23
    • 3.1 Value propositionsIce-cream is a traditional dessert, popular the world over. However, depending onregional tastes and eating habits the preferred flavours and fat content varies. Nestlé’sprimary goal is to offer the ice-cream lover an enjoyable, flavourful experience. Nestlétakes the time to make sure that their products and ingredients are of the highest quality,so the consumer can rest assured. As obesity is a major problem worldwide, Nestlé hasprovided nutritional information on all of their products, specifying the recommendeddaily allowance (RDA) and in this way, increasing consumer awareness. Furthermore,the Corporation actively works on product development. One of their latestachievements is a low-fat ice-cream, which still has the rich, creamy flavour of a regularice-cream. Ice-cream is a seasonal product and every year Nestlé update up to 20% of theircatalogue and they are constantly in search of new and interesting flavours – the latestbeing their innovative lychee and rose-flavoured ice-cream. Also, they are attempting aglobal launch of their unique peelable ice-cream, which was very popular in Thailandlast year. So in each region in which Nestlé sell their ice-cream, they cater to the localtastes.3.2 Distribution channelsIce-cream is a dessert which can be enjoyed by all. “By all” has a very wide meaningand in reality products are segmented based on their distribution channels. For example,in big chain supermarkets where people do their weekly shopping, mostly larger 450ml-1400ml family-sized ice-creams are sold with only a small selection of individually-packaged ice-creams. However, in smaller stores and at kiosks, usually onlyindividually packaged ice-creams are sold, which individuals can buy on impulse. The third-most important distribution channel is catering. A major differencehere, is that in addition to classic flavours such as vanilla and chocolate, differentunique flavours are available depending on if you are buying your ice cream in ashopping mall or a restaurant. That is to say, the flavours of ice-cream on offer in a 24
    • restaurant will not necessarily be available in supermarkets. Nestlé takes pride in thefact that they offer products that cater to all tastes, including very exclusive premiumproducts for the discerning consumer. For Nestlé, the wants and needs of the consumer always come first. To fulfilthese needs, they endeavour to always be available as and when the consumer needsthem. Nestlé’s goal is to educate their loyal customers about eating sensibly and tofollow their vision – “Good food. Good Life” – every step of the way. The task of choosing distribution channels is complicated by the nature of theproduct – ice-cream is a seasonal product, which must be kept under controlledtemperatures and requires specialised storage equipment. Product placement andincrease of awareness at points of sale is very important to Nestlé, who gives theretailers information on how to do so effectively according to their Principles ofCategory Management. Category Management is a process where the manufacturersand the retailers co-operate to lead the business in each retail site strategically, the resultof which will be favourable for the business because it understands and is fulfilling thewants and needs of the consumer. The core principle of Category Leadership is animproved understanding of the consumer’s needs, which in turn is the basis for thestrategy, goals and processes that the retailers and the wholesalers make use of. This is aspecific method for dealing with complex changes in the consumer’s needs andpurchasing behaviours. Because 50% of ice-cream consumption is while people are out and about, onemust place oneself where the consumer is. Ice-cream parlours are being opened in bigshopping centres so as to be readily available to potential customers. The goal is to beavailable “wherever, whenever, however.”3.3 Partnerships, Activities and ResourcesFor all dealings with their partners, Nestlé has very high demands for themselves aswell as their partners, because that is the only way to ensure and deliver their promise ofhigh-quality food. As all products start as raw materials, it is vital to carefully controlthe quality of these materials. For example, Nestlé has developed their own standards 25
    • and controls which the waffles in their cone ice-creams must adhere to, to ensure thatthey will not break in transit or when being used by the customer. Of utmost importance are focus groups located all over the world. There are 24of them, located near to ice-cream factories, and from these focus groups one can listento the locals’ wants and ideas to determine the preferred flavours and consumerexpectations in each area, illustrated by the figure 2. Nestlé also has a practice where avery successful flavour is slightly adapted to cater to the tastes of other areas. It is quitecommon for the same product to taste different depending on which part of the world itis being sold in.Figure 2 Ice-cream R&D and application group’s network Ice-cream is a seasonal product which is in demand in warm months, the lengthand time of which differs from location to location. This is why Nestlé teams up withlocal distributors who have connections in the local markets and employ a ZoneManager to monitor this activity to comply with Nestlé’s standards. 26
    • Logistics are important. It is crucial to maintain efficient distribution networksto ensure that the frozen products remain refrigerated in transit from the distributor tothe retailer. Mistakes here are costly and irreversible. Some of Nestlé’s partners areinternational retail chains who have their own distribution centres and warehouses, so inthis case do not need to use a middle-man. To keep the consumer informed aboutnutritional values and healthy eating, Nestlé has developed free apps for smartphones.Research and development centres are actively collaborating with institutes anduniversities. The main thing that Nestlé does to improve their overall sales results is to investheavily in product development. In addition to the 24 focus groups mentioned above,they also have two research and development centres – one in Europe and one inAmerica. The key word is ‘innovation’. For example, the unique peelable ice-cream thatNestlé released in 2010. As it met with great success in Thailand, Nestlé is planning torelease this product in many other countries. In January 2011, sales started in Malaysiaand the Philippines and a European release is scheduled for March 2011. Nestlé is a company that has built itself on strong brands. One constantlymonitored goal is that of increasing brand awareness. When entering new markets,Nestlé constantly monitors how consumers perceive their brand and whether theyrecognise the same values which Nestlé is trying to convey. They use research whichmeets Nestlé’s trading standards. The aim of the research is to determine thecommunicational strategy for the Nestle brand and to verify to what extent Nestle isassociated with health and wellness. Its aim is also to determine whether in the opinionof consumers it is a company which operates responsibly. This research is carried outeach and every year. As with most production, it is important to work in a way which does not harmthe environment. As in the production of ice-cream as well as in the practices of theCorporation as a whole, Nestlé has set standards with the aim of reducing any negativeimpact on the surrounding environment. This is very important as it protects theenvironment of the countries in which Nestlé’s factories operate. All this is being donewith the goal of mutual benefit in mind. Nestlé’s internal advantages for putting their plans into action are theirexperience in the food production industry and their pre-existing development centres. 27
    • They all work with the goal to find the best solutions to satisfy the consumer’s needs.This is all done specifically with healthy eating in mind. Many countries have approvedof Nestlé’s ice-creams, in particular for their low fat and sugar content while still beable to maintain a wonderful taste. All of their new inventions are patented to give thema competitive edge. Nestlé is a corporation which has been built on brands and has found an internalsynergy. Who doesn’t know KitKat, Lion, and Aero chocolate, or Nesquik cocoapowder or Nestea? These brands carry inherent value and they help the consumer toidentify trustworthy products. Creating a brand is a very expensive task, so to savemoney and time, Nestlé is taking their well-known existing brands and using them inthe ice-cream sector. An example of this practice is their KitKat ice-cream. They havedone the same with breakfast cereals and desserts, for example Nestlé cereal and cerealbars. This way, Nestlé does not have to create a whole new brand for every product, butthe consumer can still find a familiar brand and flavour in another aisle. Nestlé already has the necessary production equipment, which is an importantresource as it is well-known that purchasing equipment is the most expensive aspect ofproduction. It is very common to exchange production equipment between factories indifferent countries. The life-cycle of ice-cream products is very short and every yearthere is a new season where 20-30% of the product catalogue is renewed. Theproduction lines are positioned in factories in areas which require the largest quantity ofthe given product. By optimising resources this way, one can make a considerablesaving on cost.3.4 Cost structure and revenue streamsFor fast expansion, Nestlé has come up with a relatively costly, but majorly effectivesolution of partnering up or taking over with local businesses. This way, upon entering anew local market, they will already have an existing distribution network of people whoknow how to effectively transport frozen products. Upon entering new markets, Nestlédoes not try to immediately force out the local brands. This sort of expansion strategyallows Nestlé to gain knowledge from the recipes of the local brands. Examples of this 28
    • would be Mövenpic, Häagen-Dazs and Dreyer’s. The figure 3 illustrates how Nestlé hasadapted their logo to fit in in local markets. R&D is necessary in order for Nestlé to maintain their position as market leaderand to be an innovator and trend-setter. In 2010, they invested 1, 403 Swiss Francs inR&D. Unfortunately, it was not possible to ascertain exactly how much of that was forjust ice-cream and dairy products. High-quality raw materials which are important in making healthy and qualityproducts are not cheap and present a large cost to the Corporation. However, this isdefinitely not an area where Nestlé would ever think of buying lower-quality productsto save money, as the consumer is paying for the promise of receiving a product of highquality.Figure 3 Nestlé ice-creams worldwide positioning Another marketing expense that ice-cream has compared to other foodcategories is the requirement for special storage conditions at the point of sale. Toensure that the customer receives a quality product, Nestlé provides the retailer with 29
    • special freezers. They also provide special freezers for outdoor points of sale, to keeptheir promise of always being readily available for the customer. Upon entering new markets, the most costly aspect is the building of newbrands. One must win the consumer’s trust, which does not come cheap. Nestlé, sellingice-cream, is news to the consumer. This is why they adopted the aforementionedstrategy for expansion. By merging and taking over the existing local competition, theyensure that they already have a strong, well-known brand in the market. In the first fewyears, they conduct annual surveys to determine whether the local brand carries thesame values as Nestlé. If the local brands do have the same values and their popularitycontinues to grow, then they are kept. To quickly expand their product portfolio, theyuse existing brands which are already popular in other markets. An example from theEstonian market is the familiar KitKat brand - “Have a break, have a KitKat!” While thechocolate brand was heavily advertised, the ice-cream version was released without anypublicity. Similarly, everybody knows the children’s favourite, Nesquik, which is soldas a breakfast cereal, hot chocolate, chocolate and also ice-cream. Furthermore, Nesteaiced tea is well-known and has a familiar flavour, and has now been made into an ice-cream. Thanks to these brand tactics, they have managed to minimise the costs oflaunch and successfully introduce existing products into other markets by using theCorporation’s internal synergy. Licensing is when one uses other developed and popular brands to achievesuccess in their own segment. For example, when the movie Spiderman was popularamongst youngsters, Nestlé released a branded Spiderman ice-cream. The same tacticwas employed the following year with the release of an Indiana Jones ice-cream.Similarly, noticing the craze amongst little girls for Hello Kitty, Nestlé released anotherbranded ice-cream aimed towards these loyal fans. Therefore, Nestlé purchases licensesto use certain brand names for a certain period of time, thus making a saving inmarketing expenses which they would otherwise have to spend on launching a wholenew brand. Production always entails large investments such as purchasing the equipmentfor production lines. Quick expansion and attaining the position of global market leaderwas profitably and cost-effectively enabled by the fact that certain trends do not emergeat the same time all over the world. As ice-cream ranges and trends change as quickly as 30
    • fashion, Nestlé does not purchase new product lines in all of their new factories.Instead, they are exchanged between the factories because the life cycle of the productline and the payoff period is longer than that of a single product’s life cycle in any givenarea. Figure 4 summarize all before described parts of Nestlé ice-cream strategy whatgives them world lieder position ice-ream market what takes time eleven years.Figure 4 Nestlé ice-cream business model In summary, the main factors of success that Nestlé focused on in their strategyis “Food is local” and branded synergy. They found a way to differentiate themselvesfrom the competition. Nestlé had decided to take every available opportunity by usingtheir own well-known brands and licensed brands and finding an internal synergy withtheir own brands from other markets. Thus, their product range is designed so thateveryone can find something that they like – customers with local tastes; Hello Kitty forthose who follow trends; Kit Kat, Lion bar, Princessa, Nesquik and Nestea for thosewho are loyal to brands that they are familiar with. Furthermore, they have also 31
    • customised their own Ice Cream brands such as Pirullo and Extreem, which are gainingpopularity. The aforementioned strategy built upon branding secured Nestlé a success intheir endeavour to take over the global ice-cream market. They were able to considertheir goal achieved in 2003 when Nestlé acquired Dreyer’s Grand Ice Cream, givingthem a 17.5% total share of the global market, leaving their competitor, Unilever, insecond place. Since then, there has been an on-going struggle amongst the market giantsover the position of market leader. The way to goal describe figure 5.Figure 5 Nestlé ice-cream growths 32
    • 4. COMPETITIVE STRATEGYUpon analysing Nestlé’s strategy for taking over the ice-cream market, at first glance, itseem that they have covered all their bases, but there is still room for improvement. Wehave learned from their successes that “Food is local” and that ice-cream is an impulseproduct which must be available to the potential customer whenever and wherever,which is why one of Nestlé’s principles is to be where the people are. We also knowthat creating new brands is very costly, so where to go from here? Our idea is to provide the consumer with the opportunity to purchase ice-creamwhenever and wherever they may get the urge, and to be very noticeable so as to enticepotential customers. We propose putting fully-automated ice-cream machines in areaswith heavy footfall and where people linger such as: bus stops; the entrances toshopping centres; busy sidewalks; beaches during the summer and so on. Currently, it isnot possible to buy ice-cream without there being a middle-man because it is a productwhich requires special storage conditions. All the logistics and sales chains carry theseextra costs. The solution would be an ice-cream vending machine which contains capsulesof ice cream with your chosen fillings and toppings. To make paying more convenient,one could pay by cash, card or mobile phone credit depending on the specific localmarket. As this has never been done before, we would patent our unique design toensure that it could not be copied or stolen, giving us the opportunity for expansion indeveloped countries where time and convenience is appreciated. All the machines would be connected to a computer system located in a localdistribution centre where the employees can monitor the machines to ensure availabilityof the products as efficiently and at as little cost as possible. As there would not be along distribution chain and there would be fewer employees, the cost of distributionwould be lower. 33
    • As well as the vending machine, we would also patent the technology forproducing the accompanying capsules, which would give us an advantageousopportunity to find a partner in local markets and grant them use of the machine. Since “food is local” and the machine is patented, upon entering a new marketwe would aim to make one of the local market leaders our partner and order from themthe flavours which are suitable for that market. This would be a mutually-beneficialarrangement as the other party would gain an innovative technology and we would beable to quickly enter the market with suitable flavours in un-touched niches. For thelocal producer, this solution is attractive because we offer them a new distributionchannel and continue to sell the ice-cream under the local brand name. Thisarrangement ensures a mutual interest and benefit. The market leader gains widercoverage for their brand and we receive an increased profit due to reduced labour costsby way of the shorter distribution chain. Author’s idea summarizes on figure 6 below.Figure 6 Ice-cream vending machines business model 34
    • SUMMARYIn this paper, we have provided an overview about how Nestlé was able to take over achallenging segment of the global food production market. As “Food is local”, findingways to expand quickly in this sector is a major challenge. Nestlé was founded in Switzerland when Henri Nestlé came up with a newproduct for mums who are unable to breastfeed. This paper has given a summary ofNestlé’s early history from 1866 as well as their now fully-developed global businessstrategy. The Nestlé Corporation have many different strategies for success in differentmarket segments but they all have to adhere to the Corporation’s core values. In 1991, Nestlé decided that ice-cream was a rapidly expanding segment of themarket. So then they developed a plan to take over that market. They actively put theirplan into action from 1992 where they already had a presence in the UK and HongKong. Their main objective was to merge with and take over the local businesses beforeentering a new market to ensure fast and effective entry through knowledge of the localmarket and consumers’ taste preferences. Big ice-cream producers tend to have their own local brands or only licensedbrands. Nestlé found a way to separate themselves from their competition. They decidedto take advantage of all of their opportunities and used their own brands, brands alreadyknown in the local market, licensed brands and brands gained from their internalsynergy between their own brands in different market segments. Thus, their productrange is designed so that everyone can find something that they like – customers withlocal tastes; Hello Kitty for those who follow trends; Kit Kat, Lion bar, Princessa,Nesquik and Nestea for those who are loyal to brands that they are familiar with.Furthermore, they have also customised their own Ice Cream brands such as Pirullo andExtreem, which are gaining popularity. The aforementioned strategy built uponbranding secured Nestlé a success in their endeavour to take over the global ice-creammarket. They were able to consider their goal achieved in 2003 when Nestlé acquiredDreyer’s Grand Ice Cream, giving them a 17.5% total share of the global market, 35
    • leaving their competitor, Unilever, in second place. Since then, there has been an on-going struggle amongst the market giants over the position of market leader. From all of the success strategies, we can draw the conclusion that the well-branded and well thought-out product range, resulting from mergers, enabled them toquickly expand in new markets. Mergers and acquisitions are expensive and tocompensate for this, Nestlé found ways to economise on use of equipment more thantheir competitors by exchanging production lines between their own factories. Anotherimportant economy was in advertising costs as Nestlé instead used their brand synergyto launch new products. Nestlé uses the same strategy in other food categories such ascereals, dairy products and confectionary. All other strategies are geared towardsultimately contributing to the Corporation’s overall main strategy. The authors have proposed an alternative strategy as even though theaforementioned one seems perfect, there is always room for improvement. The strategyis to install ice-cream vending machines in places of heavy footfall so that ice-cream isreadily available to the consumer as and when they desire it. 36