This artclie provides a case analysis and case solution to a 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).
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.
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.
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.
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
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.
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
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
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 …