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Nestles Global Strategy
Nestles Global Strategy
INTRODUCTION
Nestl is one of the oldest of all multinational businesses. The company was founded in
Switzerland in 1866 by Heinrich Nestl, who established Nestl to distribute milk food, a type of
infant food he had invented that was made from powdered milk, baked food, and sugar. From its
very early days, the company looked to other countries for growth opportunities, establishing its
first foreign offices in London in 1868. In 1905, the company merged with the Anglo Swiss
Condensed Milk, thereby broadening the companys product line to include both condensed milk
and infant formulas. Forced by Switzerlands small size to look outside its borders for growth
opportunities, Nestl established condensed milk and infant food processing plants in the United
States and Great Britain in the late 19th century and in Australia, South America, Africa, and
Asia in the first three decades of the 20th century. In 1929, Nestl moved into the chocolate
business when it acquired a Swiss chocolate maker. This was followed in 1938 by the
development of Nestls most revolutionary product, Nescafe, the worlds first soluble coffee
drink. After World War II, Nestl continued to expand into other areas of the food business,
primarily through a series of acquisitions that included Maggi (1947), Cross & Blackwell (1960),
Findus (1962), Libbys (1970), Stouffers (1973), Carnation (1985), Rowntree (1988), and Perrier
(1992). By the late 1990s, Nestl had 500 factories in 76 countries and sold its products in a
staggering 193 nations almost every country in the world. In 1998, the company generated
sales of close to SWF 72 billion ($51 billion), only 1 percent of which occurred in its home
country. Similarly, only 3 percent of its 210,000 employees were located in Switzerland. Nestl
was the worlds biggest maker of infant formula, powdered milk, chocolates, instant coffee,
soups, and mineral waters. It was number two in ice cream, breakfast cereals, and pet food.
Roughly 38 percent of its food sales were made in Europe, 32 percent in the Americas, and 20
percent in Africa and Asia.
initial market focus to just a handful of strategic brands, Nestl claims it can simplify life, reduce
risk, and concentrate its marketing resources and managerial effort on a limited number of key
niches. The goal is to build a commanding market position in each of these niches. By pursuing
such a strategy, Nestl has taken as much as 85 percent of the market for instant coffee in
Mexico, 66 percent of the market for powdered milk in the Philippines, and 70 percent of the
market for soups in Chile. As income levels rise, the company progressively moves out from
these niches, introducing more upscale items, such as mineral water, chocolate, cookies and
prepared foodstuffs.
Although the company is known worldwide for several key brands, such as Nescafe, it uses local
brands in many markets. The company owns 8,500 brands, but only 750 of them are registered
in more than one country, and only 80 are registered in more than 10 countries. While the
company will use the same global brands in multiple developed markets, in the developing
world it focuses on trying to optimize ingredients and processing technology to local conditions
and then using a brand name that resonates locally. Customization rather than globalization is
the key to the companys strategy in emerging markets.
barriers between countries in the region come down. Once that happens, Nestls factories in the
Middle East should be able to sell throughout the region, thereby realizing scale economies. In
anticipation of this development, Nestl has established a network of factories in five countries in
hopes that each will someday supply the entire region with different products. The company
currently makes ice cream in Dubai, soups and cereals in Saudi Arabia, yogurt and bouillon in
Egypt, chocolate in Turkey, and ketchup and instant noodles in Syria. For the present, Nestl can
survive in these markets by using local materials and focusing on local demand.
The Syrian factory, for example, relies on products that use tomatoes, a major local agricultural
product. Syria also produces wheat, which is the main ingredient in instant noodles. Even if trade
barriers dont come down soon, Nestl has indicated it will remain committed to the region. By
using local inputs and focusing on local consumer needs, it has earned a good rate of return in
the region, even though the individual markets are small.
Despite its successes in places such as China and parts of the Middle East, not all of Nestls
moves have worked out so well. Like several other Western companies, Nestl has had its
problems in Japan, where a failure to adapt its coffee brand to local conditions meant the loss of
a significant market opportunity to another Western company, Coca-Cola. For years, Nestls
instant coffee brand was the dominant coffee product in Japan. In the 1960s, cold canned coffee
(which can be purchased from soda vending machines) started to gain a following in Japan.
Nestl dismissed the product as just a coffee flavored drink, rather than the real thing, and
declined to enter the market. Nestls local partner at the time, Kirin Beer, was so incensed at
Nestls refusal to enter the canned coffee market that it broke off its relationship with the
company. In contrast, Coca-Cola entered the market with Georgia, a product developed
specifically for this segment of the Japanese market. By leveraging its existing distribution
channel. Coca-Cola captured a canned coffee in Japan. Nestl, which failed to enter the market
until the 1980s, has only a 4 percent share.
While Nestl has built businesses from the ground up in many emerging markets, such as Nigeria
and China, in others it will purchase local companies if suitable candidates can be found. The
company pursued such a strategy in Poland, which it entered in 1994 by purchasing Goplana, the
countrys second largest chocolate manufacturer. With the collapse of communism and the
opening of the Polish market, income levels in Poland have started to rise and so has chocolate
consumption. Once a scarce item, the market grew by 8 percent a year throughout the 1990s. To
take advantage of this opportunity, Nestl has pursued a strategy of evolution, rather than
revolution. It has kept the top management of the company staffed with locals as it does in
most of its operations around the worldand carefully adjusted Goplanas product line to better
match local opportunities. At the same time, it has pumped money into Goplanas marketing,
which has enabled the unit to gain share from several other chocolate makers in the country.
Still, competition in the market is intense. Eight companies, including several foreign-owned
enterprises, such as the market leader, Wedel, which is owned by PepsiCo, are vying for market
share, and this has depressed prices and profit margins, despite the healthy volume growth
MANAGEMENT STRUCTURE
Nestl is a decentralized organization. Responsibility for operating decisions is pushed down to
local units, which typically enjoy a high degree of autonomy with regard to decisions involving
pricing, distribution, marketing, human resources, and so on. At the same time, the company is
organized into seven worldwide strategic business units (SBUs) that have responsibility for highlevel strategic decisions and business development. For example, a strategic business unit
focuses on coffee and beverages.
Another one focuses on confectionery and ice cream. These SBUs engage in overall strategy
development, including acquisitions and market entry strategy. In recent years, two-thirds of
Nestls growth has come from acquisitions, so this is a critical function. Running in parallel to
this structure is a regional organization that divides the world into five major geographical zones,
such as Europe, North America, and Asia. The regional organizations assist in the overall strategy
development process and are responsible for developing regional strategies (an example would
be Nestls strategy in the Middle East, which was discussed earlier). Neither the SBU nor
regional managers, however, get involved in local operating or strategic decisions on anything
other than an exceptional basis. Although Nestl makes intensive use of local managers, to knit
its diverse worldwide operations together the company relies on its expatriate army. This
consists of about 700 managers who spend the bulk of their careers on foreign assignments,
moving from one country to the next. Selected primarily on the basis of their ability, drive, and
willingness to live a quasi-nomadic lifestyle, these individuals often work in half a dozen nations,
during their careers. Nestl also uses management development programs as a strategic tool for
creating an esprit de corps among managers. At Rive-Reine, the companys international training
center in Switzerland, the company brings together managers from around the world, at different
stages in their careers, for specially targeted development programs of two to three weeks
duration. The objective of these programs is to give the managers a better understanding of
Nestls culture and strategy and to give them access to the companys top management. The
research and development operation has a special place within Nestl, which is not surprising for
a company that was established to commercialize innovative foodstuffs. The R&D function
comprises 18 different groups that operate in 11 countries throughout the world. Nestl spends
approximately 1 percent of its annual sales revenue on R&D and has 3,100 employees dedicated
to the function. Around 70 percent of the R&D budget is spent on development initiatives. These
initiatives focus on developing products and processes that fulfill market needs, as identified by
the SBUs, in concert with regional and local managers. For example, Nestl instant noodle
products were originally developed by the R&D group in response to the perceived needs of local
operating companies through the Asian region. The company also has longer-term development
projects that focus on developing new technological platforms, such as non-animal protein
sources or agricultural biotechnology products.