Nestlé and Its Nescafé Kingdom in China

Corporate Strategy and Renewable Advantage

Course 45-971 / Final Paper

Nestlé and Its Nescafé Kingdom in China

Executive Summary

Nestlé is a leading company in food industry. We choose to analysis this company's corporate strategy to reflect what we learned through the course. This report is composed with two part of analysis. In the first part, we analyze this multinational company as a whole, by looking at its scale orchestration across product lines and across market place around the world. We also analyze Nestlé's corporate strategy and its standard cycle business. In the second part, we focus on one of its brand - Nescafé in specific market place (China) as a case study, to exam if it also falls under standard business cycle and chances to turn into other types of business cycle.

PART ONE: NESTLE AND ITS STANDARD CYCLE BUSINESS

Nestlé Quick Fact

Nestlé S.A. is the largest food and nutrition company in the world. Founded and headquartered in Vevey, Switzerland. Founded by Henri Nestlé in 1866, the company operates in 86 countries around the world, and employs over 280,000 people today.

Nestlé's Scale Orchestra

Standard cycle business falls into scale orchestration, which has four sections - Product, Process, Leaning and Scale. As the leader in food industry, Nestlé's strategies meet a standard cycle business.

Product

Nestlé has some 6,000 brands, with a wide range of products across a number of markets, including coffee, bottled water, milkshakes and other beverages, ice cream , breakfast cereals, infant foods , performance and healthcare nutrition , seasonings, soups and sauces , frozen and refrigerated foods, confectionery, and pet food. Nestlé ranks as the top 2 players in most of those markets in the world.

"Good Food, Good Life" is the slogan Nestlé used around the world. The company also provides consistently high quality product in each country. Nestlé has its own corporate quality standard which is higher than GMP and ISO9000. It has standard plant design in all the countries. To ensure product quality, Nestlé sets non-negotiable quality standards for suppliers around the world. Qualified suppliers need to follow Nestlé Supplier Code, which is an integral part of all purchase orders, supply contract and is being integrated into all other commercial agreements. Nestlé also has a product quality tracking system. If one product is being found with quality problem, the tracking system can quickly search all related information including production shift, distribution shift and material supplier information. Then the company is able to identify the root cause of quality problem, tracks all products that were produced at the same shift to minimize the negative impact to consumer. The entire quality control system ensures no surprise product quality across product lines worldwide.

But at the same time, Nestlé targets at scalable market segment. "60/40 rule" is a very important standard in Nestlé's product management. "60/40" but not "80/20" because the company doesn't want to provide products to the top 20% or less top tier consumers, nor does it want to match the needs of 80% majority. Nestlé's target is to gain 60% of consumer except the top 20% and the bottom 20%, to capture the majority while maintain a relative high product margin.

Process

In production, as per mentioned, Nestlé has an entire set of standard production process to ensure products quality. And once there is a problem, it can quickly track the root cause of the problem and refine the process for continuous improvement. With the standard process, company can quickly replace and train seasonal labors for busy season in production, can also introduce its brand to a new entered market quickly.

In internal management and control, Nestlé uses similar organization and reporting structure in its regional level management and beneath that country level management follow the same structure. For example, there are global sales and production review meeting quarterly; in Greater China region, the company has similar review meeting per month; and for each SBU level in the country, managers also review with the same report format monthly or even weekly.

Organizational Learning

Nestlé invests heavily in training and organizational learning. Inside the company, Nestlé has its own internal trainers, who are responsible to design training courses and give training to employees, helping them solve typical problems in their work. They travel around and bring training courses to regional offices. The trainers may come from different SBUs and they themselves have very rich functional or leadership experience within the company. Nestlé training system covers different level employees. Just to name a few, the company gives negotiation training for sales staff, value creation training for junior managers and Mini MBA courses for higher level managers. Each year Nestlé China recruits new graduates from China's top universities for a two-year management trainee program. The company also sponsors its most promising managers for one year full-time MBA training at IMD.

Economy of Scale

The food industry has to invest on plants and production lines, which have very high fixed cost. To spread the high fixed cost companies in this industry compete on market shares, which can bring them the economy of scale and increase their total profit margin. Nestlé, as the biggest food company, has the economy of scale in many markets. For example, Nestlé holds 40-45% market share of infant nutrition in Latin America. That gives Nestlé great bargaining power in negotiation with distributors and retailers. Because the huge production volume, the company can leverage buyer bargaining power for lower material price. Especially for Nestlé, who has very diversified product portfolio, its economy of scale is higher than most of its competitors because it can share commonly used raw material cross product lines. For example, many Nestlé products use sugar in production. Although those products are produced in different factories, buyer can sum them up and negotiate for even lower sugar price.

Economy of Scope

Its products include... it actually dominate a family's kitchen. This kind of economy of scope gives the company an advantage to bundle its products together in one