Name: Adil Salim

Roll No: BX509785

Subject: Strategic Management
Course Code: 5574
Semester: 4th
Assignment No: 02 (Strategic Management Case Study Analysis of Nestle)
Tutor: Syeda Atia Rahat

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Strategic Management Case Study Analysis of Nestle
Topic Page No

Introduction 01
Task 1
 Environmental and Competitive analysis 01
 Political 01
 Economical 01
 Socio-Cultural factors 02
 Technological factors 02
 Description of Industry Structure 02
Issues/problems facing the industry 02
Industry Prospect and overall attractiveness 03
 Attractiveness 03
 Unattractiveness 03
Analysis of Competitive forces 03
PORTER’s five forces analysis 03
 Threat of new Entrants 03
 Bargain Power of Customers 04
 Competitive Rivalry 04
 Bargain power of suppliers 04
 Threat of Substitute 04
Competitor analysis 05
Task 2
Strategic performance Indicators 05
Internal analysis drawing on relevant models 05
SWOT analysis of Nestlé Company 06
Competitive strength versus Key rivals 06
Strategic Issues 07
Task 3
Strategic plan and Action recommendation 07
 Basic strategic direction 07
 Differentiation strategy by Nestlé 07
 Cost-Leadership strategy 07
Economic analysis 08
Ratio and Liquidity Analysis 09
Nestlé’s strategic trajectory 11
Major functional support strategy 11
 Information technology and Control system 11
Eminent failure 12
Recommendation 13
 Short-term action recommendation 13
 Long term action recommendation 13
Reference List 14

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Strategic Management Case Study Analysis of Nestle
Introduction

Nestlé Company was founded by Henry Nestlé who was a Swiss Pharmacist, who was focused on
producing the first milk food for infants. The production of milk food was aimed at combating the
problem of infant mortality as a result of malnutrition. Soon, the product became popular in Europe,
which in turn has created a legacy of shared value embedded within their corporate business principles
and values (Boyd, 2012). With its efficient and humble beginning, the company is dedicated to grow its
business as the leading nutrition, health and wellness company.

Headquartered in Switzerland, Nestlé operates in more than 150 countries having around 465 factories
and employs around 339000 people globally. Experience of Nestlé over the years makes it imperative
that it takes decades to build a real competitive advantage. Nestlé’s powerful establishment in the
industry is a result of its inimitable strength of strong R&D, product value chain, efficient
entrepreneurship, wide geographical coverage, significant corporate values and great people working
together.

Task 1

 Environmental and Competitive analysis

The strategic analysis of an organization usually starts with the evaluation of its external
environment. PESTLE analysis is one of the main tools for conducting micro-environmental analysis that
will investigate on the political, economic, social and technological aspects of the environment in which
the firm is operating. The main purpose of this tool is to identify the possible threats and opportunities
offered by the whole industry.

 Political

In reference to the political aspects the bureaucratic regulations, political stability and taxation
policies play an essential role in international business operations. Moreover, Nestlé generates steady
sales in its targeted market, in presence of political stability. The strict governmental laws in certifying
the use of safe and natural raw materials, public financial disclosure and regulations on fraud and
bribery has significant influence on each phase of Nestlé’s strategic planning and organizational
performance. In respect to the Chinese market, Nestlé’ has been facilitating a lower corporate tax with
the preferential policies offered by the municipal or central government to huge MNCs. As a result of
which Nestlé has expanded its growth at an unprecedented rate over a period of 20 years in the region
of greater China.

 Economical

The economic factors vary from one country to another and mainly deals with the components
related to inflation and exchange rate, economic growth, rate of interest which tends to have significant
impact on the decision-making processes and business strategies planned by the company. Nestlé’s
entrance to a new market or launching of a new product in a particular region has been planned by
considering the disposable income and purchase power of its consumers. Recent statistics on Global
food industries reveal that Nestlé is focused on expanding its business in the Middle East markets by
shifting its focus from Europe and America due to the increasing number of middle class population and
growth in disposable income within their economies.

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Strategic Management Case Study Analysis of Nestle
  Socio-Cultural factors

With effective business strategies across the global market, Nestlé is likely to capture the
consumer behavior which in turn increases its operational efficiency and productivity. The success of
Nestlé in Africa country respective to their socio-cultural aspects is presented as an example. The
production of chicken bouillon cubes by Nestlé is widely used to enhance the flavor of dish in developed
countries; however, the low income groups in Africa directly mix rice with this cube. Hence, to
customize the product with the local consumption habit and storage conditions, Nestlé has focused to
introduce small packets of bouillon chicken cube, so that the middle group can easily have one piece in
their meal.

 Technological factors

Nestlé is the proud owner of the largest R&D department for its wide range of food that are served
across the world. The company has been consistent in producing healthy and nutritious food as a result
of its strong capacity and great benefits its potential from its capacity and associations of strong
research centers. With the advancement in technology, Nestlé has experienced opportunities for its new
product lines, improvement in product, innovation marketing and promotion strategies such as online
stores and e-commerce. Nestlé leverage its competitive advantage of efficient world-class R&D to
become the lead in food and beverage industry.

 Description of Industry Structure

Nestlé is a Swiss multinational company mainly manufactures health and nutritional goods. The wide
product range of Nestlé include breakfast cereals, baby food, confectionery, ice-cream, bottled water,
snacks, pet food and coffee, dairy products, etc. Nestlé’s vast industrial spread across 150 countries,
include 461 factories that employs more than 330000 people. The corporate business principles of
Nestlé are entirely based on their culture, that was developed 140 years ago, that reflects the ideas of
honesty, long-term thinking and fairness. The history of Nestlé dates back in the year 1866, when the
Swiss condensed milk company developed the first European condensed milk factory in Cham
Switzerland. (Pritchard and Fagan, 1999). The main objective of Nestlé is to provide safe, nutritional and
tasty food to its consumers so as to improve the health and wellbeing of its consumers. Nestlé is
committed to its huge network of R&D to develop new food products with significant health benefits, in
order to meet the changing taste of consumers.

The food and beverage industry is highly competitive due to the presence of potential players such
as Kraft foods, Danone, etc. The competition becomes stiffer, with equal strength of competitors in the
market. For instance, the joint venture between Nestlé General Mill could bring significant changes in
the breakfast cereal; hence, such collaboration is successful, which in turn makes the industry all higher
performing. One of the main shareholders of Nestlé is L’Oréal, the leading cosmetic company, whose
collaboration has significantly enhanced their operational efficiency.

Issues/problems facing the industry

Majority of consumers are motivated to purchase nutritional products that are closely aligned
with their health and well-being. Manufacturing of such products are done by eliminating artificial

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Strategic Management Case Study Analysis of Nestle
ingredients, pesticides or GMO’s, etc. Such consumption behavior has resulted in the development of
cleaner labels, thereby increases products in the non-GMO and organic segments. This puts more
pressure on the food and beverage industry as majority of companies find it difficult to adapt the trend.

Unlike the industries of consumer appliances, electronics and household products those have
already gained a firm establishment in the e-commerce space, food and beverage manufacturers are
significantly slow in their propagation towards e-commerce. As more number of consumers are shifting
their preferences towards the online shopping, the manufacturers are lagging behind until they find
ways to adapt e-commerce as the key part of their marketing and sales.

Industry Prospect and overall attractiveness

 Attractiveness

The food and beverage industry is characterized by oligopoly, with the intense presence of Nestlé,
Kraft Foods, Danone performing well. With the advancement in technology, faster information
technology and better infrastructure has increased the invention of newer products thereby facilitating
the manufacturers to establish their brand image more firmly.

The enhancement in consumers’ standard of living, especially in the emerging markets is another great
prospect for the producers.

 Unattractiveness

Unlike the electronics, consumer appliance and household product industries that has developed a
strong presence online through e-commerce, Nestlé is slow in developing their presence online. The
increasing preference of consumers for online shopping is making the industry unattractive to a great
extent.

In addition, major organizations like FDA and WHO is appearing with policies against high sugar
intake and thereby recommending a cap of no more than 10% of daily calories. As a result, consumers
are not purchasing foods that have high in sugar. This is another means of unattractiveness presented by
food and beverage industry.

Analysis of Competitive forces

 PORTER’s five forces analysis

Five forces analysis determines the position of a company respective to its rivals. This strategic
analytical tool helps the company to formulate strategies in order improve the profitability, thereby
making it less vulnerable.

 Threat of new Entrants

Nestlé being a well-known brand has been serving the market over a century and hence, developed
a strong presence in the industry by boosting its quality products and customer satisfaction, which has
made it imperative for the company to enjoy a substantial share of the profitable market.
Consequentially, new entrants must impart sufficient effort to seize a considerable portion of the Nestlé’
market share in order to establish their position in the industry and survive. As a result of which, Nestlé
is the main target of the new entrants; hence, the rate of threat is moderate.

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Strategic Management Case Study Analysis of Nestle
Consequentially, the threat of new entrants is low.

Bargain Power of Customers

Customers enjoy huge bargain power in regards to their consumption of Nestlé products, due to
the presence of abundant substitute. Substitute of Nestlé products allows enough preferences for the
customers, thus having significant influence on the consumer purchase behavior. Nestlé acknowledge
the consumer power and has taken considerable measures to customize their range of products
according to the changing taste of customers. Hence, the bargain power of customer is high.

Competitive Rivalry

Nestlé was facing intense competition at the regional and national level due to the presence of
potential rivals in the food processing industry such as the Unilever, Kraft, and Master foods. These
powerhouse companies were in consistent effort to outperform one another without leaving any space
for the competitors. Nestlé was experiencing fierce competition from the industry rivals as the giant
players has gained considerable market share due to their improved performance and operating
efficiency. The fierce rivalry within the food processing industry has facilitated the consumers with
enough bargain power which is again a threat for Nestlé and the other potential brands. As a result,
Competitive rivalry is strong.

Bargain power of suppliers

Due to the brands large purchasing power, the suppliers and agricultural commodities offer
products that are far from unique to Nestlé. Consequentially, Nestlé enjoys a large bargain power than
its suppliers. In addition, Nestlé ensure the quality of raw materials while purchasing from the suppliers
by maintaining a long term and trustful relationship with them.

Nestlé also offers useful advice to its suppliers on reducing the unnecessary costs and perform more
efficiently in future. Thus, the bargain power of suppliers is low.

Threat of Substitute

Nestlé is subjected to threat of substitute goods due to the intense competition within the
industry. The wide range of similar products that include frozen food items, confectioneries, milk
products, ice-creams and pet foods tends to give tough competition to Nestlé. As the competition is
extremely violent, Nestlé must emphasize on finding new ways to improve its products and increase the
product lines, generate new means to develop sustainable growth and expansion in future.

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Strategic Management Case Study Analysis of Nestle
Competitor analysis

Market Position of
Competitor Strategies Competitive Capability
Share Key Rival

 Improved Channel Mix

 High Quality products
 Improved Geographic Mix
Kraft Foods 10.1%  Strong brand image 2nd
 Leverage new global
 Increased innovation pipeline
category team structure

 Diversification in fresh dairy

 Importance of private
products, water, medical
label production
nutrition and baby nutrition
Danone 27%  Enter the emerging 9th
 Strong R&D capabilities
markets with high
enables them to adapt to
disposable income
cultural food habit.

 Strong brand image and

 Cost leadership and
customer loyalty
differentiation strategy
Hershey 2.1%  Wide range of products 1st
 Diversification strategy in
catering the various age
their confectionary Items
groups

Strategic performance Indicators

Performance Period
Indicator Dec 2015 Dec 2014 Dec 2013 Dec 2012
Sales Growth 88.8 91.43 91.64 92.02

Net Profit Margin 19.1 20.61 21.39 21.9

Return on Equity
99% 87% 71% 69%
Investment

Internal analysis drawing on relevant models

Excellent potential of R&D serves as the foundation of growth, learning and effective
performance for Nestlé which in turn has enabled it achieve stupendous internal business processes.
High valued business activities due to its strong internal capabilities has enabled Nestlé Company to
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Strategic Management Case Study Analysis of Nestle
achieve product diversity, serve best customer services with guaranteed satisfaction, which in turn helps
them to optimize its value to the stakeholders and realize the financial goals.

SWOT analysis of Nestlé Company

Strengths Weaknesses

 long operating history of more than 140 years

 less research on consumer preferences
 it has operated factories in more than 77 countries
 product recall is increasing which in turn
across six continents
hampers the company’s brand equity
 Strong capacity of R&D
 Nestlé’s entrance into the mature market
 Reputed as the innovation leader in the sector of
gives them a tough competition to their
global nutrition and food, with the efficient team of
sustenance.
3500 scientists representing their R&D network.
Threats Opportunities
 Nestlé’s attempt to enter the already mature markets  Nestlé leverage its strong brand name and
can be a threat to its growth and brand image reputation of efficient performance over the
 The company has potential competitors across the years to grab the eminent opportunities
globe offered in the industry
 The increasing price of raw materials make it difficult  Ranked first and became the market leaders
for Nestlé to introduce new product lines The industry (Saunders and Guoqun, 1996).
is highly competitive as the multinational companies  Nestlé offers health based products which is
are extremely organized with strong financial becoming extensively popular across the
potential. world,

Competitive strength versus Key rivals

Key Success Factor Nestle Danone Kraft foods Hershey

Quality 5 3 5 4

Brand Image 5 2 4 4

Access to Raw
4 3 3 5
Material

Technological Skills 5 2 3 5

Manufacturing
5 4 3 4
Capabilities
Marketing/
4 5 4 3
Distributions

Financial Strength 4 3 2 3

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Strategic Management Case Study Analysis of Nestle
 Relative Coast
4 3 3 4
Production

Strategic Issues

Nestlé has been facing a number of strategic issues as a result of its extended operations
worldwide. The company is facing difficulty in coping up with huge logistics cost and storage issues due
to their transportation of ingredients and products internationally. Secondly, due to its vast spread
internationally and diverse range of product portfolio, the effectiveness of coordination and decision-
making between the country specific headquarters and sites decreases gradually.

In addition, Nestlé’s consistent promotion of its new and innovative products is not always
worthwhile, as some of its products or inventions are not understandable or not appropriate for specific
regions or countries.

Task 3

Strategic plan and Action recommendation

 Basic strategic direction

The strategic mission of Nestlé is to become the world leader in health, nutrition and wellness.
Company’s mission statement of good food and good life focuses on providing its consumers with the
most nutritious choices incorporating wide range of food and beverage categories. Nestlé follows the
four main strategic objectives that include enriching the life of customers with best products, to gain
excellence in operations through their exclusive R&D network and talent group working together to
make innovative new range of products each time. Financial gain is achieved with efficient performance
and acquisition of more number of customers. Consequentially, they have increased their shareholder
returns by 25% by the end of 5 years.

 Overall Business strategy

As defined by company has the choice to adopt three strategies to cope up with the competitive
edge of the industry that include cost-leadership, differentiation strategy and focus. On analyzing the
Nestlé Business principles, it is evident that the company has adopted low cost and product
differentiation strategy to win over its competitors. Differentiation strategy by Nestlé adopted the
differentiation strategy by offering extended range of high quality products that are offered at a
premium price range. Nestlé boost its presence as the leading food and beverage producer across the
globe due to its extensive core capabilities and resources that supports its huge R&D network. As a
result of which Nestlé is able to deliver high quality, innovative and nutritious products to its customers,
unlike its competitors. Moreover, Nestlé actively distinguishes its products from its competitors by
taking advantage of its talented employees, distinctive features of its products, advanced technological
background, stupendous services and worthy advertising campaigns.

 Cost-Leadership strategy

Nestlé has achieved distinctive competitive advantage with its cost-leadership strategy. The
company emphasize on producing and marketing its products at a lower cost in comparison to its
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Strategic Management Case Study Analysis of Nestle
competitors. Such an approach was easily adaptable by Nestlé due to its economies of scale in product
manufacturing, raw materials and marketing. Nestlé’s attempt to grasp the market share and building a
strong base of customer loyalty in majority of developing countries was attained by promoting its wide
range of products at an affordable and low price cost.

 Economic analysis

Nestlé has attained outstanding performance in the year 2014, as a result of which their
shareholders has gained satisfactory dividends. Nestlé is significantly disciplined and consistently drives
its performance in line by following the company’s model of resource efficiency and profitable growth.
However, the company has not been successful in obtaining higher income in the consecutive year due
to decline in the sales of the product. Therefore, nestle is required to focus on their market capability
and opportunities to enlarge the organizational activities around the world.

Due to decline in the net income of the company in 2015, the return on assets was 6.59%,
return on equity was 13.69% and for the same year return on investment was 9.03%. Therefore, it could
be indicated that the performance of the company is low which can create problem in maintaining the
market share.

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Strategic Management Case Study Analysis of Nestle
 As per the balance sheet of the company, the growth in the total assets value is not stable.
However, the total value of the assets is more than the value of debt. It indicates the company can use
its assets for clearing the due debt.

Ratio and Liquidity Analysis

 Current Ratio

It can be viewed that liquidity position of the company is not good. It suggests that the company
might be facing problem in managing its working capital cycle. Also, it can be assumed that, the firm
may be taking too much time to meet their short term obligations.

 Net Profit Margin

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Strategic Management Case Study Analysis of Nestle
 From the above graph, it could be observed that the company is not being able to maintain their
profit margin and it shows a declining trend year after year. The sales of the company have significantly
dropped in spite of increasing marketing and administration expenses in the year 2015. The declines in
the sales and profit have impacted the earnings per share which has dropped to 2.90 million in 2015
from 4.54 million in 2014. If such performance continues in the future, then company can fall into huge
losses or debts.

 Debt to Equity Ratio

It can be seen from the above graph that Nestle is using more of debt than equity for financing
its projects or operations. The ratio has significantly increased in 2015 which indicates that the company
might face financial risk if it does not take serious measures or actions. On the other hand, it could also

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Strategic Management Case Study Analysis of Nestle
be assumed that the company may not be able to accumulate enough cash for satisfying its debt
obligations.

Financial Forecast

The market performance and opportunities of the Nestlé’s brand helps in forecasting increase or
decrease in the dividend in subsequent fiscal years. It has predicted that dividend would grow by
approximately 2.27%.

Despite of decline in sales revenue and profit, it is assumed that the company would be able to increase
their revenue by 1.63% annually. Through investing on product quality and marketing opportunities, the
company would be able to generate positive revenue in future.

Nestlé’s strategic trajectory

The international market has always been instrumental for every multinational company in
order to develop a strong market of consumer products. Facts reveal that 95% revenues are generated
from its international businesses. Nestlé has a wide extension due to its global geographic organizational
structure that has enabled the company to become proactively involved in international business rapid
expansion. As Nestlé has the background of stable technology and mature product lines, in order to
attain low-cost manufacturing within the international countries.

With the aim to open up new market opportunities, Nestlé has merged with the manufacturer
of Maggi soups and seasonings and acquired the Crosse and Blackwell who is a famous British
manufacturer of canned and preserved foods. Moreover, Nestlé has undertaken a number of
acquisitions and merging throughout the decades. Nestlé’s establishment of a joint venture with the
Coca-Cola and Beverage partner worldwide is also a strategic move to shift its focus from milk and
confectionery items to beverages. The strong alliance with the companies allows them in effective
planning to develop the beverage business of black tea and green tea. Nestlé leverage its brand image as
the key source of its competitive advantage. In order to break away from its current industry, the
company has established and entered into joint ventures in order to develop its growth in new business
areas that relates to fitness. Nestlé shift into the business segment of nutricosmetics under the brand
name of Inneov, was a result of its joint venture between Nestlé and L’Oréal. Through its affluent
capability in research and development, Nestlé leads the industry with innovation and thus providing
maximum flexibility in product portfolio.

Major functional support strategy

 Information technology and Control system

Following the guidance presented by Company’s quality policy, Nestlé is focused on building trust by
offering appealing services and products that satisfies the expectation and preferences of customers.
The company strictly comply with the external and internal food quality, safety regulations. Nestlé has
designed and established a common technology infrastructure and control systems which integrates all
of its businesses focusing on the key objective of quality. Advanced information technology has
significant impact on the design and management of organization in four aspects that include
decentralization of organizational structure, improved relationship within organizations, enhanced
horizontal coordination and better network facilities. During the initial phase of its business operation,

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Strategic Management Case Study Analysis of Nestle
Nestlé allowed its local subsidiaries to conduct their business independently. Nestlé gradually realized
that independent operation is leading to local differences which in turn is causing inefficiency and extra
costs as a result of which Nestlé could not compete effectively in the market due to the lack of standard
business processes.

Hence, Nestlé took a strategic move by incorporating company-wide instalment of SAP enterprise
resource planning software, in order to integrate significant applications on material, accounting and
distribution. This strategic move from traditional information and control technology to SAP ERP system
has helped Nestlé to collect information, process them to deliver the entire operational feedback that
include processing of order, designing of products, purchase of raw materials, inventory, manufacturing
and distribution, human resource, payment receipt and forecasting of the future demand.

Eminent failure

Nestlé performance was greatly criticized by the WHO due to their promotional ideology of
persuading mothers by stating that infant formula is better for their babies than breast milk. However,
Nestlé experiences a situation of locked-in customer, due to the reason of mothers switching to
powdered milk and stops feeding breast milk, which in turn close downs her capability of producing
milk. Critics of Nestlé argued the fact that mothers those are switching to instant formula feeding can
even lead to the death of infants. Consequentially, Nestlé faced boycott due to the infant formula
controversy which is again an eminent failure of the company. In response to handle WHO criticism,
Nestlé started close operation with the International Council of Infant Industries (ICIFI), which is known
to be the

self-regulatory organization of the industry. After Saunders and Earnest was elected as the president of
ICIFI, they immediately started the negotiation process with WHO as a result of which the boycott to
Nestlé’s infant food products finally ended on 1984.

One of the biggest failures in functional food and beverages include the Nesfluid. According to
the functional food expert, Julian Mellentin, Nestlé’s failure in the launch of its Nesfluid was more of a
confusing launch as the brand promised hydration, nutrition and alphabet soup as health benefits in a
dubious tasting beverage range. Statistics reveal that, Nesfluid was competitively priced product which
was supported by huge marketing investment, but the product achieved very modest sale, hence it was
withdrawn within 18 months of the launch. The main reason of its failure was subjected to Nestlé’s
attempt to explore the mass market by adding various product ranges together that involve combination
of hydration and nutrition, mixing up with coconut water and blending whey protein.

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Strategic Management Case Study Analysis of Nestle
Recommendation

Short-term action recommendation

Nestlé company is proactive in every phase of its operation. For example, Nestlé was the first company
in Europe to introduce biodegradable ingredients for water bottles. However, Nestlé’s lack in vertical
integration makes it difficult for them to accomplish the aim of being the proactive leader. This is a
significant vertical integration issue. Nestlé is recommended to implement vertical integration which
also helps them to become cost effective.

Long term action recommendation

The sales and market share of Nestlé has been dropping down significantly, due to the failure of some of
its top selling products such as Nesfluid and Maggi. These products were scientifically proved to contain
hazardous chemicals that are harmful to human health. Nestlé must focus on transforming its brand
image and reputation to a health, nutrition and wellness leader, by connecting to a network of experts
who can help to invent the present and upcoming products into healthier and GMO free. Moreover,
Nestlé is experiencing a decreasing sale in their chocolate and confectionary segment. In addition, the
water segment of Nestlé Pure Life is also lowering the operating margin. Nonetheless, high sugar
products of Nestlé do not align with the principle of health and wellness of consumers. In order to
improve its operational efficiency and brand image, Nestlé must focus on utilizing its R&D network to
introduce healthier products along with the assurance of quality and product safety.

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