Introduction
This report discusses the strategy of Nestlé, a multinational enterprise (MNE) with a broad brand portfolio in the processed food industry. It is structured in four main sections. The first part provides a brief background to Nestlé, its product offerings, market share, and position in its industry, among others. An analysis of the company’s external environment in its home country and suggested corporate-level strategies are presented in section two and three. In the next part, business-level strategic proposals for Nestlé are described followed by a conclusion summarising the findings and suggestions.
Background to Nestlé
Nestlé is a multinational corporation that manufactures and markets about 10,000 household brands across 130 countries worldwide (Varma & Ravi 2017). It was founded in 1866 with the launch of infant formula. It owns local subsidiaries – factories and research centres – in 80 nations. Nestlé’s headquarters are in Switzerland, but its multinational strategy development involves collaboration among strategic business units (SBUs) spread across three market zones: European market, the Americas, Asia, Oceanica, African region, and the Middle East (Nestlé 2017). Each SBU concentrates on a specific product line, e.g., coffee and beverages, and cooperates with the firm’s R&D department to ensure consumer-driven strategy and innovation. Nestlé has implemented some innovative ideas in its product development; therefore, the company was selected for this analysis to provide insights into its strategic capabilities and responses to outer-organisational forces.
An abridged version of Nestlé’s vision is “to bring consumers foods that are safe, of high quality and provide optimal nutrition to meet physiological needs” (Nestlé 2018, para. 2). This statement shows a pledge to offer superior nutritional products. Its mission is to “make better food so that people live a better life” (Nestlé 2018, para. 1). Its objective is to offer tasty and healthier food choices conveniently to consumers. Nestlé’s market share and position in the fast-moving consumer goods industry are illustrated in Figure 1 and 2 below. It is found that coffee is the best performing segment (27% market share) of Nestlé (Figure 1). The firm is a market leader in instant coffee, infant formula, and baby food (Figure 2).
Outer-Organisational Environment of Nestlé
Porter’s Five Forces Model gives a framework for analysing a firm’s internal and external environments and strategy development (Hitt, Ireland & Hoskisson 2017). These factors are described below using Nestlé as a case study.
Threat of New Entrants
Great product diversity characterise the Swiss consumer food industry. In Switzerland, there is an accelerated investment in this sector among new foreign entrants, particularly German discounters like Lidl and Aldi Suisse, attempting to challenge local companies (Euromonitor International, 2017). However, the current players have reported good performance in this industry with significant market shares. They understand the Swiss market well and enjoy consumer loyalty. Nestlé’s rich history of providing high-quality products makes it the third largest player by turnover (Euromonitor International, 2017). Therefore, few smaller entrants succeed in this industry; hence, the threat of new entrants in this industry is low.
Bargaining Power of Suppliers
Nestlé, as a significant player in the Swiss consumer food industry, buys raw materials in large quantities. It sources coffee, milk, technology products, and packaging materials from suppliers. Nestlé spends about CHF 941million on supplies sourced from local farmers for production in its Swiss factory (Varma & Ravi 2017). Thus, Nestlé is an ideal trading partner for suppliers, which gives it considerable bargaining power in the supply chain. The firm also offers technical support to over 400,000 farmers in 40 nations, such as Mongolia, to enhance quality and output (Nestle 2015). The long-term supply chain relations and moderate switching costs for this company mean that supplier power is relatively low.
Bargaining Power of Buyers
An intense competitive pressure in the Swiss packaged food market implies that buyer power is high. Major brands such as Crémo, Migros, and Emmi compete directly with Nestlé products on price (Nestlé 2017). As a result, switch of costs are low for buyers, as competitor firms offer substitute products, such as chocolate confectioneries. Changing consumer tastes and preferences and environmental consciousness also implies that people can quickly switch to brands that offer higher nutritional value, instant preparation, and convenient packaging (Varma & Ravi 2017). These aspects indicate that buyer power is significant. As a response, Nestlé ensures that its product development efforts are driven by consumer insights to create brand loyalty.
Threat of Substitutes
Nestlé’s products, such as bottled water, have substitutes in the Swiss market. Specialty coffee is the firm’s fastest growing product line (Matzler, Bailom & Kohler 2013). However, growth in internet retailing and cross-border buying exposes consumers to wide array of similar packaged goods (Euromonitor International 2017). An additional threat comes from baby food prepared at home. Concerns over the safety and nutritional value of some of Nestlé’s products may increase switching to other options by health-conscious consumers (Mohajan 2015). Therefore, the threat of substitutes is significant in this market.
Competitive Rivalry
Competition in the consumer food industry is very stiff. In the Swiss market, Nestlé is the third-largest player after Migros and Emmi (Schneider 2017). Its direct rival includes Kraft Foods, an American company that sells a range of packaged products. Nestlé also has competitors in specific segments, for example, it competes with Kellogg Company in the cereal sub-sector (Schneider 2017). The rival companies’ local market share is significant. The firms also invest in aggressive brand promotion campaigns and compete on price, product innovation, and variety. Therefore, competitive rivalry is high in this industry.
Corporate-Level Strategies
Corporate strategy communicates a firm’s general growth direction in its industry (Hitt, Ireland & Hoskisson 2017). It primarily involves portfolio or business unit management for optimal value. Scholars give different classifications of corporate-level strategic possibilities that firms can pursue to gain competitive advantages in the market. A comparison of corporate strategy options proposed by Wheelen et al. (2014) and Dessler (2016) is presented in Table 1 below.
Table 1: Corporate Strategy Classifications. Source: Developed by the Author for this work.
Nestlé’s external environment is characterised by an intense competitive rivalry that threatens its profitability. Directional growth strategies are suggested to enable the company to strengthen its competitive position in its industry. They are equivalent to Dessler’s (2016) concentration and diversification orientations. Such strategic options are meant to grow sales, revenue, or assets (Wheelen et al. 2014). Continued sales growth will enable Nestlé to achieve economies of scale, and thus, increase its profits. Since rival firms compete on the price, cost reduction and diversification into a small, profitable niche, e.g., specialty coffee, will allow this firm to grow its market share.
Specifically, by leveraging on its core competencies (product knowledge, distribution channels, factory network, etc.), Nestlé can use concentration (vertical and horizontal strategies) to enter related industries, e.g., chocolate confectionery, to address high buyer power through variety. It can also reinforce its operational position through vertical growth options that enhance value chain efficiency (Hitt, Ireland & Hoskisson 2017). Greater vertical integration with farmers or partners can fortify its supply network and reduce supplier power. Another growth strategy recommended is horizontal diversification or geographic expansion. It entails going global by setting up operations in new destinations or overseas locations through franchise agreements, joint ventures, etc. (Dessler 2016). Diversifying into markets outside of its current international operations will provide opportunities for further sales growth to achieve higher competitive gains. However, growth strategies are criticised for focusing on expansion, as opposed to first developing production value, enhancing business efficiency, and adopting technology (Valcic & Bagaric 2017).
Another group of strategic possibilities for Nestlé is portfolio analysis. Under this framework, a firm considers product lines or subsidiaries as investments that should be managed profitably (Wheelen et al. 2014). Nestlé could use the BCG growth-share matrix to depict its 3 SBUs and over 10,000 brands in relation to its market share. In this regard, the corporation will identify the ‘stars’ (i.e., highly profitable products/units), ‘question marks’ (potentially successful), ‘cash cows’ and ‘dogs’ (unattractive categories). The framework will help inform funding decisions to strengthen product features – quality and nutritional value – to reduce consumers’ propensity to substitute. However, critics state that the BCG matrix’s four strategies are too simplistic and generic to capture the full extent of a dynamic business environment (Wright, Paroutis & Blettner 2013; Madsen, 2017). Nevertheless, portfolio analysis could help Nestlé strengthen its competitive position and market share.
Business-Level Strategies
Firms use business-level strategic options to create consumer value and acquire competitive gains by leveraging on core capabilities or specific products (Hitt, Ireland & Hoskisson 2017). These generic strategies represent a firm’s action plans designed to achieve corporate-level deliverables. In this paper, two frameworks – Porter’s generic strategies and Ansoff’s matrix – are compared to propose suitable business-level strategic options for Nestlé.
Table 2: Porter’s Generic Strategies and Ansoff’s Matrix. Source: Developed by the Author for this work.
Multiple business-level strategies are available to Nestlé that could enable it realise its corporate-level goals. One such strategic option proposed in this paper is low-cost leadership. As a top brand, a significant proportion of Nestlé’s costs result from quality raw material purchases. Cost leadership would allow this firm reduce production costs through efficiency, inventory control, and quality focus (Doole, Lowe & Kenyon, 2016). This business-level strategy aligns well with the suggested BCG growth-share matrix (corporate-level) that supports resource allocation across product lines or SBUs. Reducing unnecessary costs in Nestlé’s SBUs will result in lower prices relative to those of rival firms. In this way, the corporation will control the threat of substitutes and competitive rivalry. However, a cost leadership strategy has limitations, such as potential imitation by competitors and the possibility of strategy-consumer taste mismatch (Kim & Wang 2014).
A second strategy proposal is the differentiation model – vertical and horizontal. The aim of utilising this strategic option is to distinguish a firm’s products from those of competitors and develop a unique brand reputation (Doole, Lowe & Kenyon, 2016). Nestlé sells over 10,000 products with distinctive features, including nutritional value, packaging, labelling, etc. (Nestlé 2018). New products should reflect consumer tastes to enable the firm to create a differentiated position in its industry globally and charge premium prices. Therefore, a unique brand image based on quality will result in competitive gains for Nestlé. However, a differentiation strategy is prone to imitation by rivals, low market acceptance, and high costs (Kim & Wang 2014).
A third business-level strategy that is proposed is diversification into new products and markets. This approach is related to the concentration orientation suggested above. Nestlé currently has operations in 130 countries in three zones (Varma & Ravi 2017). It could use concentric diversification to offer products closely related to its current portfolio or the horizontal option to provide new brands (Hill, Schilling & Jones 2017). It could also utilise these strategies to expand into new industries or locations to avoid bottlenecks associated with market saturation and intense rivalry. Although global diversification is linked to improved market share and competitive positioning, it is also associated with a decline in firm value and increased exposure to international market shocks (Chang, Kogut & Yang 2016).
Conclusion
In this paper, the outer-organisational analysis using Porter’s five forces reveals that the threat of substitutes, buyer power, and competitive rivalry are high in Nestlé’s industry. However, the threat of new entry and supplier power is low. Based on a review of strategy classifications by Wheelen et al. (2014) and Dessler (2016), two corporate-level strategic options are suggested for Nestlé to enable the corporation to improve its competitive position, manage buyer power, and reduce the threat of substitutes. They include directional growth strategies and portfolio analysis. Based on the corporate-level orientations, three business-level strategic options are proposed, namely, low-cost leadership, differentiation, and diversification.
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