Nestle Background
In history, the company seemingly saw every challenging environment to develop and strive harder in its operations. Way back in 1860s, the founder Henri Nestle developed an alternative for breast feeding babies to save a child phasing death. Since then, the resistance to quit and strategy formulation followed as the demand of several governments to its daily products rose during World War I. When the war had ended and demand ceased, it institutionalized efficiency and developed new chocolate products. On to World War II, sales persisted to drop abruptly from to million year-on-year but it again gave Nestle the motivation to excel by introducing Nescafe as US military’s staple drink. Ever since, it expanded operations through acquisition and joint ventures as it served globally. (Nestle Homepage).
Today, the firm is characterized by 500 companies, workforce of 247,000 employees, Switzerland’s largest industrial company and world’s leading food company. It has a range of product like beverages (coffee and water), milk products, ice cream, nutrition, culinary products (soups, seasoning, pastas), chocolate, biscuits, food services, professional products, pet products, pharmaceutical and cosmetics company, joint ventures and associate company. In 2004, it gained highest sales in Europe at 28,000 (in million CHF) and highest profit in America at 4,000 (in million CHF). Milk products topped its sales at 23,000 (in million CHF) while beverages got the highest profit by product category at 3,000 (in million CHF). Being global, Nestle adapted business principles such as equal creation of value to stakeholders, emphasizing long-term success, adaptation to culture and legislation of the host countries and employee excellence (Nestle Homepage 2004).
Outsourcing
Through the primary and secondary activities in the value chain, Nestle necessitates the existence of business partners to promote cost-efficiencies as it operates in 86 countries (Kimbrell, 2001). It is rather inconvincible to say that it does not have the capability to do so but three reasons surfaced for this global company to remain fragmented in the value chain; namely: to have greater leverage, to adapt quickly in the local environment and to embody its social responsibility more effectively. Due to this, it outsources logistics, raw materials and machines to suppliers not to imply its financial incompetence but to realize several outsourcing opportunities and prevent overextension of activities.
For example, it outsources the service of small and big logistics companies in its USA plants to distribute its outputs to distribution centers and vendors (Skydel, 2002). It seemed an ordinary outsourcing strategy but the firm restructured logistics system and established a single Load Control Center (LCC). As a result, there was improvement in on-time delivery, stable costs are maintained and reduction of needed carriers to a small fraction of the original number. Before LCC, the firm lost management control over deliveries of logistics companies and the measurement of their performance cannot be calculated causing inefficiencies. However, with the technological development and installation of RedPrairie software (later upgraded by SAP German technology giving LCC robust and scale compatibility of activities with the size of Nestle), delivery management could now be done at real time and in a centralized manner.
Further, due to perishable nature of Nestle inputs and emphasis in freshness, local outsourcing of raw materials is necessary for time efficiency of harvest-to-manufacture transfer (Nestle Homepage). In effect, purchasing activities are designed both at strategic and operational level. Strategic refers to selection and evaluation of suppliers, managing and negotiating contracts and other strategic planning activities in purchasing while operational activities provide inputs for supplier performance, actual ordering, receive goods and services and manage supply signals. In view of this, the firm acknowledges close cross-functional communication within the organization and with the suppliers themselves including external authorities which is supported by intranet and e-procurement to establish an environment wherein information will be transferred in real-time and with efficiency. This communication system allows the firm units and divisions to share purchasing networks to maximize category leverage, plan long-term competitive supply and result to fewer and standardized contract specification of suppliers.
Lastly, although the firm’s manufacturing machines are produced by others, it has the necessary leveraging to customize its design and functionality according to its specific needs (Demetrakakes, 2004). This outsourcing advantage makes Nestle a “dictator” to suppliers partly because of its huge operations and financial scale. A high buyer purchasing power, however, did not hold the firm to transfer the research and development activities to machine suppliers. It has created “application groups” that can address immediate market needs particularly in packaging. For example, packaging preferences in different regions are motivated by convenience, environmental concerns and economic conditions. In Germany, glass packaging is preferred because it is deemed more environmental friendly while countries UK and France prefer plastic. Americans prefer bigger packaging while Europeans see this size inconvenient while both of these regions favor for bulk packaging of maggy bullions unlike Africa which goes for individual ones due to lower purchasing capability. These country differences, if not addressed efficiently, could lead to looses and can result to outsourcing problems. Nestle prevents them occurring through internalization of monitoring activities outside the outsourcing contracts.
In this respect, outsourced activities can be evaluated through four skills essential for managers; namely, strategic thinking, deal making, partnership governance and managing change (Hitt, Hoskisson, & Ireland, 2003). The first, second and third can be best exemplified by Nestlé’s commitment to control the source and prices of suppliers (Nestle Homepage) particularly in agricultural products. The firm required their partners to produce quality, safe and cost-efficient raw materials including its adherence to minimize ecological hazards. When the contract has been signed, continuous audits will be performed in the supplier’s site to assure maintenance and improvement of activities with legal and ethical practices in mind (like absence of abuse on child labor). Finally, traceability is also an on-going commitment of the firm that necessitates suppliers to uncover their processes in order for the firm to assure contract standards and control any deviations that may arise therein.
In managing change brought about by new business partners or old partners that changed their processes, the LCC logistics strategy showed how the firm handled external resistance to introduce new technology. The firm firstly studied the whole organization and external partners in order to benchmark and initiate possible conflict areas. This preparation stage became crucial to the actual application of the technology and helped stakeholders to accept the change with mutual interest in it. The management acknowledges that time is needed to realize the fruits of the change that made them allow some futile moments in its implementation. This futility, however, did not result for managers to sit down rather encourage suppliers to participate in load planning, thus, ensuring that partnership governance is withheld even though the technology came from Nestle.
In conclusion, outsourcing initiatives of Nestle management is seen in the lens of purchasing power due to local adaptation. The company could demand specific agreements in its advantage to suppliers because it has the financial back-up and principle of safety and quality across its century-old brand name. The requirements became more aggressive when efficiency issues and local legislation becomes stiff. Since cost-effectiveness can be negatively affected by additional pressure to comply with local legal requirements, these rigidities are transferred to suppliers that in turn provide the firm the necessary leverage the latter cannot solely attain because of the demanding environment it is operating. Thus, without outsourcing, it could only choose between cost and quality (according to local responsiveness) and not be able to exploit the streamlining of both into its operations.
On Outsourcing and Business-Level Strategies
Looking in its outsourcing scheme, the firm’s great demand from its suppliers in terms of control, efficiency and quality sinks well to operate under integrated cost leadership/ differentiation strategy (Hitt et al 2003). Because of the outsourcing structure, Nestle could adapt quickly to environmental changes as the local supplier has ample knowledge and wide experience base that can provide optimal inputs and enhance legal adherence of the firm in ht locality. Second, this could prevent the firm to learn new skills and develop new technologies just to meet the local demand because the supplier already developed facilities to blend with local preference and issues. Lastly, outsourcing can effectively leverage core competencies for the firm while competing against rivals. This last rationale in outsourcing made the firm focus its capabilities to other activities in order to excel in quality, cost or product line which can be difficult to develop when it has several tasks to perform.
Flexibility is necessary for firms to effectively use this hybrid strategy (Hitt et al 2003). The introduction of several software devices to Nestle enhances the flexibility of its manufacturing system because of the minimum manual intervention, thus, reducing human error and group decision bias. With cost leadership/ differentiation strategy, the company could be caught with the low-cost versus product variety trade-off. But due to its automation in its operations, the firm retained not only cost effectiveness and product variety but also quality. The development of Gene technology (Nestle Homepage) had benefited the firm to increase food production, quality, nutritive value and support sound agricultural practices. Also, looking at technology in general, Nestle has 17 research and development sites including nine product technology centers (responsible to transform R and D findings into manufacturable products) that increases its ability to excel both at cost and differentiation strategies.
In addition, communication network (Hitt et al 2003) with suppliers is maintained and improved. This can address both operational and relational partnerships of the firm and create communication technology, establish mutually-beneficial contract and sustain long-term business with them. This strengthening of partnership is done to link the organization not only to suppliers but also to distributors and customers for another source of strategic flexibility. When the firm and distributors are closely operating, delivery and order requisition is done harmoniously, thus, preventing distribution and collection delays that can disrupt cost effectiveness, worse, results to disbandment of contract. Nestle provides win-win solution to partners which is a characteristic of an internationally known brand competent to grant such environment.
Acquisitions, Vertical Integration and Diversification
The Nestle Waters of North America claimed that in order to be competitive, the company should be vertically integrated and be a low-cost manufacturer (Demetrakakes, 2004). This could be the particular reason why some activities in the value chain of Nestle would not just be apportioned to outsourcing. Vertical integration exists when the firm not only produces its own inputs and but also handle the distribution channel (Hitt et al 2003). It creates market power for Nestle over rivals by saving cost of operations (through sharing of resources and technologies) and protecting valuable company information against imitation. Because suppliers have several contracts that could be serving one of Nestle competitors, strategies of the firm can be easily translated and adapted by these rivals. Internalization of activities kept them secret, thus, making the imitation costly and characterized.
Nestle started as a mere producer of milk products, however, with several mergers, joint ventures and acquisitions, it diversified its business to include chocolate (merger with Chocolat Suisses SA), cosmetics (L’Oreal equity interest) and pet products (Ralston Purina acquisition). Among diversification strategies, acquisition seemed the widely used by the company. To illustrate, in addition to Purina, acquisition, which progressed in 1970s, includes Alcon (pharmaceutical), Buitoni-Perugina (culinary) and Valio (ice cream). Partly, outsourcing was disregarded because activities are under it largely connotes vertical integration. Rather, most of these acquisitions are linked to related and horizontal integration because they are within healthcare and nutrition industry.
With this, it can be said that Nestle used outsourcing in its vertical set-up while acquisitions are prominent when it intends to diversify to different markets and products. By making these acquired companies into subsidiaries, Nestle could make use of leveraging between outsourcing and internalizing activities. Processes need not be adapted or restructured to be compatible with the new acquisition because suppliers and partners shoulder such responsibilities. For its part, Nestle internalize its activities deemed crucial to maintain its reputation in nutrition like research and development wherein they are installed in the world headquarters of the firm in Vevey, Switzerland for close coordination with the corporate managers. On the other hand, outsourcing is best used to overcome entry barriers (Hitt et al 2003) in the host market where the firm wish to operate. One entry barrier is government regulation that requires foreign firms to make use of local resources. By outsourcing the human capital of the host country, Nestle is both satisfying corporate operations and government regulation at the same time.
With acquisitions of differentiated companies, the firm also avoids the cost of new-product development and adheres to the importance of speed to market (Hitt et al 2003). For example, developing the chocolate product can include significant investments, time and periods of sacrificing profitable returns. Its success can also be unpredictable and vague especially when the firm is new to developing product, thus, creating huge risks. However, Nestle acquired Cailler brand (Kimbrell, 2001) which gave the former the speed to market and brand history competitive advantage. The 200 year-old history of this chocolate brand, wherein one half of which belongs with Nestle, caused chocolate tradition to be pegged to Switzerland and known worldwide. The chocolate subsidiary also gave Nestle an effortless distinction of its chocolate products against rivals in which it was known to be a passionate brand compared to others like Lindt as intellectual brand. Procedures in introducing confectionary products like market testing is also adapted by Nestle from the partnership which made it to conduct blindfold taste tests. As a result, Nestle gained such recognition and profitability without huge marketing campaign and even elevated its corporate brand name and attached it to Switzerland’s history particularly in chocolate business.
In conclusion, advantages of diversification for Nestle can be achieved and protected through acquisition while vertical integration can be leveraged through outsourcing. As it expands into different product lines, Nestle needs to be flexible in its manufacturing and other value chain activities. As a result, market power should not be exclusively attributed through internalization of activities especially when diversification connotes adjustment of operations based on the requirements of the subsidiary. Rather, market power should be a balance between outsourcing and internalization to uphold strategic flexibility of operations. It means that the firm, even though could not secure all possible leakages of company information that could lead to imitation, has the sole knowledge on how to operate the balance and make competitive advantage over it. This is concretized by its half century old contracting and in memoriam internal efficiency enhancement operating through its unique company goals and human resources attitudes towards innovation and excellence.
Nestle and International Strategies: Wrapping the Whole Activities
Using the determinants of national advantage (Hitt et al 2003), agricultural products is outsourced to local producers because of the presence of the necessary factors of production particularly in the developing countries wherein agriculture remains a common industry. This is also true why research facilities are enclosed within the borders of the mother company in Switzerland stimulated by the presence of supporting industries and the demand for extensive product researches. However, with its environmental concern in the forefront, Nestle could bridge the gap of research exclusivity and raw material decentralization. Ecological themes such as 80% of the waste materials in the manufacturing are converted as useful by-products while the 20% are disposed in environmental sound way (Nestle Homepage) and discourage the use of ozone depleting substances in its refrigerants, echoes research activities to the different parts of the world from the square miles of its Swiss facilities.
The idea of the company to use global strategy (Hitt et al 2003), that is standardized research products across country markets, is to integrate the health issues of country divisions and promote lower risks of lost of accountability and prevent high investment costs. It can be argued that the strategy reduces the capability of the firm to exploit growth opportunities, say, the human capital of Japan and other scientific prowess of other nationality including their state-of-the-art facilities. But Nestle is protecting a century-old brand name and could not seem to delegate the authority to create safe and nutritious products in other’s hands. So even though findings are limited, it is within quality standards. It is to be noted that a commercial drug takes 15 years and approximately 0 million to successfully launch in the market (Hitt et al 2003). As to Nestle, wherein its products have nutritive values, it could be argued that developing diverse country research centers could mean increased costs and even increased exposure to imitation.
On the other hand, outsourcing agricultural products is largely done through multi-domestic strategy (Hitt et al 2003). Even though there is a centralized purchasing principle, final decisions to acquire certain perishable raw materials is in the discretion of local management. Being perishable and vulnerable to human and natural factors like weather, too specific and rigid standard operating procedures could serve as bottleneck in smooth operations of local plants and offices that centralization could alter effectiveness of contingency approach to problems. Also, consumer needs and desires are aligned to the local distribution schemes of the firm. Cereal and pasta may not appeal to the Asian markets whereas nutritive values could be undermined by poorer countries in favor of the basic need to eat and quench the thirst. These regional differences are important to a global firm especially if it wanted to maximize the value of catering to local demand and improve profitability.
In conclusion, the decision to outsource, vertically integrate, business-level strategy and international strategy lies with the firm’s ability to leverage its resources and core competencies to achieve its market superiority. Its firm structure necessitates it to contribute to the society where it has its local operations while shareholders require it to increase the value of the firm. Its commitment to serve stakeholders in co-equal basis with the best it can calls continuous improvement of its value chain and competitive position. In the process of continuous improvement, its human capital and other resources developed their respective leveraging capabilities and flexibility to endure complex environmental results and aggressive competitor movements like that of Unilever. This complex set of Nestle strategies and adaptation reflects its historic feat to survive stiff competition and near bankruptcy. Challenges seemed a company tool to excel and discover new ways to solve problems even though it entails not a single but multi-faceted application of global and business strategies.
Recommendation
Its balancing strategy between internalization and outsourcing should be designed as to prevent occurrence of stifled innovation or inefficiencies because a supplier produces a product at a lower cost (Hitt et al 2003). Due to increased management monitoring, software like RedPrairie should be promoted and installed in different country divisions in order for information to be linked in not only to top management decisions in the Swiss headquarters where research and development is located but also to country offices in order to align their objectives to the trend of other offices or their business partners. Failure like managerial myopia or lost of flexibility could result to gain the black side of integration and outsourcing instead of exploiting their potentials. However, technology could be overestimated as the number one option to integrate and enhance communication than face-to-face planning. In order to avoid this, the management should consider a biannual meeting to country divisions, suppliers and other governmental authorities for strategic planning activities.
Further, maintaining the cost leadership and differentiation strategy at the same time could drown the firm and be “stuck in the middle” (Hitt et al 2003). To prevent this, it should keep its first mover advantage with that of the close rival, Unilever, and other niche competitors especially in pharmaceutical and pet products. It should maintain the thread that links its diversified business into one superior veil— health and nutrition. Intensifying its research, but preventing over-research as too much research can lead to morbidity or can result to exposure to competitors, and being aggressive in innovating environmentally conscious practices can assure its long-term breakthrough: bounded but effective. Its sustainable development that includes the whole stakeholders intensify its first mover advantage, at least being a diversified food company, that can provide it the conducive environment to improve operations to protect its historic reputation.
Acquisitions and diversification strategies of the firm should also be controlled and monitored to avoid it to resort to greater levels of diversification because of low performance (Hitt et al 2003). Ineffectiveness or inefficiency should be regarded as a multi-option of divestures, restructuring or internal and external improvements not just simply an option to release a lot of money to buy new firms or subsidiaries in different business. The trend of Nestle in latest acquisition/ partnership is to team up with pet foods and cosmetics industry apart from being human food company. Economies of scale and scope might not be realized rather reflect the opportunistic behaviors of managers to retain their positions of increased their salary due to increased responsibility. As a result, Board of Directors awareness and knowledge of company operations and evaluation of managers are necessary to identify the culprit in the organization. Transparency should be adhered while directors should convene regularly to have in depth grasps of the logical cause of a proposed diversification.
Finally, market research should be conducted in regions with varying preferences on packaging or product itself for effective multi-domestic strategy (Hitt et al 2003). It will assure that Nestle does not only comply with regulations on health issues but also satisfies the customers by conducting surveys to get the pulse of the consumers on ht end-result of research and manufacturing operations on top of health security and quality assurance. In addition, global strategy in primary research endeavors from the firm’s headquarters should attempt to coordinate with other research companies in other countries to promote universal discoveries of new founded technologies. This could enhance speed to market of innovative products from nestle by simply buying the patent form these foreign researchers. The job of the research team is to improve and align patented technology to the firm’s brand image avoiding the rigorous and costly development of such technology. It should be cautioned that such foreign research firm or institution should be accredited by some international bodies to assure quality for the receiving firm.
Bibliography
Book
Hitt, M, Hoskisson, R & Ireland (2003). Strategic Management: Competitiveness and Globalization. 5th Edition. Singapore: South Western Thomson Learning.
Periodicals
Demetrakakes, P. (2004, October 1). Nestle’s packaging wraps up the world: a truly international food company combines local and global strategies in packaging its huge array of products. Food & Drug Packaging
Kimbrell, W. (2001, January 1). Nestle Suisse Plans Global Masterstroke.
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Skydel, S. (2002, September 1). The very best; Nestle USA: 2002 T3 Information Technology Enterprise of the Year award winner. Transport Technology Today.
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Electronic Source
Internet (2006). Nestle Homepage. Retrieved on March 28, 2006 from http://www.nestle.com/.
Internet. (2006) High Beam Research. Retrieved February 10, 2006, from www.highbeam.com.
Internet (2006) Questia Online Library. Retrieved February 9, 2006, from www.questia.com.
Internet (2006). Wikipedia: The Free Encyclopedia. Retrieved March 22, 2006, 2006, from www.wikipedia.org.
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