Through a series of well-coordinated mergers and the growth of a vast selection of innovative food products, Nestle became the global giant it is today. Nestle’s success can be attributed to its deep agricultural supply chain, strong local market teams, hiring from within, and long tenured CEOs. Nestle has become the epitome of innovation and success in the retail food product industry. In 1996 Nestle established the Nestle Environmental Management System (NEMS) in an attempt to produce more environmentally friendly products.
NEMS required innovative eco-design in the company’s products and activities, and gave preference to suppliers who worked to improve their levels of efficiency and sustainability regarding their use of resources. Aside from this, NEMS also requires independent environmental auditing regarding the practices of the company. In addition, environmental awareness training for the employees and business partners is required. Nestle launched Sustainable Agriculture Initiative Nestle (SAIN) in 2000 in order to optimize the transparency from farm-to-table and to increase efficiency and productivity.
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Nestle took a big risk as it was the first to implement this type of program. The program was effective, and other companies such as Unilever and Groupe Danone adopted the idea. In 2006 it further expanded the program to make water a central area of concentration. Five Forces Model Porter’s Five Forces Model was created to act as a framework for industry analysis and business strategy development. Porter singled out five different forces that impact competitive intensity which portrays an image of the overall attractiveness and profitability of a market.
To aid in our evaluation of Nestle and its status in the industry, we will apply Porter’s Five Forces Model to the company. Threat of New Entrants The food processing industry is very large and competitive; it is not uncommon for firms within the industry to do quite well. As a result, many companies enter into the market every year in an attempt to gain a portion of the profitable market. Luckily for Nestle, the company has been around for over a century and boasts a long history of quality products and consumer satisfaction, which has allowed the company to obtain a considerable share of the market.
As a result, new entrants into the industry must attempt to seize a portion of Nestle’s market share in order to survive. Essentially, Nestle is constantly a target, and so the threat of new entrants is moderate. Threat of Substitute Goods Due to the nature of the industry, Nestle is beset with the threat of substitute goods. From bottled water to lean pockets, there are arrays of similar products that compete directly with Nestle. It is vital for Nestle to continuously find new ways to improve its products because competition is so fierce.
In recent years, Nestle has focused on the health and wellness aspects of its products to maintain its competitive edge in the market. Bargaining Power of Suppliers Nestle prides itself on creating and maintaining positive relationships with its suppliers all over the world. Due to the large purchasing power of Nestle, and because the suppliers of agricultural commodities offer a product that is far from unique, Nestle holds more bargaining power than its suppliers. Aside from this, Nestle prefers to create and preserve long-term relationships with its suppliers as this helps to ensure the quality of the raw materials being purchased.
In addition, Nestle also offers useful advice to its suppliers on how to perform more efficiently to minimize unnecessary costs. Bargaining Power of Customers Customers have a large amount of bargaining power regarding their consumption of Nestle products. As stated previously, there are close substitutes for Nestle products which allows for the preferences of the customer to be very influential. Nestle understands the power of the customer and has taken specific steps to meet the needs of its products consumers.
Specifically, Nestle is incorporating health and wellness into the creation of its products as society has started becoming more health conscious. Competitive Rivalry within the Industry Nestle is a powerhouse in the food processing industry but so are Kraft Foods and Groupe Danone. These companies, among others, are in a constant and continuous battle to outperform one another. Regarding advertising alone, these companies spend hundreds of millions of dollars in an attempt to appear more desirable than the competition. Rivalry is fierce in the food processing industry, and this is a good thing for consumers.
As long as these companies continue striving to one up one another, consumers will continue to enjoy ever- improving product lines. ————————————————- When applied to Nestle, Porter’s “Five Forces Model” depicts a competitive, but profitable market for the food processing industry. Furthermore, the model places Nestle in a somewhat comfortable position within the food processing industry, while acknowledging the threats to its market share. Specifically, the model notes a moderate threat of new entrants into the market and a substantial threat of substitute goods.
In addition, the model shows that Nestle tends to maintain the upper hand over its suppliers as commodities have exact substitutes in the market. Also, customers have a considerable amount of bargaining power, as Nestle must adhere to consumer wants and needs because there are so many close substitutes. For the final force, the model depicts a large amount of rivalry within the food processing industry. ————————————————- Goals ————————————————- Nestle has established many goals throughout the life of its company.
Being a highly innovative company, it is always looking for new ways to develop higher quality products. In order to maintain a competitive edge over top competitors, Nestle should improve its innovative technology; this will create new products and lead to better efficiency which will minimize costs for Nestle and its consumers. Another goal is to maintain growth by continuing to create value for consumers and shareholders through implementing an effective risk management policy. This can be done by ensuring compliance with Nestle business principles and international law.
In addition, Nestle will ensure that its actions are environmentally sound, socially just, and economically viable. Lastly, it should continue to uphold and expand environmental policies (i. e. SAIN, NEMS). This will be done by improving the communication between farmers, employees, managers, and distributors. ————————————————- Constraints ————————————————- There are a few pertinent constraints that will affect the implementation of the goals. First, is the loss of brand loyalty due to the current economic recession.
With a strain on household incomes, Nestle consumers are more likely to choose less costly and lower quality alternative products from generic brands of competitors. Nestle must improve its certification process of raw materials to meet higher quality standards. An accurate trail of material/product quality information through the various levels of the food chain is key to Nestle maintaining the overall quality of Nestle end-products. The last constraint is the increasing cost of energy, which affects all levels of input, production, and distribution. ————————————————-
Nestle is constantly expanding its horizons. One example is that the company has taken on an ambitious task such as doubling sales and expanding its buyer market. As stated above Nestle continues to search for opportunities to increase efficiency to expand its profitability. With the ever-changing price of commodities, supplies, and consumer tastes, Nestle will continue to struggle with its market position. Nestle has stayed strong and adjusted well through many obstacles over its lifetime. Nestle’s executives are confident they can accomplish just about any goal and are developing new strategies to make this happen. ———————————————— Central Problem ————————————————- Peter Brabeck, the chief executive, for Nestle uses the approach—when you aren’t growing, you are dying—in how he runs the company. For the past 30 years, this notion has worked for Nestle. Its shares have outperformed competitors in the S&P 100. Internally, a central problem for Nestle is how it plans to continue its global capitalization while resisting plateaus or stagnation. Externally, Nestle’s problem is how it will keep the lead on competitors. ———————————————— Nestle has managed its organization around decentralization. This is the idea that globally there is no one specific taste or preference wanted by all. Instead, Nestle has made its productions more regional. This will ensure that it produces products to the wants of the local communities. This strategy has helped Nestle outperform its competitors in different regions. The problem is, companies have taken notice of this practice and are implementing similar strategies. Alternatives Alternative One Cocoa is essential to 40-50 million people’s lives worldwide.
Over five million small holder farms produce it. Over the last 20 years, chocolate consumption has doubled, and in the last five years, it has increased 14 percent globally. There has been a shortage of cocoa for four consecutive years now because farmers are producing lower yields as demand continues to rise. “Many farmers struggle on small plots with aging trees that are vulnerable to disease. Economic pressures mean that farmers are focused on the short term and are not able to invest in good farm management which would help them secure better quality, higher quantity yields in the long term. This quote from Nestle. com states the most apparent reason for the cocoa shortage, which are poor resources for farmers in other countries. The shortage of cocoa has caused the prices to increase continuously. Nestle is one of the world’s biggest buyers of cocoa, and it has pioneered advanced technology in cocoa and coffee for 30 years. Several years ago Nestle created “The Cocoa Plan” as part of its goal of Creating Shared Value for shareholders, employees, farmers, consumers, and the communities where it operates. The plan will improve sustainability of the cocoa (and coffee) supply.
This plan is a long term solution, not just a quick fix. It requires a step-by-step approach and implementation process. Over the next 10 years, Nestle will invest CHF 110 million in plant science and sustainability initiatives for cocoa. There are five activities in their implementation plan. The first activity is plant expertise. Nestle has a research and development center in Abidjan in the Cote d’Ivoire in West Africa and also gives training to plant scientists in other cocoa producing countries such as Ecuador and Indonesia.
During this first activity, “The Cocoa Plan” looks to improve quantity and quality of yields by bringing 12 million plantlets to producer countries. The second activity is farmer training and assistance. This process will attempt to improve yields and to ensure sustainability by teaching better farming methods. The third is improving the supply chain. This is a commitment by Nestle to buy beans strictly from farmers who use sustainable practice and to help cooperatives by speeding up the process from farm to shipping.
The fourth is better social condition that looks to improve conditions where there is poor access to healthcare and education, and child labor. Nestle is partnered with the World Cocoa Foundation and others in order to achieve these improved conditions. The fifth and last activity is consumer communication. Consumer communication utilizes a Cocoa Plan logo and a Web site dedicated to inviting consumers to learn about the cocoa supply chain and Nestle’s work with farming communities. Our alternative solution comes in at activity one, plant expertise.
Nestle could supply these countries with genetically modified seeds and fertilizer, such as the products produced by Monsanto Co. , in addition to supplying producer countries with plantlets. Monsanto uses two techniques to develop seeds that meet the needs of farmers. The first type is breeding the seeds delivering superior genetics, allowing farmers to get higher yields from each seed. The second type is inserting one or more genes into the seed, which in turn protects against insects, controls weeds, and yields are preserved through the growing season.
Better seeds make crops healthier and easier to grow, which then allows farmers to be more effective when producing food, feed, and fuel. The benefits of farmers’ use of these products are the following: increased productivity and reduced costs, healthier crops that are easier to grow, conserved time and inputs, and possibly the most important to producer countries—improved protection from insects or disease and increasing crop tolerance to heat, drought, and other environmental stress.
Monsanto also offers conservation tillage. Conservation tillage is a protective cover of mulch over crops when they are not in season. This cover holds soil in place, minimizes runoff, and decreases erosion drastically. An advantage to implementing this strategy into “The Cocoa Plan” would be decreased cost in cocoa due to increased production. By obtaining these suppliers through this plan, Nestle would gain a competitive edge over competitors in the industry by having the best, most efficient, cocoa producers.
Another advantage is that it would help to expand environmental policies such as SAIN because it will increase efficiency and productivity. It would help to overcome some of the constraints. The plan would allow Nestle to keep an accurate trail of product quality information. Nestle would know the quality of the products by contributing to the production process. It could ensure the farmers know the proper way to produce quality cocoa. It would also help with the constraint of increasing costs. By increasing production and reducing the cost of cocoa, Nestle would be reducing input costs.
A disadvantage to providing producer countries with seed products is Nestle’s cost of supplying the products. Nestle has a planned budget of CHF 110 million for cocoa and would use part of this budget to purchase the products. Another disadvantage would be that the existing decrease in brand loyalty would not be improved through these methods. The cost of the product could potentially even increase slightly. The key to overcoming this issue would be to advertise and demonstrate to cocoa consumers Nestle’s efforts and attempts to positively impact less fortunate countries.
Customers are attracted when businesses help communities in need and know the money they spend on a product will benefit others in need. Alternative Two Nestle currently offers an athletic/ sports nutrition line of products geared towards “smart energy” production and endurance called PowerBar. Nestle bought PowerBar on February 22, 2000, in an effort to expand its influence in the sports nutrition industry as well as show its commitment to a healthy nutritious lifestyle for its consumers. PowerBar is the largest energy and nutrition bar business in the United States.
The PowerBar brand is widely distributed and a recognized name in the sports nutrition industry, but it provides a relatively low variety of products and seems to only focus on one segment of the sports nutrition market. When compared to other suppliers such as Apex and GNC, it falls short on many levels. This is because PowerBar, while being a “smart energy” source, does not provide nearly the punch that the other brands offer. The competitors in this industry offer products for people looking to jump-start, reinvigorate, or maintain their fitness routine.
Its products specifically focus on high protein intake, electrolyte replenishment, and natural vitamins, amino acids, and molecular combinations geared towards rapid absorption into the body’s functions. Nestle’s PowerBar products are mainly geared towards maintaining light to medium intensity fitness regimens and recreational activity. None of its products appeal to the avid sports enthusiast/ highly athletic consumer looking to increase their performance. There are four main categories of sports products: energy/protein bars, protein shakes, electrolyte replenishing sports drinks, and daily vitamin/nutrient packs.
For example, GNC and Apex provide an array of energy bars ranging from high protein, endurance, and snack bars to meal replacement, and Pro performance bars. These energy bars all provide high protein content, amino complexes and rapid absorption properties, but only some are considered all natural or organic. While all of Nestle’s PowerBar products are considered all natural, its highest protein bar has only 10 grams of protein whereas GNC’s highest protein bar has more than three times the protein with 32 grams. Nestle’s PowerBar does not provide a line of protein shakes or vitamin packs.
It has a line of powder sports drinks that nutritionally compare about evenly with competitors; however, it is a powder. It is not offered pre-mixed and bottled, so it will not be found at a local convenience store like Gatorade or Powerade. The sports nutrition market has continued to increase during the recession with an estimated growth of almost 7% in 2008. This development has been accredited to people trying to avoid pricey doctor visits by staying healthy as well as turning toward sports recreation as a substitute to pricier forms of entertainment.
Despite the recession GNC saw an increase of 2. 5% in the first six months of 2009. Nestle’s PowerBar is a much larger company than GNC; however, GNC is just one of the many suppliers seeing market increases in this industry. This shows that the sports nutrition market is growing, and there is definitely room for expansion and the potential to increase profits even during the recession. We propose that Nestle use its PowerBar brand to create a specialized segment of sports nutrition that focuses on all natural, organic superior training products providing the same or more benefit than the competition.
This new segment would provide a whole body plan that includes supercharged vitamin packs, energy drinks, and protein shakes and bars marketed towards the GNC high intensity athlete consumer. By increasing its product diversity and appealing to a larger group of consumers, PowerBar could begin creating higher brand loyalty and capture a larger share of the market. Currently, PowerBar is a product that is found only on the shelves of distributor stores, but with this expansion, it could eventually be its own store.
Consumers could go to the PowerBar wellness and nutrition store and get outfitted with everything they need for any type of athletic life style and level of performance they desire. Success in this type of product has the potential to be a “flagship line” for Nestle that could bring focus to the whole Nestle company as a leader in all natural, healthy foods. There are several disadvantages that stem from this alternative. One disadvantage is an increase in cost to expand Nestle’s line and establish its own distribution stores in hopes of the market continuing to expand and the line gaining market share.
PowerBar focuses on a segmented market and expanding the product line could potentially dilute Nestle’s image resulting in loss of brand loyalty from customers. Alternative Three One of Nestle’s most popular product lines is its pet care brands. Nestle owns many common household brands such as Purina, Beneful, and Alpo. It currently operates its dog food production factories in Venezuela, Thailand, and China. Quality standards in these countries fall below that of the United States, and as a result, there have been recent recalls of dog food produced by Nestle in these particular countries.
Recentralizing production by returning to factories in the United States would prevent these problems from occurring due to superior production standards. The advantages of returning to U. S. -based production would be higher quality products and less risk of product recall due to contamination. Several disadvantages present themselves if Nestle recentralizes operations: First, there will be increased costs of labor, which in turn, causes increased production costs. Second, increased costs associated with exportation of goods to foreign markets.