Executive summary

The paper has been divided into two parts. The first part addresses the internal and external

influence on Nestle, which it is basically the environment analysis of the company. For a

successful global operation, organisations need to consider both their internal and external

environment which is likely to affect the company and which also varies among different

countries in which a company operates. The internal analysis consists of all the internal

variables, such as the employees, board of directors, organization structure and culture and so on.

These variables determine the strengths and weakness of an organization and can be controlled

by an organisation to a large extent. But the external environmental analysis includes remote,

industry and opportunities and threats analysis, which organisations have less or little control

over. Thus to be in the game all organizations including Nestle have to plan in-depth analysis for

such factors.

The second part of the paper discusses the about the role innovation plays on Nestle‟s policies

and decision making decision. Nestle, being the world‟s largest food and beverage company by

sales, has been driven quite extensively by globalization. Their „Glocal’ philosophy and

approach has been a notable aspect of their accomplishments. The organization‟s reaction to

local responsiveness has been quite proactive and optimistic.

Background of the study

The company that I have chosen for this assignment is Nestle. Nestle is engaged in the business

of manufacturing and marketing branded food and beverages. Nestle with headquarters in Vevey,

Switzerland was founded in 1866 by Henri Nestle and is now the world's largest food and

beverage company by sales (nestle.com). Nestle has a strong brand portfolio such as Milo,

Nescafe, Nesquick, Nido and Kit Kat to name a few. Many of its brands are associated with

quality and are global leaders in their respective markets. Its existing products grow through

innovation and renovation while maintaining a balance in geographic activities and product lines.

The Company's priority is to bring the best and most relevant products to people.

For more than 130 years, Nestle has offered an extensive range of products through continually

empowering their surge for geographic presence (nestle.com). Their philosophy is to integrate

their strong R&D with the broadest geographic, which consequent to great products and strong

values. In addition, the intrinsic link generates over a billion consumers every day, purchasing a

Nestle product.
Introduction

There are two types of driving force that influence the way an organization operates which are

internal and external. These forces may have either a positive or negative impact on the

organization, which is to say can either act as strength or a weakness for an organization. The

internal driving forces originate from inside the organization and include all the internal

variables such as the employees, managers, owners, organization structure culture and so on

(Grosse, 2003). Organization need to control these factors and manage it in a way so that the

forces can be aligned with objectives of the organization.

Similarly organisations also need to consider how all the external environmental factors affect

their business. These are uncontrollable factors which poses possible opportunities and threats

for the organization. The set of external influences impacting an organization‟s performance are

numerous and diverse and thus need to be well thought out (Giddens, 2002).
Critical Analysis

In order to assess the internal and external influences of a company, a situation analysis is the

basic appraisal that can be expounded. According to Filippov & Zhang (2009), a situation

analysis facilitates and interprets the status of the environment the organization is positioned.

The situation analysis offers a framework and comprehension for planning. The figure below

illustrates the context of a situation analysis that is used by organizations.

Situation
Analysis

Internal External
Analysis Analysis

Strengths Weaknesses Opportunities Threats

Source: netmba.com

SWOT analysis of Nestle

Ability to leverage Ability to customize

Research and
Strengths strong brand name products to the
development
to generate sales local market

Limited presence in
Weaknesses Product recalls organic foods
market

Transition to a Increasing teenage

Growth in the US
Opportunities 'nutrition and well-
coffee market
and young adult
being' company population

Increased New regulation

Allegations of
competition in the issued by Food and
Threats unethical business
bottled water Drug Administration
activities
segment (FDA)

Source: Datamonitor
Internal factors influencing Nestle:

The internal factors that influence Nestle are its strengths and the opportunities that are present in

the market for future development. Nestle has a strong brand portfolio (Nestle.com). Many of its

brands are associated with quality and are global leaders in their respective markets. A strong

brand portfolio allows the company to address varied age groups and customer profiles.

However, with increasing popularity of private labels combined with the depth of their

penetration in local markets, Nestle may see the erosion of its market share in certain

geographies and is likely to face a bigger challenge from these private labels in the future.

Influence of internal environment

An organization‟s internal environment consists of conditions and forces within the organization.

It consists of owners/shareholders, board of directors, employees, organization culture, structure,

knowledge, infrastructure, resources and capabilities (Ojha, 2002). Each of these members of the

internal environment also plays an important role in influencing organization operations.

Ability to leverage strong brand name to generate sales:

Nestlé has strong brand equity. According to the Datamonitor.com, in 2007, the Nestle brand

figured at the 63rd position in the top 100 global brands ranking of Business Week and

Interbrand, a branding consultancy. Business Week and Interbrand valued Nestlé brand at $5,314

million in 2007. Apart from a strong corporate brand, Nestlé has a large ownership of product

brands. The company‟s billionaire brands, including Nescafe, Purina, Maggie and the recently
acquired Gerber have annual sales in excess of CHF1 billion (approximately $760 million). The

Nescafe brand was also ranked 24th by Business Week and Interbrand in the top 100 global

brands in 2007.The Nescafe brand is valued at $12,950 million. These strong brands ensure a

steady revenues and a competitive advantage.

Ability to customize products to the local market

One of Nestle‟s strength is that it has the ability to customize global brands according to local

preference. It believes that the there are no global consumers and the markets are psychologically

and culturally separated. For instance, its confectionery range sold in the UK is called Rolo,

while it is called Rossyia in Russia (datamonitor.com).

Research and development

A major strength of Nestle is the structure it has that supports research and development

(nestle.com). The company aims to achieve high volumes by renovating existing products and

innovative new products. Nestle defines "renovation" as "to just keep pace in the industry. As a

result it beats the competition by producing low cost products but of good quality.

Product recalls

Nestle has a history of recalling a number of products from the market. In March 2006, Nestle's

subsidiary, Purina Pet Care recalled some of its pet products from the market as it contained

contaminated wheat gluten tainted with melamine, a substance used to make plastic kitchen

utensils and fertilizer. Nestle also recalled two batches of its promotional packs containing 10

bars of Kit Kat in the UK due to the possibility of the product containing small metal particles.
Also in 2005, Nestle recalled the company's infant milk product in France, Portugal, Spain and

Italy because of a photographic chemical which was present in the product (datamonitor.com).

Such occurrences indicate inadequate quality assurance and quality control systems for Nestle.

Limited presence in organic foods market

Nestle spends approximately CHF 13 billion a year on agricultural materials such as milk, coffee

and cocoa does not own any agricultural land or operate commercial farming activities

(nestle.com). The company do not acquired any organic brand companies nor has it launched

organic products like its competitors such as General Mills, Kraft Foods and Kellogg. According

to the Organic Trade Association, sales of organic foods have risen between 17% and 21%

annually since 1997 and reached nearly $16 billion in 2006. The US organic food sales are

expected to reach almost $24 billion by 2010.

External factors influencing Nestle

The external factor comprises of opportunities and threats which comes from the external

environment (Snower et al., 2009). External influence can be determined by conducting a PEST

analysis, which is an analysis of the external macro-environment that affects all firms. P.E.S.T. is

an acronym for the Political, Economic, Social, and Technological factors of the external macro-

environment. Such external factors usually are beyond the firm's control.
Many macro-environmental factors are country-specific and a PEST analysis will need to

perform for all countries of interest. The following are examples of some of the factors that

might be considered in a PEST analysis.

Political Factors

These are the actions taken by governments, European Union, trade union movement and

regulatory bodies which can have major effects on Nestle‟s business and markets, including

creating or reducing demand for particular products and services.

Economical Factors

The consumer spending of a country may be controlled by a range of economic factors such as

income levels, inflation, taxes, unemployment, exchange rates and mortgage rates. These factors

are crucial to the success of any organisation because it affects the home economy situation and

trends. The economic factors also include international trade and monetary issues as well as

the market and trade cycles (Snower et al., 2009). These uncontrollable economic factors affect

the lasting success of organisations, whether in a positive or negative opportunity.

Social Factors

The external social factors that affect any organisation will include the change in, social

responsibility, consumer attitudes, ethics and religious factors and social attitudes, demographics.
Nestle have realized that, it is not enough to address the needs of the 2.5 billion consumers who

earn more than 1,500 US dollars per year, and are thinking about the 4 billion people who earn

less than 1,500 dollars per year, providing them with products relevant to their nutritional needs

(Werner Bauer, Nestlé's Head of Technical, Production and R&D).

Technological Factors

Technological factors may include innovation potential, research funding, global

communications and information technology. Since the external technological factors affect

not only organisations but individuals, companies need to monitor the technological issues and

changes to make use of any opportunities that might arise. Businesses have used technology to

their advantage especially in production by cutting cost as Nestle have done by cutting more than

100,000 million tonnes of sugar, more than 25,000 tonnes of trans-fatty acids and more than

5,000 tonnes of salt (nestle.com)

Economical - Consumer
Political - The actions of
spending may be
governments can have
controlled
major effects on business
by a range of economic
and markets
factors

Social - Social trends are

important because Technological -
they have a direct Development in
influence on the technology gives rise to
demand for particular new products and market
types of product. opportunities,

Source: Hill & Jones, 2009

Opportunities

Transition to a 'nutrition and well-being' company

Nestle is increasingly putting efforts to transition into a 'nutrition and well-being' company. The

company created a new unit, Wellness in Action, in 2004 to strengthen its leadership position in

core nutrition business and also work towards bringing out the nutritional and health advantages

of the company's products.

The company also have created its own opportunities by conducting series of acquisitions which

have taken it to a strong position. The company's subsidiary in Australia acquired Uncle Toby's,

a food company engaged in breakfast cereals, nutritious snacks and instant soups in May 2006.

This acquisition gives Nestle Australia the leading position in nutritious snacks under the Uncle

Toby's brand. Furthermore the acquisitions of Gerber and Novartis have further strengthened its

position.

Increasing teenage and young adult population

Increasing teenage population could increase the sales of the company's products. The young

adult population in the US, the largest market for Nestle has been increasing, which has a

favourable impact on the sales. According to Ashcroft (2006), more than one fourth of the US

population aged 3 and older attended school which adds up to 76.6 million students.

Growth in the US coffee market

The US coffee sector has seen phenomenal growth in the recent past. The coffee sector accounts

for 70.8% of the total US hot drinks, generating total revenues of $3,345.8 million in 2006. The
sale is projected to grow at a CAGR (2006–2011) of 6.1% and reach $39,458 million in 2011.

Also, 54% of US coffee drinkers are willing to pay a price premium of over 10% for coffee at

home. Nestle has strong presence in specialty coffee market through its brands such as Nescafe,

and the anticipated growth in this category will offer the company considerable opportunities for

further growth and expansion in the near future.

Threats

Allegations of unethical business activities

Nestle has been criticized by various social organizations for alleged unethical business

activities. For instance, the company has faced warnings over the past several years as it sourced

cocoa from farms in the Ivory Coast, which employed child labour. Other criticisms include

allegations of false labelling to promote unhealthy food such as cereals with high fat, sugar, and

salt contents (datamonitor.com). Such criticisms lead to negative publicity and may have a

significant impact on customer loyalty and attitudes towards the company

Increased competition in the bottled water segment

Bottled water has seen renewed growth especially in Europe, US and Canada owing to

increasing health-consciousness among consumers. However, the sales are constantly threatened

by local label suppliers who supply substitutes at cheaper rates.

FDA regulations

In the recent times, the US Food and Drug Administration (FDA) has been keeping a strict vigil

on the manufacturers of pet foods. FDA claims that some of the recalled pet food may still be on
the shelves in some retail establishments. To verify the effectiveness of the recall, FDA

conducted approximately 400 checks of retail stores across the US, in 2006. Strict vigilance by

the FDA has increased the operating cost incurred by pet food manufacturers such as Nestlé in

maintaining the quality recommended by the FDA (datamonitor.com).

Porter’s 5 forces model

Porter‟s 5 forces model is also used by organizations in a competitive environment for analyzing

a particular market industry (Kotler, 2010) which are used in the industry environmental

analysis. According to Thompson et al (2004), this begins with identifying specific competitive

pressures of each force, then evaluates the strength of the pressure and lastly, considers the

overall pattern of competition and their collective impact. The model is depicted below:

Threat of
substitute -
Firms offering
substitute
products

Rivalry among
Bargaining
competing sellers -
power of Bargaining
suppliers -
Competitive pressures power of buyers
Suppliers of raw for better market - Buyers /
materials and position, increased Customers
other inputs
sales and market share,
and competitive

Threat of new
entrants -
Potential new
entrants

Source: Strickland, 2009

 Threat of new entrants

With major changes from technology and increase in consumption, there has been an opportunity

of entry of new organisations into the food industry. Hard discounters and private label are

continuing to grow in Europe and are now worth over 100 billion euros (Werner Bauer,

Nestlé's Head of Technical, Production and R&D).

Bargaining power of buyers

Bargaining power is also relatively high as customers are price sensitive and due to availability

of number of other well known brands. Eg. Ahold USA, Stop and Shop Giant Foods, Safeway

and Wal-Mart. Cott Corporation (datamonitor).

Rivalry among firms

There has been some intense rivalry but due to Nestle‟s global reach, rivalry has not hit the firm

with much force.

Bargaining power of sellers

Nestle can buy raw materials in bulk for most of its brand as a result it imposes many restrictions

on its suppliers (nestle.com).

Threat of substitute goods

Threat of substitute goods are very high due to some private labellers.
Globalization defined

Businesses today have encountered a phenomenon that is quickly spiralling organizations to

change business processes accordingly. The paradigm of globalization has taken the world by

storm and is collectively affecting every individual and organization likewise. Globalization is

phased to be the integration of the world (Krugman, 2009). It can be described as a progression

by which the people of the world are incorporated into a solitary civilization and behave

together. Market globalization is just a phase of amplifying communal relations and international

sincerity. An objective definition of market globalization has been noted by (Berg & Krueger,

2003) as the development of economic interdependence between countries by means of increased

intensity of international trade.

The consequences of globalization has altered the global market convention by eradicating trade

barriers; introducing global cost drivers to organizations for instance economies of scale; by

crafting global customers; by standardizing worldwide technology and communication; and by

producing cultural homogenization (Hollensen‚ 2007). Jan Aart Scholte (2009) has

conceptualized five definite classifications of „globalization from literature. They are categorized

as follows:
 Internationalization

Liberalization Deterritorialization

Globalization

Modernization /
Universalization
Westernization

Source: Jan Aart Scholte (2009)

Internationalization

Globalization is observed as a cross-border relation between countries. It expresses development

of international exchange and interdependence. This mode of globalization relays that distinctive

national economies are restructured into the approach ensued by international processes.

Liberalization

This classification refers to globalization as a procedure to disengage government required

restrictions on trade in order to construct a receptive and borderless global economy.

Universalization

The course by which presence and knowledge of various objects and experiences can be shared

by people across the global can be signified by this denotation. For example – Nestle’s ‘coffee-

mate’, ‘Nescafe jar’ and ‘La Lechare’ shelf-stable milk are illustrations of products that

have been developed in one nation, but is present and recognized across the globe

(Demetrakakes, 2004).

Westernization / Modernization

Globalization is implicated as a dynamic, whereby the societal configuration is spread across

universally, resulting in the demolition of pre-existent traditions and local independence.

Deterritorialization

This classification entails a reconstruction of geography, where communal space is no longer

entirely drawn in terms of territorial places, distances and borders. For example – glass

packaging of Nestle products is popular in Germany as they are perceived as recyclable

and environmentally friendly, whereas plastic packaging is wanted sought after in the UK

and France (Demetrakakes, 2004).

Furtheremore, the most recognizable distinction of globalization can be made to

internationalization, as it is the fasting growing expansion process implemented by organizations

(Axinn, 2002). As this phase has acquired a significant interest amongst scholars, Kotler and

Armstrong (2001) elaborated six different stages organizations‟ conform to internationalization.

Deciding on a global marketing organization - to develop the

organization that accommodates into a global organization
from an export dept. then international division to global.

Deciding on global marketing programs - adapt to local

preferences, standardization or adapted marketing mix

Deciding how to enter the market - decide upon the

appropriate mode of entry; joint venture, exporting, FDI

Deciding which markets to enter - decide upon international

marketing objectives and policies; decide on countries to
enter

Deciding whether to go international or not - compare risks

and capabilities to operate globally

Looking at the global envioronment - understand the

international marketing environment

Source: Kotler & Armstrong (2001)

Effects of globalization & its effectiveness

While Nestle employs their “global brands” in various markets, in the developing world they

focus on striving to optimize elements and progression technology to attain local conditions and

empathy (Ali, 2000). The approach towards globalization concentrates around two essentials:

Establishing a proper balance between regional and global conditions and decentralizing

operations and global connections, as well as coordination.

Producing locally and regionally of each product, which in turn yield products that

employ local raw materials and correspond to local eating habits, and sell them at

affordable prices.

Customization instead of globalization is the fundamental to the company‟s strategy in emerging

markets. There are various challenges Nestle encountered due to their approach, for example -

in Nigeria the company built a network of small warehouses around the country to avoid

its traditional distribution channel, which was not feasible due to poor infrastructure .

Furthermore, due to violence across the country, the company arranged their goods to be

carried out only during the day and regularly under armed guard (Rapoport, 1994).

Another example of local adaptation by Nestle for its long-term concentration can be traced in

China – during the early 90’s, Nestle was given access to enter the Chinese market. They

soon launched a plant that produced powdered milk and infant formula (Rapoport, 1994).
However, they were prompt to comprehend that local rail and road infrastructure was

insufficient for their operations. This led to the crafting and implementation of the ‘milk

roads’. Nestle established its own distribution network across 27 villages, where they

offered incentives to farmers to bring their produce, which in turn was collected and

transported to the factory by dedicated vans.

The affect of globalization has not only transformed the business processes of Nestle, moreover

it has also led to the renovation of their management structure. Nestlé is a decentralized

organization. This provides a high degree of autonomy to local units, as they are assigned

with the responsibility of operations that include; pricing, marketing, distribution and

personnel (Rapoport, 1994). Even so, the company is organized into seven worldwide

strategic business units (SBUs) that have responsibility for high-level strategic decisions

and business development, which is depicted below.

Source: Cunningham (2009)

Technological advancements are a key driver of globalization and this is prominently observable

in Nestle, which confers significance to their research and development operation for

establishing innovative foodstuffs. For example, the formation of Nestle instant noodle was a

elucidation to the apparent needs of local functioning companies through the Asian region

(Rapoport, 1994).

Identifying the equilibrium between localization and globalization has resulted in a vital

accomplishment for Nestle. Their balancing functions engage not only geography, but a wide

product portfolio that comprises of foods and beverages of every description (Demetrakakes,

2004). Their capability to comprehend and poise has honoured them as 2004‟s Food/Beverage

Packager of the Year, presented by Food & Drug Packaging.

Recommendations

Nestlé needs to realize it may have a vast product variety than is required. Instead of crafting

strategies that look for production economies by condensing stock-keeping units, focussed

marketing support, and controlling the powerful brands with retailers, Nestle can chose to

preserve a assortment of national and international brands.

For example – Germany competitors, Henkel has speckled their laundry detergent

strategies of Persil in Europe to attend to diverse laundry practices by culture across the

globe. Cooler water is traditionally preferred in Southern Europe for washing compared

to the North. Southern European consumers have favoured less overpowering detergents

that can be applied with bleach (Frost, 2005). However, in contrast, hindrance towards

bleach has been shown by Northern Europeans as they tend to choose hot water for

laundry.
Conclusion

The paper begins by examining the impact of internal and external influences on Nestle which

includes various forces from the environment. These environmental factors had many major

impacts on Nestle and will continue to do so. The forces offer many opportunities as well as

some threats and the successes of any company will depend on how well they manage their

internal environments to cope with the pressures from the external environment (Johansson,

2009).

The second part of the paper discusses about the influence of globalization and how it has an

impact on the performance of Nestle. It ends by suggesting actions which the firm can take in

order to improve on their efficiency.

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