Business Administration & Economics Department

Operations & Process Management

CBE 6102

https://youtu.be/dt-y3N0Sy9Y

Implementing Operations Strategy for Competitive Advantage

Alexis Ioannou – Eirini Emmanouilidou

World count:
Executive summary

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This paper provides an extended analysis and evaluation of the competitive advantages of Nestle
by focusing on four core operations strategies; the overall operations strategy, the product
design, the capacity and the total quality control. The study draws the attentions to the specific
product cases in every section in order to illustrate effectively the strategies and the benefits that
Nestle receives. A great finding is that Nestle filters all its activities through its decade promise;
the leading place in Health Nutrition and Wellness sector. Although Nestlé’s portfolio includes
2,000 brands in 196 different countries, it has some weaknesses.

Part of this mission is the Continuous Excellence Program, which is visible in capacity and
planning and in total quality segment. Nestle exercises the approach of lean and just in time
thinking to eliminate costs and waste. Under the umbrella of Globe and Continuous Excellence,
Nestle has managed to save almost $2 billion globally in 2010. Further investigations reveals
about the improvements in sustainability and efficiency while Nestle manage to sustain the high
quality in products lines. Moreover, the product design of Nestle offers strategic differentiation
and uniqueness. Through the analysis of Nespresso, it should be consider that is the pearl of the
company because the value in the markets is bigger from the competitors. However, the risks
conditions are high, in terms of patents expiration and the compatible products.

This research paper evaluates the strategic position of Nestle by emphasizing on competitive
advantages that came from the activities and concludes with few recommendations in particular
areas, where Nestle is threaten by rivals or weaken by external conditions. Finally, Nestle might
think the equilibrium among the quality and the elimination both of cost and waste.

Contents
Executive summary.....................................................................................................................................2
1. Introduction.............................................................................................................................................5
2. Nestle S.A. – Case study analysis............................................................................................................5
2.1. Brief business profile of Nestle.........................................................................................................5
2.2. Strategy and vision of Nestle............................................................................................................7
2.3. Operations strategy...........................................................................................................................8
2.3.1. Corporate Strategy.....................................................................................................................8

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 2.3.2. Subsidiary Strategy..................................................................................................................10
2.3.3. Global Strategy and M&A.......................................................................................................11
2.4. Capacity planning...........................................................................................................................12
2.4.1. Lean and just-in-time production (JIT)....................................................................................13
2.4.2. Capital investment in emerging countries................................................................................16
2.5. Product and service design – The case of Nespresso......................................................................17
2.5.1. Upstream innovation................................................................................................................18
2.5.2. Positioning...............................................................................................................................19
2.5.3. Product and Service design......................................................................................................19
2.5.4. Shared value creation...............................................................................................................20
2.6. Total quality management (TQM)..................................................................................................21
2.6.1. Nestle Quality Management System (NQMS).........................................................................22
2.6.2. Nespresso AAA Sustainable Quality Program.........................................................................24
2.6.3. GLOBE Program.....................................................................................................................24
3. Recommendations.................................................................................................................................25
3.1. Nestle Purina – Pet and Care Market Growth.................................................................................25
3.2. Nestle horsemeat scandals and better quality control......................................................................26
3.3. Nespresso – The challenges in hot drinks and possible partnership................................................27
4. Conclusions...........................................................................................................................................29
5. References.............................................................................................................................................31
5. Appendices............................................................................................................................................47
Appendix 5.1. Global market share of Nestle in four different industries..............................................47
Appendix 5.2. SWOT Analysis.............................................................................................................50
Appendix 5.3. Boston Matrix................................................................................................................54
Appendix 5.4. Baby food platform........................................................................................................55
Appendix 5.5. AAA Sustainable Quality Program................................................................................56

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1. Introduction

The case of Nestle S.A. is been investigated within this paper and more specifically how the
company’s operational strategies are executed in order for Nestle to achieve but also sustain
competitive advantage within the market. As it can be seen from underneath, a comprehensive
and well-organized analysis is provided highlighting the company’s four major operational
management pillars of corporate strategy, capacity planning, product and process design and
finally, total quality management (TQM). It is been demonstrated from the analysis that Nestle
S.A. is currently following and implementing various efficient operations strategies which have
undoubtedly contributed to the dominant market place position Nestle holds against its
competitors within the industry.

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2. Nestle S.A. – Case study analysis

2.1. Brief business profile of Nestle

Nestle S.A. is a multinational company that is headquartered within Switzerland and operates
predominantly within the industry of food and beverage industry but also nutrition (Financial
Times, 2014). The company was founded by Henri Nestle in 1866 and today is seen as the
dominant leader of the food and beverage environment in the world (Osiris, 2014). Its brand
portfolio includes almost 2,000 global brands which are sold in 196 different countries
worldwide (MarketLine, 2014) and thus position Nestle on the leading place among different
industries (Appendix 5.1.). Finally, according to Forbes (2014), Nestle S.A has been awarded as
the 41th most respected and well-known brands globally.

Chart 1
Title: Revenue and net income of Neste

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Source: Financial Times, 2014

In terms of its financial performance, it can be easily proved from the graph that Nestle S.A. can
be definitely considered as a much profitable corporation. More specifically, the company has
recorded a revenue stream of $99.5 billion in 2013, 2.7% larger of the revenue at the end of 2012
period (MarketLine, 2014).

2.2. Strategy and vision of Nestle

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Figure 1
Title: Nestle strategy
Source: Nestle website, 2014

As it can be seen from Figure 1, Nestle key objective is to become the leader within Nutrition
Health and Wellness industry. According to the company, this can be achieved only when the
company’s attention is primarily on its stakeholders and more specifically on its customers.
Nestle tries to achieve and sustain a trustful behavior with its stakeholders by constantly
delivering its promises and satisfying their customers needs, always having in mind the rule of
“Good Food, Good Life” (Nestle website, 2014). Consequently, by satisfying its community,
Nestle is also creating and sustaining value for its shareholders.

2.3. Operations strategy

Nestle is the market leader in many product lines with the corporate purpose ‘’Good Food, Good
Life’’. It pushes customer to understand that Nestlé’s product are healthier and better driven by
company’s promise. The well-designed corporate strategy is an outcome from the long
experience as measurable, credible and consumer oriented organization (Nestle, 2012). The
corporate principles of Nestle reflect ideas of trustworthiness, fairness and long-term value,
which have formed by Nestlé’s operations strategy the last 150 years. In order to maintain the
competitive advantage, Nestle uses the Roadmap, which follows the company into three levels;
the corporate strategy, the subsidiary strategy and the global strategy (Husted, 2000).

2.3.1. Corporate Strategy

Moreover, Nestle focused mostly on the optimization of rules and principles in order to ensure
the risk control and the efficiency across the management system. The corporate management
system of Nestle works through the learning process with trust and corporate culture as
foundations (Ruigrok and Wagner, 2003). Accordingly, Nestle adopted the GLOBE program for

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the harmonization and the simplification of the whole business structure in order to ensure the
establishment of best practices from the purchasing activities to production planning and the
customer service. The headquarters of Nestle give autonomy to the subsidiaries because the core
guidelines and practices are common. Many MNEs separate the strategic decision from tactical
one as the HQ center focus mostly on the core purpose of the company and give the opportunity
to independent subsidiaries to focus on within their operations based on local requirements
(Chadler, 1991). Nestle uses this type of HQ to carry out value creation or administration
functions and to be able to create paths for growth.

The overpowering majority of MNEs operates in many businesses and diversifies their
operation’s activities, either as related or unrelated (Frynas and Mellahi, 2011). The related
geographic diversification increases the autonomy of the subsidiary because it offers many gains
from the convergence of particular customer tastes and gives opportunity for regional synergies
due to the homogeneity (Vachani, 1999). However, the unrelated geographic diversification
eliminates the subsidiary autonomy. The cultural diversity and the complexity of knowledge
transfer may create difficulties on monitoring by the headquarters (Balinga and Jaeger, 1984;
Vachani, 1999). For more examples of diversified businesses of Nestle see Appendix 5.3.

The technical expertise in Innovation and Renovation encouraged Nestle to make JV and
acquisitions forced by geographical motives. To illustrate this point, the joint venture with Coca
Cola is agreement to compress the geographic range of operations in US marketplace, similar
with the General Mills joint venture. On the other hand, the unrelated diversification with the
acquisition of Alcon Laboratories and the known L’Oreal are typically investment driven, as
extra source of finance. Nevertheless, Nestlé’s mission does not allow for further and more
extensive unrelated diversification activities. The enlargement in health illustrates the eager of
Nestle to lead the science nutrition the next decade. The actual implication of ‘’shaping the
space between pharma and food’’ is the company’s objective. (Euromonitor International, 2011).

2.3.2. Subsidiary Strategy

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With the increasing impact of internationalization, the management types of Headquarters of
MNEs is changing from controlled decentralization, downsizing and reformation, to strategic
synchronization and integration in managing subsidiaries. Regarding this, MNCs go forward
from establishing miniature replicas to ‘’stress global management’’ (Roth and Morrison, 1990).

Nestle that has around 100 subsidiaries worldwide, used to adopt a considerable autonomy
between the parent company and the subsidiaries. The headquarters used to support financially
and technologically, only, the subsidiaries due to the fact that Nestle was multinational oriented
company. Nonetheless, Nestle understood that this type of structure does not give the
opportunity for integration of resources in a particular region. Then, Nestle created under the
regional HQ, the sub-headquarters. Now, the subsidiaries report to the sub-HQ and Nestle is
benefited from the regionalization strategy (Li et al., 2010).

Next, in terms of global strategy, Nestle follows a decentralized organizational structure.

According to Integration-Responsiveness Framework, global organizations react to economic
and environmental pressures by shaping themselves according to the local responsiveness degree
combing the global level of expansion (Haugland, 2010)

It can be argued that Nestle follows different integrated strategies during its history. The effort
for coordination in local markets and the existence of product segments that are dedicated on
Strategic Business Units (SBU), tend to confirm that the international strategy of Nestle is really
strong. Nonetheless, some products are concentrating to meet different nationwide preferences.
Besides, there are several local units of Nestle enjoying their autonomy such as Nestle India and
Nestle China.

In such a manner, Nestlé’s products started its diversification process from 1904 with the
beginning of the chocolate milk, followed by the acquisition of canned foods manufacturer from
UK, Crosses and Blackwell, in 1960. The forthcoming years, Nestle became superior, countless
and more differentiated due to the high adaptation of its products by meeting the local
preferences worldwide (Benady and Simonian, 2005). To illustrate better this, the graph below
shows the low to medium coordination and distinct configuration of Value chain. Nestlé’s Ice-

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cream in European region, it is a characteristic example because it is separate business unit
compare to American region (Economist, 2004).

Later on, during the 20th century the globalization pressures forced Nestle to use its brands on a
global scale and to apply the standardization processes. The low cost strategy was a strong
benefit for Nestle, because the economies of scale, including the learning effect and location
economies came from the R&D function. Hence, the appearance and the recipe of the distributed
products are not affected. For example, the typical example for the global strategy of Nestle is
Purina. The functions of the business unit like R&D and marketing are located in US. The
country of production for Purina is US and then the products are distributed to the rest of the
world. Therefore, Purina do not adapt to local economies (Nestle Purina, 2013).

2.3.3. Global Strategy and M&A

Part of Nestlé’s global strategy is the acquisitions in emerging markets from the beginning of the
20th century. The purpose of M&A activities of Nestle is to acquire established and credible
local players in order to identify correctly its target segments (Kwapong, 2005). A mixture of
asset and market-seeking motivations tend to drive developing companies to make huge M&As
(Dunning and Lundan, 2008). Luo and Tung (2007) have clarified the way that emerging market
MNE’s, given their viable flaw, are progressively gaining strategy assets from established MNEs
in developed countries to deal with their disadvantage of late mover. Hence, the technology
access and the know-how expertise are core motives for acquisition from foreign companies in
China or India, mostly. It is worth standing that M&A is better way, in terms of efficiency and
cost, to have a source of technology than licensing (Forsans and Balasubramanyam, 2010).

The last four years, Nestlé’s performance lifted above the packaged food industry level by 6%
overall. In 2012, Nestle China continued its well- fitting purchases locally and globally.
Especially, Nestle is targeting China by acquiring the Pfizer Nutrition, one of the leaders in
pharmaceuticals in Chinese market, for $11 bin (Euromonitor International, 2014). This
acquisition fits with wellness and nutrition oriented strategy of Nestle because it combines the
existing capabilities of knowledge with the home-asset and technology seeking through dynamic

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learning (see Appendix 5.4.). The actual motivation for this deal is that Nestle do not just acquire
a local innovative company, Pfizer, but also complementary actions for the expansion of Infant
Nutrition platform (Nestle Investor Seminar, 2013).

2.4. Capacity planning

Attributable to the enormous levels of competition within today’s global business environment,
organizations prefer to concentrate on their own operational capabilities which can directly
provide them with competitive advantages (Nair and Mackelprang, 2010). More specifically,
multinational businesses have introduced within their operational environment, lean and just-in-
time (JIT) production in order to perform more efficiently, expand and survive in the long run
(Chiang and Sim, 2012). For instance, the entire operational procedure of Nestle S.A. is been
implemented by following the principles of lean and just-in-time production (The Times, 2012)
which according to Buchel and Zintel (2013) are called as ‘continuous excellence approaches’
within the company.

2.4.1. Lean and just-in-time production (JIT)

According to Holweg (2007) and Al Smadi (2009), organizations nowadays practice lean
production to reduce operational costs and overproduction. Furthermore, just-in-time method is
currently been used worldwide to decrease the levels of unnecessary inventories and time spent
(Meybodi, 2005) but also to eliminate waste within organizational operations (Holl, Pardo and
Rama, 2011).

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Figure 2
Title: The seven wastes in operations
Source: Lopez, 2008
As it can be seen from the above picture, Nestle exercises the approach of lean and just in time
thinking to eliminate motion, conveyance and correction (Lopez, 2008). Moreover, according to
Bloomberg (2014), Robin Tickle, a spokesman of Nestle, has said that by applying the value of
‘continuous excellence’, the company is able most importantly to reduce the levels of over
production and inventories, time spent and therefore the cost of operations which is extremely
important for company’s leading position. Hence, capacity and operational efficiency is been
achieved comprehensively through this approach, which can be considered as a massive
competitive operating advantage that Nestle holds against its competitors (Lopez, 2011).

In order to successfully establish this capacity and operating efficiency, Nestle S.A. introduced a
$2.4 billion project called “Globe” in 2000, the most important program this organization has
ever implemented (Steinert, 2006). According to Ray (2011), the main objective of this project
was to contribute to an effectual management of company’s operating and capacity efficiency
that will provide Nestle a global competitive advantage. More specifically, by executing Globe,
the management of Nestle was able to better control capacity and therefore monitor company’s
productivity more resourcefully (Mitra and Neale, 2014). In fact, this project was successfully
introduced in 300 factories of the company within a very short period and is expected to be
implemented within all global departments of Nestle (Greenfield, 2006).

The application of Globe within all the manufacturing areas of Nestle changed the method that
company controls and monitors its capacity. In fact, the factories of Nestle have to handle orders
and capacity within a much controlled technique; more specifically, according to Mitra and

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Neale (2014), the industrial units of Nestle don’t use a diversity of calendars for manufacturing
any longer, but they follow a calendar month as the unit of time production universally.

Chart 2
Title: Cost saved
Source: Lopez, 2011

Furthermore, as it can be seen from graph1, by exercising lean production through Globe and
continuous excellence, Nestle has managed to save almost $2 billion within its global operations
at the end of the year of 2010 (Lopez, 2011). As a result, it can be easily said that Globe and
continuous excellence can be considered successful in terms of capacity and planning and will be
undoubtedly beneficial for Nestle for decades (Nairobi, 2012).

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Chart 3
Title: Increasing production volume with fewer factories
Source: Lopez, 2011

As stated by Stenzel (2007), lean production and JIT can be used to develop world class
performance by doing more with less. This can be easily demonstrated through the example of
Nestle (see bar chart 2). Reducing the number of company’s factories but simultaneously
increasing productivity and thus capacity due to increasing demand can be also considered as one
of the main objectives Nestle is ongoing applying within its operations (Lopez, 2011).

2.4.2. Capital investment in emerging countries

Due to the increasing demand of company’s products, Nestle invests heavily in capacity within
its manufacturing operations worldwide. For instance, Nestle has invested $450 million within its
factories located in India for dairy production to double capacity because the demand for these
products within this country was extremely huge (The economist, 2011). The demand for
chocolate (KitKat) within India was also enormously high and therefore Nestle invested almost
CHF200 million in 2012 to increase capacity (Duvoisin, 2012).

Moreover, the investment activities of Nestle within China, the second biggest market in the
world, are exceptionally gigantic. The Chinese demand for coffee is growing massively and
accordingly Nestle has already invested million but is also expected to invest billions of money

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into its factories’ capacity within that region (Wong, 2013). Nevertheless, Nestle is also
expanding capacity through partnerships within this country; more specifically, the company has
come into agreement with partners to produce 120,000 tons of coffee and thus successfully
satisfy demand within China (Euromonitor, 2014).

The huge amount of investments in these two different countries can be linked back to the global
strategy of the company. More specifically, Nestle is much confident about the Chinese market
and thus is massively investing within this country in order to better meet customers’ demands
and needs, increase company’s revenues and thus create shareholder value (Zhuan, 2013). This
case also applies for India because once again Nestle considers that the growth prospects and
opportunities are extensively positive within this particular country and therefore as a global
company is aiming to invest heavily in many of its products (e.g. KitKat, baby foods etc.) in such
an attractive region (NSE, 2014).

2.5. Product and service design – The case of Nespresso

Strategy is all about difference. Companies that prosper in developing a sustained competitive
advantage, they will be successful in long run period (Porter, 1996). Consequently, there is a
need for the shared value creation of the company to be clear and diverse from the competitors,
and on the same time efficient and effective. McGrath states in her interview by Cliffe (2011)
that the product innovation does not offer, anymore, adequate competitive advantage in
distinguishing powerful companies. It is widely understandable that competitors promptly are
able to imitate innovation patents; the product life cycles (PLC) becoming smaller and
competitors might enjoy cost and price benefits from developing countries.

Value creation extracts the advantages the company creates for its consumers. The customer
value matches with the willingness of customer to buy the good of the service (Bowman and
Ambrosini, 2000). Otherwise, the added value is transformed into profits, known as value
capture. Therefore, value creation and the value capture are the key constrains for a business
model (Pitelis, 2009).

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Following this, Nespresso is the rapid growing business unit of Nestle, which represents a
successful business model based on innovation, uniqueness and coherence. Nespresso is one of
the most innovative business models the last decade, growing by 30% annually. In 2013 turnover
amounted to CHF 3billion and every minute consumers drink more than 11,000 cups of
Nespresso across the globe (Nestle-Nespresso, 2010; Nestle, 2013).

2.5.1. Upstream innovation

According to Koen et al. (2010) business model innovations has three motivation factors:
technology, financial rate and value network. The value network includes upstream and
downstream activities. Nestle distributes two different kind of coffee in the market, Nescafe and
Nespresso. Nescafe is a mass product with availability in grocery stores, while Nespresso is a
available in coffee shop boutiques for young professionals. Many established and growth-
seeking companies want to create new value networks in order to maintain its financial rates
(Koen et al. 2011). Nespresso represents an new value network for company’s coffee business.
There is a shift from the sell of instant coffee for the mass market to a delicate coffee for young
and high-class professionals. Christensen and Raynor (2003) believe that separation of sustaining
business products from the new value network is essential to avoid cannibalization. However, it
is dependent of the level of synergy between the products. Nestle split Nespresso unit from
Nescafe, as the last one observed that Nespresso would steal its sales. Nespresso is an up-market
excellent experience, while Nescafe is a fast moving product with a really low quality and price.

2.5.2. Positioning

Behind the concept of Nespresso, the core idea is customization. Individualization is a leading
factor in today’s markets. The Nespresso is an innovation that delivers to customers individual
‘’freshly-ground coffee’’ in various tastes. In other words, it is an excellent cup of coffee every
day (Kashani, 2000). Certainly, this concept gave the opportunity to Nespresso’s sustained
differentiation in the coffee industry. Consumers are able to prepare their espresso coffee based
on their personal preferences with delicate crema, full-bodied taste and aroma. The unique

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positioning of Nespresso arises from the convergence of a wide variety of options and a personal
coffee desire combined with convenience (Matzler et al., 2013).

2.5.3. Product and Service design

Next, Nespresso’s product and service logic is based on the uniqueness of capsule system.
Nespresso offers sixteen particular tastes in vacuum-packed capsules, which encloses the
freshness and the brilliant flavor. Whereas the majority of customers had the classic flavor of
coffee at home, Nespresso allows satisfaction in a wide range of tastes exclusive to any personal
coffee experience (Nestle-Nespresso, 2010). The enclosed capsules keep the coffee flavor safe,
clean and fresh against the air, moisture or light. Nonetheless, the quality of espresso coffee is
extended with the quality of espresso machine. The temperature and the pressure of the water are
essential for the brilliant taste. Consequently, Nespresso patented its own coffee machine with
temperature control. Personalized and high-class customer service on 24/7 basis, confirms
individual care for each customer (Matzler et al., 2013). Thus, the product and service design is
completely supported by the positioning.

2.5.4. Shared value creation

Additionally, Nestlé’s key competencies are the actual production process and the marketing of
food and beverages, but not the manufacturing of home machines or appliances. Hence, the
company decided to make and launch the Nespresso machine in relation with external delicate
design and various machine specializations with more than 1,700 patent applications (Nestle-
Nespresso, 2010). Actually, Nestle does not gain money from the Nespresso system, as
established manufacturers in the markets, under permitting agreements, are responsible for the
production and the distribution of machines (Kashani, 2000). Alternatively, Nespresso want to
advance the experience of coffee, as more desirable, and to support the shared value concept of
Nestle (Porter and Kramer, 2011).

Part of shared value creation logic is the involvement of Nespresso in sustainability practices; the
AAA Sustainable Quality Program. This program is an effort to keep the high quality of coffee

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from the difficult external conditions and to promote three level of sustainability across the
whole value chain (Nestle Nespresso, 2007). Nestle promote farmers to enroll and be active on
this program while there is no contractual obligation and profit purpose from sell of the coffee.

The AAA program is a mutual approach with commitment and a voluntary initiative designed by
Nespresso for the development of clusters of farms with the same characteristics of coffee
(varieties, aroma, oil etc.). Furthermore, this program uses a holistic approach by establishing a
opportunistic future for small coffee farmers and making more attractive this sector to young
generations (Alvarez et al., 2010; FAO, 2013). By enlarging the economic and the social
importance of Nespresso, Nestle create long-standing beneficial prospects for farmers, customers
and for the company itself. In 2013, Nestle and RA signed a promise named as
‘’Ecolaboration’’, which is a pact for continuous improvement and premium and fair prices to
farmers through the assessment of sustainability methods (Nestle-Nespresso, 2013; Datateam,
2009). For more details see Appendix 5.5.

2.6. Total quality management (TQM)

According to Chen and Lin (2004), total quality management (TQM) can be considered as a
management system that is been used systematically by organizations nowadays. Bergman and
Klefsjo (2003) defined TQM as “a constant behaviour to fulfil and preferably exceed, customer
needs and expectations at the lowest cost, by continuous improvement work, to which all
involved are committed focusing on the processes in the organizations.” Also, TQM is an
enhancement approach that is been used for the reason that quality can be considered as a
massive competitive advantage nowadays (Joseph and Longenecker, 1996). In fact, this was
heavily supported by Brah and Rao (2002) who suggested that organizations which have adopted
TQM within their operational environments can be considered more competitive against those
that have not. Moreover, Joiner (2007) also recommended that businesses which are ongoing
concentrating on continuous improvement hold a massive competitive advantage against their
competitors and they are more likely to outperform those who don’t take excellence as their
major operational pillar.

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For instance, Nestle is among the leading organizations that have successfully applied TQM
within its operations worldwide through its strategy of continuous improvement (Juran, 1993). In
fact, there is a well-established history inside the various departments of Nestle that quality
excellence inspires company’s culture, tradition and vision (Mitra and Neale, 2014). More
specifically, according to Bulcke (2010), the CEO of Nestle, “quality is everybody’s
commitment” and can be undoubtedly considered as the most significant business principle that
drives every single operation within the company.

Nestle S.A. has developed numerous successful techniques in order to establish the principle of
high quality and therefore achieve total quality management within its operations worldwide.
More specifically, the entire procedure starts with ‘Nestle Quality Management System’, a
platform that is been used inside every single operation of the company in order to ensure high
quality standards that will eventually create value for consumers and thus shareholder value in
the long run (Nestle website, 2014). By using this particular program, Nestle has achieved an
effective production process which ongoing provides high quality and safety products to the
customers (Buchel and Zintel, 2013).

2.6.1. Nestle Quality Management System (NQMS)

Nevertheless, for Nestle in order to successfully achieve a successful ‘Quality Management

System’ within its operations, specific quality standards are been incorporated based on
numerous ISO and OHSAS systems (Nestle Quality Policy Report, 2014). More specifically, the
CEO of Nestle, embraced ISO 9000, 14001, and 22000 but also OHSAS 18001 and 22001 within
all the factories of Nestle in order to make sure that they comply with international standards
related to quality, health and safety but also environmental recognitions (Intertek, 2010). For
instance, Nestle Waters is one of the various subdivisions of the company that is certified with
ISO 14001 and OHSAS 18001. Through this recognition, Nestle Waters is now well-known that
follows and sustains specific high quality and safety principles in order to produce bottled waters
that create value for customers (Challinor and Alton, 2010). Additionally, ISO 22000 food and
safety management system, is been implemented within all the factories of Nestle that

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manufacturing food products. By doing so, the company has achieved a global recognition for
their systems for assessing safety and quality of food (ISO, 2012).

Total quality management is extremely important when it comes to the nutrition products of
Nestle. More specifically, quality and safety are the fundamental elements that Nestle Nutrition
is continuing following because through them, a bond of trust between the company and its
customers is been created (Nestle Nutrition, 2009). Total quality within the nutrition department
of the company is achieved through a huge amount spent on research and development (R&D)
which can be considered as another competitive advantage of Nestle. Through twenty nine R&D
testing labs, Nestle is able to identify and test different mixtures and thus come up with those that
achieve high-standard quality for its nutrition products (Nestle Website 2014). Nevertheless, the
key R&D division of Nestle that is responsible for quality is ‘Nestle Quality Assurance Center’
in Dublin where more than two hundred specialists work together in order to discover solutions
that better please customers’ desires in terms of quality and safety (Noblit, 2013).

2.6.2. Nespresso AAA Sustainable Quality Program

The company’s commitment towards total quality can be also demonstrated through “Nespresso
AAA Sustainable Quality Program” which can be linked back to the company’s mission of
continuous improvement. According to Collin and Gabriela (2010), through this specific system,
Nestle has accomplished to secure coffee at the highest quality levels while simultaneously
endorsing social, economic and environmental sustainability for its stakeholders. More
specifically, AAA program has been introduced within Nestle in 2003, having as objective to
guarantee high quality coffee to the customers but also to secure the livelihoods of the
company’s farmers that produce it (Kamp, 2014). Therefore, through this particular technique,
Nestle managed to improve sustainability and efficiency while sustaining high quality products
(Smale, 2009 and Nestle Nespresso, 2014).

2.6.3. GLOBE Program

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In conclusion, according to Schonberger (2014), there is a robust symbiotic connection between
lean production and total quality management. More specifically, lean and just-in-time
productions are techniques that support significantly TQM. This was also reinforced by Stern
and Stalk who suggested that lean and just-in-time embrace the idea of continuous excellence
and therefore of total quality management. This can be easily demonstrated by the example of
Nestle S.A. since through its lean and just in time production approaches has also achieved total
quality within its operations (The Times, 2012). For example, through the Globe system, an
adequate quality control is been exercised within all the factories of Nestle. More specifically, by
using Globe, the quality team of the company is able to do frequent quality checks and
examinations in order to make certain that products will satisfy customers’ expectations (Mitra
and Neale, 2014). The positive results of Globe in terms of quality can be verified by the
example of Nestle Purina. This particular product of Nestle which is been following the
principles of Globe system, has been rewarded with the ‘Malcolm Baldrige National Quality
Award’ in 2010 (Nestle Website, 2014) which according to Prybutok and Cutshall (2004) this
award endorses world class recognition and credit to organizations in terms of total quality and
competitiveness.

3. Recommendations

3.1. Nestle Purina – Pet and Care Market Growth

Nestle Purina, which as it was been mentioned above has been recently awarded with ‘Malcolm
Baldrige National Quality Award’ (Brown, 2010), can be definitely considered as one most
significant products on which Nestle should build further capabilities in order to obtain more
competitive advantages in the future. This is because according to MarketLine (2014), the pet
market in US and Mexico is expected to have a 5% annual growth during the period of 2013 and
2018. In fact, a percentage of 68 of the household in United States and a percentage of 58 in
Mexico own a pet, numbers which are extremely high and are estimated to be increased even
more in the near future (MarketLine, 2014).

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Consequently, Nestle Purina should focus its market capitalization strategy on USA and Mexico
because through its numerous pet care products, it is very potential to receive a massive market
share which will thus provide the company with an enormous competitive advantage. This
opportunity was also suggested by Kaye (2013) who said that it is very prospective for Nestle
Purina to obtain a massive market share in Mexico and USA through its valuable products which
have recently been awarded with Malcolm Award, the most well-known award in terms of
quality. Thus, by concentrating on these two countries, Nestle S.A. will be able to build further
capabilities around its pet and care products which will undoubtedly provide company with
future competitive advantages.

3.2. Nestle horsemeat scandals and better quality control

According to Whitworth (2013), Nestle was on the numerous companies that was unfortunately
dragged into the horsemeat scandals. More specifically, Nestle was forced to remove two pasta
meal products from its retailers’ shelves in Italy and Spain because after some DNA tests these
particular products were diagnosed with over than 1% of horse meat instead of beef (Tostevin,
2013). These two products were supplied by H.J. Schypke, a German company that was one of
the main providers for Nestle S.A. (CNN, 2013). Unfortunately, this scandal has negatively
impacted the reputation of the company but also the behaviour of customers when it comes to
buy products of Nestle (Castle, 2013).

Moreover, according to MarketLine (2014), Nestle collaborates with countless suppliers and as a
result as the company does not hold much power over the quality of products that are provided
by its suppliers. Consequently, if any product does not meet the quality standards will
unfortunately impact the company tremendously. For that reason, it can be suggested that Nestle
should develop a quality control program within its suppliers operations to make certain that
quality and safety standards are always met. This was also mentioned by Newman (2013) who
said that Nestle should execute specific quality programs such as Globe within its suppliers’
operations in order to evade similar scandals for instance the horsemeat scandals of 2013 which
influenced heavily the reputation, profitability and competitive position of the company. By

22
doing so, Nestle will eventually gain the customers that lost from horsemeat scandal back and
hence further reinforce its competitive position in the global food market.

3.3. Nespresso – The challenges in hot drinks and possible partnership

The Nespresso, within its beverage segment, is a high-growth platform with significant attention
by media, supported by its flagship, the R&D. Despite the leading position in hot drinks across
the globe, the technology innovation does not promise significant success. Nestle faces a lot
challenges in Western Europe, where holds the 41% of the coffee market. The appearance of
compatible products is an enormous risk to Nespresso. These compatible products such as
Tassimo or L’Or Espresso coffee are available in many supermarkets or online, which gives
greater accessibility to consumers. Both these competitors are emerging as core challengers of
Nespresso in Europe, mostly (Euromonitor International, 2014).

Next, although that in 2013 Nestle marginally leaves behind the hot drinks market globally, the
upcoming years Nestle will face a huge challenge by the merger of Mondelez (Tassimo) and
DEMB (Senseo). This partnership, under the name of Jacobs Douwe Egberts (JDE), will be a
real threat for Nestle, but hopefully with be in the second place in hot drinks. Nestle should
develop more its distribution network. There is an emergency of copycat of compatible and the
private label products, which create stress and pressure on Nespresso’ share. Nestle might have
to expand assertively its coffee capsules in US and secure its competitive advantage of its
position in emerging countries. Recently, the launch of VertuoLine, in US market, permits the
machine to make a large cup of espresso, which is a good trial (Euromonitor International, 2014).

However, in hot drinks the game is extremely challenging and the competitors try to be stronger
via collaborations. The investment in pod machines is huge and it is really complicated the
distribution and maintenance of them. Many alliances have been formed; Keurig with Lavazza
and Keurig with Starbucks. Additionally, the JDE, the joint venture of Mondelez and DEMB,
will be the number one in coffee retail volume due to the fact would have a greater brand
portfolio than the founder companies. This automatically gives the opportunity to JDE to expand
in countries that the one of the two companies is absent. For example, Mondelez is absent from

23
the coffee market in Brazil. Next, Nestle faces another threat from the Keurig’s acquisition from
Coca Cola in US (Euromonitor International, 2014). Thus, Nestle should boost its position in US
by expanding its professional customers, like high-class restaurants. Although, Nespresso
launched a coffee machine for US foodservice sector and the 30% of Michelin-starred
restaurants in US make espresso for customers with Nespresso machines, the results and the
presence of the US food industry still remains unclear.

On the same time, Nespresso should be available to many access points and to stop the eagerness
of retail channels to depress the sales profits from capsules. The challenge increases as
competitors imitate the eco-friendly pods with lower price and with some infringement cases for
its patents, such with L’Or Espresso (Simonian, 2010; Talt, 2014). This might gives an
opportunity to Nestle in order to encourage its competitive advantage in terms of accessibility of
Nespresso boutiques.

Additionally, the AAA Program offers Nestle a partnership with farmers to build sustainability
through the ‘Ecolaboration’’ project. However, the ‘’Ecolaboration’’ project should increase,
among other things, the rate of recyclable capsules by 25%, from 50% to 75%. Furthermore,
Nespresso should improve the logistics network of the collection points of capsules around the
world from a standardized way to a more customized, as the complexities, the legislation and the
public engagement about recycling varies from country to country. A step further to this, Nestle
should improve the recycling process of capsules used by their business customers (Nestle-
Nespresso, 2011). An upscale performance due to the elimination of capsule waste, it will leave
far behind the recycling competitors as Nestle supports its eco-activities by the specialized R&D,
which it’s the core competitive advantage of the company.

Furthermore, despite that Nestle is a leading company in many of its business, it is the time to
form collaborative partnerships with weaker players such as Strauss Group. By doing so, Nestle
S.A. will manage to achieve an effective market share that will eventually provide the company
with such a competitive position that will differentiate it by JDE, its main future competitor. The
future of the pod market is quite challenging due to the patent war of compatible products. This
will be an alert for customers, which probably might create loyalty problems. The M&A history

24
of Nestle shows the last year a shift of the company towards its Health and Wellness vision with
a deeper focus on hard investment in R&D function; for instance, the acquisition of Pfizer and
Prometheus Laboratories. Hence, it is suggested to Nestle to make a partnership with more local
players in Latin America and Russia in order to win the battle with JDE, which uses the strength
of DEMB in Brazil. It is necessary for Nestle to create its competitive advantage in this region
with the presence of fresh coffee.

4. Conclusions

In the end, Nestle focuses on its promise and its vision for the next ten years, to be the leader of
Health and Wellness sector. This view is supported by the company in several levels of its
operations, from the strategic management to the design and the total quality of the product.
Through the corporate strategy, Nestle emphasize on related diversification by geographic region
in areas of health, which illustrates the eager of Nestle to lead the science nutrition the next
decade. This confirms the company’s objective about the ‘‘shaping the space between pharma
and food’’. Next, the company in order to enjoy the benefits of regionalization strategy created
the sub-headquarters under the existing subsidiaries across the world. Therefore, Nestle applies
the principles of JIT and lean production through the GLOBE Excellence program for its entire
operational procedure. Nestle enlarges its capacity with massive capital investments in factories
in emerging countries, which is linked with the whole corporate strategy.

Additionally, the differentiation strategy of Nestle is the catalytic factor in combination with
R&D, for the establishment of its products in several markets. Nespresso is one of the flagships
of the nutrition leader, which is a new value network for company’s coffee business. This fast
business unit represents the competitive advantage of Nestle in terms of advanced and desired
experience via the shared value concept of company. The last part of analysis presents the
commitment of Nestle towards total quality commitment. For Nestle, this particular step of the
operating process is the most vital, since safety and quality is the fundamental element for
nutrition foods. The total quality is demonstrated through two sustainable programs, which can
be linked back to the company’s mission of continuous improvement.

25
Finally, suggestions for the improvement of existing competitive advantages of Nestle are then
provided. For instance, the fulfillment of weaknesses in emerging economies like Latin America
and the transformation of opportunities into strengths in specific sectors, like hot drinks and pet
food in US and prepared food in Mediterranean region.

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5. Appendices

Appendix 5.1. Global market share of Nestle in four different industries

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Chart 4
Title: Global bottled water market share
Source: MarketLine, 2014

As it can be seen from the chart 1, Nestle S.A. is the leading company within the global bottled
water industry with 14.9% market share (MarketLine, 2014).

Chart 5
Title: Global Frozen Food market share
Source: MarketLine, 2014

As it can be seen from the chart 2, Nestle S.A. is the leading company within the global frozen
food with 6.9% market share (MarketLine, 2014).

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Chart 6
Title: Global Baby Food market share
Source: MarketLine, 2014

As it can be seen from the chart 3, Nestle S.A. is the leading company within the global baby
food industry with 36.4% market share (MarketLine, 2014).

Chart 7
Title: Global Hot Drinks market share

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Source: MarketLine, 2013

As it can be seen from the chart 4, Nestle S.A. is the leading company within the global hot
drinks industry with 10.2% market share (MarketLine, 2013).

Appendix 5.2. SWOT Analysis

Strengths:
Weaknesses:

(1) A variety of strong brands that

(1) Horsemeat worldwide issues
provide the leadership to Nestle
and scandals have caused various
(2) Strong R&D capabilities
problems with the company’s
(3) The company holds a strong
products
financial position

SWOT 42
Analysis of
Nestle S.A.
Strengths

(1) The company holds some of the most well-known product brands within different industries.
Its most worldwide recognized brands are Nescafe (coffee), Nespresso, Nan, Nido, Maggi, Kit
Kat, Nestle Pure life and more. Through its enormous brand portfolio, Nestle has achieved to
conquer leadership positions and sustain it by improving always the characteristic of its most
valuable brands.

(2) The infrastructure of Nestle includes thirteen four R&D centres worldwide. Moreover, the
company holds three hundred of application groups that suit the preferences of local market with
the capabilities of the company’s products. In terms of its Health category, Nestle created an
institute called ‘Nestle institute of Health sciences’ in order to better deliver knowledge into its
products. Finally, by focusing strongly on R&D capabilities, Nestle is able to offer customized
goods to its various geographic areas, and thus increase its revenue dramatically.

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(3) Nestle is among the most profitable companies worldwide. More specifically, the company
recorded almost $100 billion of revenues at the end of 2013. Its operating and net profits are also
enormously high and therefore company’s strong financial performance provides Nestle with the
opportunity to expand its operations and activities even more.

Weaknesses

(1) The number of meat suppliers of the company is relatively high and thus this can be
problematic and dangerous when it comes to quality and standards. Any quality mistakes from
suppliers could cost Nestle huge loss of sales and thus profits. The meat scandal within the
United Kingdom in 2013, has affected the behaviour of the customers and thus this lead to the
reduction of sales of Nestle.
Opportunities

(1) Various health issues have forced consumers to be more sensitive when it comes to buy food
products. Today’s people are looking for healthy and nutritious food and thus this scenario has
changed the strategies of food manufactures such as Nestle because they are trying to align its
products’ characteristics with the preferences of the consumers. This can be considered as the
main reason why Nestle is aiming to become the leader within food and nutrition industry. In
fact, the company is ongoing improving the health quality of its products by eliminating
unhealthy ingredients and thus making its products more attractive to customers that seek healthy
products. This will eventually lead to achievement of customer loyalty which will thus increase
company’s market share and revenue growth.

(2) The demand for coffee is increasing dramatically and is expected to grow even more in the
following years. Therefore this can be considered as a huge opportunity for coffee companies,
especially for Nestle. The company was introduced within the coffee industry since 1986 where
its competitors entered the market way much later. This provides the company with a huge
timing competitive advantage. Therefore, it can be said that through this, Nestle has gained the
advantage of being the first mover within the coffee industry.

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(3) The activity of Nestle within developing and emerging regions, especially in China and India,
is enormously high. These countries are fastest republics that are recovering from the global
economic crisis and therefore their global shares are much important. Nestle has achieved its
collaborations with these countries through its M&A activities and subsidiaries. Thus, this can be
considered as a huge opportunity for Nestle who is trying to increase its market share within the
developing and emerging countries.
Threats

(1) Small private companies with lower pricing products can be considered as huge threats for
large organizations such as Nestle. The economic crisis has forced the customers to be very
sensitive when it comes to buying products and thus to always look for the cheapest products that
exist in the market. Therefore, many small private companies are developing such cheap
products in order to attract the interest of the customers. This is a huge threat for Nestle but also
for other large organizations. However, Nestle is trying to react against these threats by adopting
competitive pricing strategies.

(2) The regulations by the government and different institutions within the food and health
industry are extremely high. Nestle ought to comply with specific rules in an ongoing pattern of
time. Therefore, any changes on the regulations by the governments will undoubtedly influence
the cost structure of Nestle.

(3) Nestle is heavily investing in the quality of its water products such as Pure Life. Water
scarcity could immediate impact the investment of Nestle in its water products and more
specifically its production costs and capacity. The pollution of water is increasing dramatically
and thus this will influence the operations of Nestle and therefore its future profitability in the
long run.

(Source: MarketLine, 2014)

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Appendix 5.3. Boston Matrix

Furthermore, there are many strong brands under the Nestlé’s corporate umbrella. Their product
lines are divided into many sub-categories, like baby food, bottled waters, dairy products,
chocolates, drinks and etc. Each product is placed differently in the Boston Matrix, which ranks
the products according to the business growth rate and the relative market share (Witcher and
Chau, 2010). For the simplicity of this project, few flagships of Nestle SA will be used as
examples in order to explain better the tool. Body foods and Chocolate products are cash cows
for Nestle, because are the strong brand image across the world and good source of finance. Kit
Kat is universal cash cow for example. Also, Nido, as emerging product in nutrition milk became
very popular in 2010 in Asia (Timmons, 2010). The stars are the units with possibilities for
development in the market. For Nestle, the frozen products are able to cover the fall in the US
cooking market. Nestle turned its focus to frozen pizzas in order to secure the market share
(York, 2011).

Moreover, dogs are products that are not the core source of revenue for the company and their
sell or removal is suggested in order avoid crush in profits. For Nestle, LOreal was a business
dog as Nestle focuses more to nutritional products than cosmetics. Hopefully, Nestle in 2014
sold some shares of LOreal to focus on its nutrition vision (Reuters, 2014). Finally, question
marks are products with high uncertainty future. However, these products can be transformed
either as cash cows with positive impact on business or as dogs. Nestle launched cereals for
breakfast in India. Nonetheless, regarding the Indian culture and the low popularity for cereal
breakfast in Indian region, cereals are question marks because they are struggling to overcome
the future risks (Segal, 2012).

46
 BCG Matrix for Nestle

High Low
Relative Market Growth Rate

Frozen Cereals
High

Pizza in India

Nido
Low

L'Oreal
Kit Kat

Relative Market Share

Figure 3

Title: Boston Matrix for Nestle

Appendix 5.4. Baby food platform

Nestle is a innovator of developmental knowledge by augmenting its current stock of knowledge

and syndicates the home-asset seeking and the technology trough dynamic learning (Wesson,
1999). In order to make stronger the Infant Nutrition, Nestle give emphasis on reviving the top
line (Lagorce, 2007). This aims that the increased business has unconventional presence in
beneficial platforms. More specific, Nestle, after the acquisition of Pfizer, acquired a local
innovator in China and gained an advantage in development of complementary activities for the
Infant Nutrition platform. Based on the knowledge and the expertise of Pfizer, Nestle developed
in 2014 the last three phases of the platform as we can see from the graph below (Nestle
Investors Seminar, 2013).

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Figure 4
Title: Step by step the development of Infant Nutrition Platform
Source: Nestle Investors Seminar, 2013

Appendix 5.5. AAA Sustainable Quality Program

Figure 5
Title: pillars of the AAA Sustainable Quality™ Program
Source: FAO United Nations, 2013

48