Business Administration & Economics Department

Operations & Process Management

CBE 6102

Implementing Operations Strategy for Competitive

Advantage

Alexis Ioannou – Eirini Emmanouilidou

World count:

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Executive summary

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.

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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
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

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 Appendix 5.3. Boston Matrix.......................................................................................................54
Appendix 5.4. Baby food platform............................................................................................55
Appendix 5.5. AAA Sustainable Quality Program.................................................................56

1. Introduction

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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.

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.

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Chart 1
Title: Revenue and net income of Neste
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.

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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 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.

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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

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

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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

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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-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

11
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 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.

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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).

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

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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 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.

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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 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

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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,

17
value creation and the value capture are the key constrains for a business
model (Pitelis, 2009).

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.

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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 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.

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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 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’’,

20
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.

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

21
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 manufacturing

22
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

23
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

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

24
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).

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

25
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 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

26
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 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,

27
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,

28
which probably might create loyalty problems. The M&A history 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

29
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.

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

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).

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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).

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).

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Chart 7
Title: Global Hot Drinks market share
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).

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Appendix 5.2. SWOT Analysis

Strengths:
Weaknesses:

(1) A variety of strong

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

SWOT
Analysis of
Nestle S.A.

Opportunities:

Threats:
(1) Company’s objective to
transform into a nutrition (1) Private label
and well-being company penetration
(2) Dominant position in (2) Increasing costs due to
the coffee market strong regulation
(3) Major activity in (3) Water scarcity and its
developing and emerging future impacts
economies
Strengths

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(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.

(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.

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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.

(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

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(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).

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 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

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