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

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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.

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).

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2.2. Strategy and vision of Nestle

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

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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 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.

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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).

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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 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,

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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-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

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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
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

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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).

Figure 2
Title: The seven wastes in operations
Source: Lopez, 2008

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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 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)

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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 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

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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).

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

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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 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

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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 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

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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

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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 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

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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 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).

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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

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

24
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).

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

25
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 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.

26
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.

27
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, 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

28
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 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

29
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.

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.

30
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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 the (2) Increasing costs due to

coffee market strong regulation

(3) Major activity in (3) Water scarcity and its

developing and emerging future impacts

economies

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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.

(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.

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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).

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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

56