Case of Nestlé: Organizational Transformation at Nestlé

Swiss-based Nestlé, the world’s largest food manufacturing company, employs around
247,000 people and has factories or operations in practically every country in the world.
However, Nestlé does not focus simply on building and exploiting global brands. As
noted by CEO and chairman Peter Brabeck, ‘There is a trade-off between efficiency and
effectiveness in global brands . . . Operational efficiency comes from our strategic
umbrella brands. But we believe there is no such thing as a global consumer, especially
in a sector as psychologically and culturally loaded as food. Although Nestlé does not
believe in homogeneous consumer preferences, it has started to integrate its
businesses at the regional level and even the global level – it has become much
more than a holder of a portfolio of national units.

The inherited unique features at Nestlé When Peter Brabeck became CEO in 1997, he
and Helmut Maucher, his predecessor, identified two unique features at Nestlé that
should not change: first, the commitment to decentralization to cater to local
tastes, and second, the minor role of information technology in everyday
operations, relative to the importance of its employees, brands and products.

At that time, Nestlé operated more like a holding company, with country-by-
country responsibility for many functions. Such an organization certainly helped
Nestlé on the marketing side. Local managers could change the product taste,
formulation and packaging according to local preferences. For example, Nescafé,
Nestlé’s instant coffee brand, had 200 different variants: in Russia, Nescafé was
very thick, strong and sweet, totally different from the bitter flavour in Western
Europe. In Britain, Kit Kat consisted of chocolate and wafers, but in Japan, Kit Kat
had a lemon cheesecake flavour. However, such a decentralized organization leads
to efficiency losses. Until the mid 1990s, Nestlé factories located in the US still
purchased their raw materials separately. As a result, a single supplier charged
different Nestlé factories more than 20 different prices for vanilla. Moreover, the
downplaying of information communication technology (ICT) aggravated the
inefficiencies. For example, even though senior managers at Nestlé USA knew about
the existence of different prices for vanilla, they had difficulty finding out which factories
were overcharged, as each factory used a different purchasing code for vanilla.

Consolidating the business: As Nestlé expanded, competitive environments forced it to

become more efficient. In spite of its status as the largest food manufacturing company
in the world, its profit margins were lower than those of its main competitors, such as
Unilever, Heinz and Danone. Starting in the late 1990s, Nestlé embarked upon a
fundamental transformation of its business organization. It shifted away from its
longstanding geographic/functional focus to incorporate some product-oriented
organization. The geographic focus still dominates, however. A decentralized
front end (markets and businesses) Nestlé currently operates its downstream
activities with three geographic zones and eight strategic business units (SBUs).
Zone organizations refer to the major regions – Zone Europe, Zone Americas and
Zone Asia, Oceania and Africa, with zone executive officers responsible for
market/region business targets. The eight SBUs (Beverages; Milk products,
nutrition and ice cream; Prepared dishes and cooking aids; Chocolate,
confectionery and biscuits; PetCare; Pharmaceutical products; Water; and Nestle
nutrition) develop business strategies for selected market clusters, accelerate
innovation and renewal, and introduce ‘brand boards’ to develop strategic
brands. To achieve focus in its branding, Nestlé operates with six umbrella brands:
Nestlé, Purina pet foods, Maggi, Nescafé, Nestea and Buitoni. However, strong local
brands are still kept, such as the Rossiya confectionery range in Russia and the Rolo
brand in the UK. Moreover, the regional market head is responsible for the SBUs, and
the country market head is responsible for the market/country performance. The country
market head also functions as a business portfolio strategist in a given market. In this
way, the former decentralized structure is still kept alive for many downstream activities.
In some countries, including many African countries, Nestlé still remains completely
decentralized, with powerful country managers responsible for the operations in their
host countries, as local features remain particularly idiosyncratic there. A regionally or
globally run backline (factories and shared services) To be cost-efficient, Nestlé has
streamlined its upstream/back office activities by integrating the management of its
factories into regional and even global management units. For example, in four and a
half years between the end of 1998 and mid 2003, Zone Europe closed or sold 68
factories, reducing the number of factories in Europe from 179 to 140 even after
acquiring 29 factories during the period. The reduction in number of plants reflects the
rationalization

efforts at the back end of the value chain, in order to gain scale economies and better
international coordination. Similarly, in New Zealand, Australia and the Pacific Islands,
Nestlé integrated the functions of accounting, administration, sales and payroll.
Moreover, Regionally Shared Service Centres have also been established, to
provide back-office functions for each region. For example, in the Americas Zone,
Nestlé Business Services provides the purchasing, HR/payroll, retail sales execution,
disbursement, general accounting, operations accounting, ICT maintenance,
transportation, tax and legal services for all the operating companies in the region.
Finally, the three geographic units have started to implement regional ICT systems and
common standards. For example, the three geographic units had been using different
inventory, accounting and planning software; in 2001, Nestlé introduced a single
company-wide resource planning system called ‘Globe’ in order to standardize
company-wide ICT systems and to leverage scale economies in its back-end
activities. Grouping markets into clusters Inside each SBU, Nestlé groups its markets
into clusters, not by region but by other similarities, such as consumer preferences or
the stage of market development. For example, in its coffee business, Nestlé has
defined two clusters, according to consumers’ coffee drinking habits. The first
cluster, where soluble coffee is the norm, includes the UK, Japan and Australia;
the second cluster consists of the USA, Germany, France and Spain, which are
only emerging markets for soluble coffee. In those markets, roast and ground
coffee are dominant. Similarly, Nestlé groups its confectionery markets into four
different clusters based on consumers’ eating habits. Managers within the same cluster
can develop strategies together, share best practices and innovations, and achieve
synergies in manufacturing and some marketing services. Managers also transfer
knowledge across clusters, although that is less common. Moving away from the
independent subsidiary model Nestlé is transferring knowledge more between
subsidiaries. For example, Nestlé Purina PetCare (NPPC) was the market leader in the
US in 2004, with a 31 per cent market share of total pet food sales. However, in Europe,
Nestlé Purina PetCare had only 24.5 per cent in 2004, well behind the 40.1 per cent
market share of Mars, the market leader. To catch up, managers started to apply in
Europe several concepts that had worked in the US, such as the ‘small serving’
concept. In the mid 1990s, US consumers still bought primarily multi-serve cans.

for their pets. In recent years, however, small serving cans (e.g., cans containing only a
single serving) gradually became more popular. Accordingly, Nestlé Purina PetCare
North America developed a very profitable small serving can called Fancy Feast. Nestlé
Purina PetCare then introduced small serving cans in Europe, which helped it to narrow
its market share gap with Mars. In Europe, managerial attention in the past had usually
not focused on the entire region, but unfortunately on only some of the national markets,
thereby missing significant business opportunities. For example, the efforts of European
PetCare focused on France and the UK, the top two markets in Europe, but not
Germany, the number three European market. In Germany, Nestlé PetCare employed a
specialist strategy by focusing on premium, high-end products. As explained by John
Harris, the head of European PetCare, ‘We as a company have never been strong in
Germany, we’ve never focused a lot of resources in Germany and it’s not in our
strategic plan to become a dominant player in Germany. In Germany we want to be a
player but we are not willing to invest what is required to be the number one player. In
2004 and 2005, CEO Peter Brabeck stressed the need for substantial changes in
organizational functioning at Nestlé, including a stronger business focus by
delegating profit responsibilities to business executive managers or divisional
managers and establishing regionally/globally shared services (see Figure below).
As of 2006, Nestlé is still in the process of integrating some back-end activities through
its Globe project.

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QUESTIONS:

1. What was Nestlé’s initial organizational approach as an MNE (centralized exporter,

international projector, international coordinator or multi-domestic MNE)?
2. Has Nestlé transformed itself towards a less homogeneous, more multidimensional
model? Can you identify certain Nestlé subsidiaries with specific roles – e.g., strategic
leaders or contributors?

3. Has Nestlé been able to transfer knowledge from ‘strategic leader’ subsidiaries to
other types of subsidiaries? Please identify an example in the case.

4. What is different between the subsidiary network discussed in this case and the
model in the paper by Bartlett and Ghoshal?

5. Can you provide an update on Nestlé’s international organizational approach, using

materials available on the Web.