Knowledge Based Capital in a Company Innovation Sweet-spot Stefan Dobrev OECD 13 th February 2012
Knowledge
Based Capital
in a Company
Innovation
Sweet-spot
Stefan Dobrev
OECD
13th February 2012
13th February 2013 1
Globally, Nestlé is the world’s largest food
company
The USD > 10bn Food & Beverage Companies in 2011
Fo
od
& B
eve
rag
e S
ale
s (
Bil
lio
ns o
f U
SD
)
CHF 83.6 billion in sales in 2011
328,000 employees
461 factories
10,000 brands
1 billion Nestlé products sold every day
Locally, we are facing intense competition
13.6
11.7 11.6 10.8 10.6 10.6
9.1 8.4
7.4 7.4
Highest Nestlé Market Shares 2012 (% of Packaged Food Retail Value)
13th February 2013 2
7.6 7.8
8.0 8.4
8.8 9.1
0.0 0.1
4.9 5.0 5.0 4.8
2007 2008 2009 2010 2011 2012
Brazil Market Shares (% of Packaged Food Retail Value)
Nestlé SA Brf Brasil Foods SA
Source: Euromonitor
In key markets, we are competing against
strong local players
Market Leader 2nd 3rd 4th 5th 10th 12th 51st
Malaysia abcdef Lam Soon
Philippines abcdef San Miguel
Brazil abcdef Brf Brasil
Chile abcdef Fonterra
Germany abcdef Unilever
Indonesia Indofood abcd
ef
Australia Kirin abcd
ef
Nigeria Friesland abcd
ef
India Gujarat Co-op abcd
ef
Poland Unilever abcd
ef
Egypt Savola abcd
ef
Saudi Arabia Almarai abcd
ef
Russia PepsiCo abcd
ef
Mexico Grupo Bimbo abcd
ef
South Africa Tiger Brands abcd
ef
Colombia Grupo Nutresa abcd
ef
China Mengniu abcd
ef
Turkey Yildiz abcd
ef
Japan Meiji abcd
ef
Source: Euromonitor
Knowledge is a key competitive advantage
of a large global company
13th February 2013 4
Competitor
Co
mp
etito
r
Competitor
Co
mp
eti
tor
5
Nestlé can deploy knowledge
across growing billionaire brands
Size
13th February 2013
Ex
pe
rtis
e
Food Safety
Packaging
Texture
Taste
Drying
Systems
Data
13th February 2013 6
Cross-category technologies enable us to
leverage our scope
Businesses
Economies of scope drive efficiency in our
R&D organisation
7
100
117 126
142 146
0
20
40
60
80
100
120
140
160
Nestlé Competitor 1 Competitor 2 Competitor 3 Competitor 4
Ind
ex
, N
es
tlé
= 1
00
Nestlé R&D Efficiency Advantage vs. Competitors (R&D Intensity Adjusted For Product Mix)
13th February 2013
8
Scale makes it worthwhile to own the
innovation value chain
Dedicated
Engineering &
Deployment
Product &
Technology
Development
In-house
Fundamental
Research
Nestlé Research Centre
Nestlé Institute of Health Science
Clinical Development Unit
31 Product Technology Centres
and R&D Centres
Product Technology Centres
and Application Groups
to support 460 factories
13th February 2013
Most of Nestlé’s value is in knowledge
based capital
Debt 14
Market Value 171
Tangible Fixed 24
Other Knowledge Based Capital
127
186 186
Enterprise Value Assets
Nestlé Implicit Capital Composition (CHFbn, FY2011)
Maggi
Nestle Pure Life
KitKat
Purina
Nescafé
Nestlé
13th February 2013 9
Selected
Brands*
35
*Source: BrandFinance
We go to great lengths to protect it
269
224
186 179 170
Patent Co-operation Treaty Applications 2012
132
295
16,000
24,000
0
5,000
10,000
15,000
20,000
25,000
30,000
0
50
100
150
200
250
300
350
400
450
2006 2012
Nestlé Patents
New Total
13th February 2013 10
Source: WIPO
Knowledge based capital is costly
22%
6%
Marketing + R&D CapEx
Nestlé Knowledge Based Investment as
Percent of Sales (2011)
13th February 2013 11
0.6 0.7
0.9 1.0 1.1 1.2
1.5 1.5 1.6 1.8 1.8 1.8 1.9 2.0 2.1 2.1
2.3 2.4
2.6 2.7 2.7 2.7 2.8 2.9 3.0
3.4 3.4 3.6 3.7 3.7
4.7
PolandTurkey
South AfricaRussian Federation
BrazilItaly
IrelandChina
NorwayNetherlands
United KingdomCanada
European UnionBelgium
FranceWorld
AustraliaOECD members
IcelandSingapore
AustriaGermany
United StatesDenmark
SwitzerlandKorea, Rep.
JapanNestlé*
SwedenFinland
Israel
R&D Spend as % GDP/Gross Margin
Source: UNESCO, except Nestlé data
*Percent of Gross Margin
13th February 2013 12
Knowledge investment is risky - only half
of our developments make it to market
0%
20%
40%
60%
80%
100%
120%
Start Go to Concept Go toDevelopment
Go toIndustrialization
Go to Launch Go to PostLaunch
Cumulative Survival Rate of R&D Projects
All Projects & Years
Started in 2011
Improvement Pilot
Not everything gets patented
0
100
200
300
400
500
600
2009 2010 2011 2012
Nestlé Recorded Ideas And Patents
Ideas Patents
13th February 2013 13
14
What happens to the rest?
Knowledge Block
Knowledge
Block
Knowledge Block
Knowledge
Block
Knowledge
Block
Product/Process
Product/
Process
Technical
Assistance
Technical
Assistance
Product/Process
Flow of
Knowledge
13th February 2013
Nestlé scientists publish over 200
scientific articles every year
0
5
10
15
20
25
30
35
Imp
ac
t F
ac
tor
Peer Reviewed Articles
Impact Factor of Nestlé Scientific Articles (2012)
13th February 2013 15
2012 Total:
240 Peer reviewed articles
Positive externalities of knowledge based
capital can misalign investment incentives
13th February 2013 16
Accruing
to
Company
“Social
Surplus”
Investment
(Opportunity Cost)
Return
(Benefit)
Total
Social
Benefit
Accruing
to
Company
“Social
Surplus”
Investment
(Opportunity Cost)
Return
(Benefit)
Total
Social
Benefit
Invest in
Knowledge Based Capital
Do Not Invest in
Knowledge Based Capital?
Summary
The social benefit of corporate risk taking in knowledge exceeds the private
benefit
Therefore, it is worthwhile encouraging risk taking beyond what companies
would rationally do if left to their own devices
Possible means include
Improve Efficiency: create knowledge infrastructure
Universities, Clusters
Sharing Hubs
Education
Improve Returns: facilitate spin-offs (monetise “excess” knowledge)
Improve Cost: fund early stage research
13th February 2013 17