Nestle

Cana multinational corporation's infor-mationsystems strategy be designed tosupportits global business strategy? Inthecase of good and pharmaceuticalgiantNestle, we will first examine itsbusinessstrategy for the food side of itshusiness,and then we will describe itsinformation systems approach in orderthatyou may evaluate how well its in-formation systems actually support itsglobalbusiness strategy.

Nestle SA, headquartered inVesey, Switzerland, is a $43 billion(1993)food and pharmaceutical com-panythat operates virtually all over theworld.The corporation has close to 300operating companies and includes 80information technology units to serviceits approximately 200,000 employeesworldwide. This large diverse companyeven has three official languages-English, French, and Spanish. In thefood area, while it is best known for itscoffee, chocolate, and milk products, itactually is the manufacturer and/orpurveyor of thousands of products vir-tually all over the world. It has been anenormously successful company, in-creasing sales in 1993 by 5.5 percent,resulting in a 7 percent increase inearnings, reaching $2.2 billion in 1993.

In recent years Nestle's globalbusirless strategy has changed in re-sponse to changillg market conditionsin Europe and the United States. Thesetwo giant markets have long accountedfor a majority of Nestle's sales and prof-its, and they continue to do so. None-theless, they are mature markets, andas is often the case in such markets,Nestle management is watching theirprofit margins sink as fierce competi-tion cuts into either Nestle's marketshare or its profit margin (lowered prof-its in order to maintain market share).For example, in the United States in thefirst three years of the 1990s manage-

GLOBAL INFORMATION SYSTEMS TO SUPPORTNESTLE'S GLOBAL BUSINESS STRATEGY

ment watched their coffee businesslose a total of $100 million due to fierceprice competition from Folgers Coffee(a Procter & Gamble brand). They havehad to restructure their coffee opera-tions in the United States and closedown four of their seven plants. This isa general trend in the mature markets,causing Salomon Brothersfinancial an-alyst Les Pugh to comment that "Thedays ofthe 15 percent operating marginfor the U.S. food industry are dead andburied." In Europe Nestle's operatingmargin has fallen to 10.7percent, belowsuch major competitors as Kellogg,Heinz, and Hershey.

The question facing Nestle man-agement was what business strategyshould they follow to compensate for thelower profit margins in the very coun-tries where their major sales and profitshave traditionally occurred? In the so-called mature markets, undaunted-orperhaps actually spurred on-by the in-creasingly tough competition, Nestlemanagement has continued to moveahead with their strategy of acquisitions.In recent years, for example, they haveacquired Carnation, Stoufter's. Perrier,Hills Brothers, and Buitoni. Their goal incontinued expansion has been to im-prove their margin of profit througheconomies of scale. Nonetheless, theirmajor strategy to counteract reducedprofits and other market problems inEurope and the United States has beento emphasize accelerating the growth ofboth sales and profit in the less devel-oped countries.

Nestle has long and vigorously pur-sued a globalization policy. Behind thatpolicy is its strong commitment to astrataqv of localization and regionaliza-tion. This localization and regionalizationstrategy involves at least five principles.First, Nestle leadership does not believein trying to sell the same product world-

wide. Rather, they buy or develop prod-ucts that fit well in the local market andculture. The proof oftheir commitmsnttothis type of strategy can be seen in sev-eral startling statistics. Nestle ownsabout 8000 different brands worldwide,but of these, about 7250 (over 90 per-cent) are registered in only one country,and only 80 (one percent) are registeredin ten or more countries. Second, Nestleis committed to reliance upon local andregional staff to manage its interests.Thus, many national and regional man-agers in the Nestle organization-atpresent about lOO-spend their wholecareers in their own country and region.Their career paths never require them todo a stint in the home office or in a more"advanced" country to gain experience,as is the custom for so many managersin most American and European firms.Even the exception sometimes provesthe case. Austrian-born AlfredSenhauser has risen to become thegeneral manager of Nestle Thailand.However, he has spent 30 years workingfor Nestle in Thailand and has become anaturalized Thai citizen. He evenchanged his name to Att Senasarn.

The third principle in the strateqv oflocalization is Nestle's patience andlong-term perspective as it builds itspresence in a specific national market.For example, in talks with Chinese offi-cials, management persevered for 13years before they were invited in to ac-tually do business. The fourth principle isNestle's willingness to evaluate marketpossibilities on a regional basis. For ex-ample, the company looks at Thailand,Vietnam, Laos, Cambodia, and the neigh-boring Chinese province of Yunnan as asingle geographic and cultural region.Since the population of this region is aslarge as Europe, Nestle is moving geo-graphically and fast. Fifth, Nestle is com-mitted to developing products from the

Case Study 747

less developed countries made from in-gredients native to those countries,thereby supporting the local economieswhile keeping costs low.

Has Nestle's globalization strategybeen successful? By the end of 1993 atleast 25 percent of its sales was comingfrom East and Southeast Asia and LatinAmerica. That 25 percent totals to morethan all of General Mills' worldwidesales in the same year. WatineeKhutrakul, a director of Deemar SurveyResearch in Thailand and the personconsidered to be the leading markettracker in Asia, says, "As long as bigcompetitors remain tentative about thispart of the world, Nestle can sweep upthe market in any product category itchooses." To better understand and ap-preciate how Nestle executes its poli-cies, we need to look at some examplesofthis globalization strategy in practice

Nestle is a market leader world-wide in coffee sales. However, coffee isoverwhelmingly sold as a hot beverage,which presents special marketingproblems in steamy, tropical Thailand.In 1987, Nestle's Nescate coffee salesin Thailand were climbing at a rate ofbetween 7 and 10 percent annually, asolid growth in such a sultry country af-ter being on the market for only 10years. Nonetheless, the Thai economywas expanding at an extremely rapidrate, and local Nestle management feltthey could do better. While coffee hastraditionally been advertised on the ba-sis of its aroma and its stimulationpower, Senasarn and his staff decidedto shift this advertising emphasis. Theymapped an advertising campaign theythought would better fit the local cul-ture and climate, selling Nescate as away to relax from the tensions of the of-fice, from the noisy city traffic and evenfrom romance. Rudolf Tschan, Nestlezone manager for Asia, viewed the firstTV ad and angrily rejected the wholeapproach, but he did not have the au-thority to overrule the local team's deci-sion-and they remained committed totheir new marketing approach Theythen strayed even further from the tra-ditional coffee marketing when they be-gan to produce and market a cold cof-fee-based product called Nescale

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Shake. They even designed specialplastic containers in which to mix thedrink. They then invented a dance,which they called the Shake, to helpsell the product. Senasarn even de-cided to run an annual "talent" contestfor "the Shake girl." The result of all thislocalization? By 1993, the Shake girlcontest had become as big as the MissThailand event, and Nestle coffee saleshave jumped to $100 million, four timesits 1987 level. As Khutrakul explained it,Nestle "made coffee into a Thai drink."

Nestle's successful entrance intoChina is <In example of the Nestle man-agement tenacity and their willingness toinvest for the long run. It is also anotherexample of their localization policies.While they began talks with China in1973. It was not until 1987that they weregiven their first business opportunitythere. The government of HeilongjiangProvince (in northeastern China, formerlyknown as Manchurial asked Nestle tohelp them boost their powdered milk pro-duction. Heilongjiang had neither ade-quate milk supplies, nor a dependabletransportation infrastructure, nor facto-ries to produce the powdered milk. Intentupon success in China, Nestle viewedthis as an opportunity and moved aheadvigorously. In 1990Nestle opened a pow-dered milk and a baby cereal plant inChina. In order to get the milk manage-ment needed to their factories, they de-cided to establish their own, more de-pendable milk collection network. Theyestablished "milk roads" from 27 villagesIn the region to their collection points(known as chilling centersl where themilk was weighed and analyzed. Thefarmers used traditional Chinese meth-ods to take their milk down the gravelmilk roads-wheelbarrows, bicycles,and feet. As an incentive to increasingproduction, Nestle decided to pay thefarmers promptly for their milk. Within 18months the number of milk cows in thedistrict climbed from 6000 to 9000.To fur-ther aid the farmers, Nestle decided tohire retired government workers andteachers as farm agents, bringing inSwiss experts to train them in animalhealth and hygiene. These new farmagents were given a commission basedon sales to add further incentives for in-

CHAPTER 19

creasing the quantity and quality of 'milk. .,

This approach is beginning to'pioff financially for Nestle. Whereas thtpowdered milk factory produced on:316 tons of powdered milk and infan~formula its first yea r, it turned out 10,000tons in 1994/ an increase of over 3000'percent in four years, and Nestle j':tripling the capacity of the factory aninitiating construction of other factQ!'ries. It has the exclusive right to sell' iproducts throughout China for 15yearJ~To improve their sales capacity, the,;

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area managers have established a van"delivery system exclusively for Nestle';,.products. According to David Sheridan,tof James Cappel in London, NesthL;sales were about $200 million in 1994)and had become profitable, He expects:sales to reach $700 million by the end of ,;the decade, and he thinks Nestle will beall alone in this field. "I haven't foundanother company willing to pour re-sources into China like this. The bigpayoff is still to come, but you can bet itwill be solid and ionq-lastinq." he says.

In Malaysia, Nestle faced a verydifferent kind of problem, Malaysia ex- .~ports large quantities of cocoa beans,but Malay beans are of lower quality ,than many others due to their being lessrich in flavor. Nestle wanted to start sell-ing chocolate bars in Malaysia, but thenational market was not large enoughtojustify a Malaysian chocolate candy barplant using higher-quality imported co-coa beans. The solution came fromJohnny Santos, the Filipino head ofNestle Singapore. He suggested devel-oping a lower-quality but lower-pricedcandy bar in Malaysia and exporting itto the Asean countries-Malaysia,Singapore, the Philippines, Indonesia,and Thailand. Asea is a trade group, andthe high tariffs of its member countriesare significantly reduced if the item isproduced within one of its member na-tions. Nestle decided to develop newversions of two popular Nestle choco-late candy brands, KitKat and Smarties(an M&Ms competitor). Manaqementworked with farmers to increase cocoabean quality while also developing newformulas for the two candies. Thecandy, while being less tasty than the

Managing International Information Systems

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imported competition, sells for a 30 per-cent lower price, while still givingNestle a 20 percent profit margin. Now,.according to Low Ming Siong, a direc-toryof Kuala Lurnpur's Crosby Researchoffice, because of its lower price,"KitKat is one of the fastest-growingproducts in Malaysia in its category."

Even in some of the less developedAsian countries, Nestle is beginning toseesome of the market maturation thathastaken place in Europe and the UnitedStates,and Nestle's response is an indi-cation of its flexibility in working with lo-cal conditions. American-style super-markets are appearing in large numbersin Taiwan, Malaysia, and Thailand. InTaiwan,for example, the sales of one su-permarket chain, Makro, reached about$1 billion in 1994. In Thailand supermar-kets accounted for 8 percent of Nestle'surban business five years ago; today[1994) it's 45 percent ofthe business. Theproblem for Nestle is that supermarketsmean a serious reduction in profit mar-gin. Nestle Thailand's response? It over-hauled its sales team. It nicknamed thenew team the "Red Hot Sales Force,"staffed it with college graduates whowere fluent in English, and gave theteam members a great deal of training inincreasing supermarket product salesand in techniques in building partner-ships with supermarket managers.

What about Nestle's informationsystems infrastructure? With 80 differ-ent information technology units, its in-formation technology infrastructure hasbeen described as a virtual "Tower ofBabel," with all types of hardware andsoftware being used, including equip-ment from IBM, Hewlett-Packard, andDigital Equipment Corporation (DEC)running both proprietary and open sys-tems. Some ofthese systems are redun-dant. There has been no way for devel-opers to communicate with each other.Every time Nestle makes another acqui-sition, this condition is only made worse.

Therefore, Nestle has embarkedupon a program to standardize and co-ordinate its information systems. Theword standardize does not mean thateveryone will do everything the sameway. Rather, to Nestle IS, standardiza-tion has several goals: First, standard-

ization should promote communicationbetween various units of the company,if for no other reason than that Veseymanagement needs to be able to com-municate with its many units and tomonitor and control their activities.Second, Nestle's annual technologybudget is more than 500 million Swissfrancs or about $340 million, andManfred Kruger, assistant vice presi-dent of management services in Vesey,believes that IT standards will prove tobe cost effective by eliminating redun-dancies and building more effectivesystems. The company has decided tomove to a client/server environment in-ternationally, and to that effect has al-ready established some standards, in-cluding UNIX; Oracle RDBMS; R/3integrated material, distribution, andaccounting applications from SAP (seethe case at the end of Chapter 12);Powersoft's Powerbuilder applicationdevelopment tools; and Ernst & Young'sNavigator for development methodol-ogy and CASE tools. However, the workof standardization has barely begun.Nestle still needs to establish stan-dards in many other areas.

According to Jean-Claude Dispaux,Nestle senior vice president andKruger's boss, headquarters does havethe power to enforce any standards theyinstitute for all units of this global giant.All Nestle really needs to do is block theIT budget of the noncomplying unit untilit accepts the standards. However, thisis rarely done. Nestle prefers to push re-sponsibility out to the countries. WhatKruger does instead is to recommendstandards. This approach reflectsKruger's personal philosophy that"nothing works if you don't get key play-ersto agree." In addition, Kruger's expe-rience has shown him that the staff inVesey, Switzerland, is just too far awayfrom most of the Nestle locations to un-derstand their problems. Previously, forexample, when his organization hadstandardized on a specific microcom-puter vendor, he heard a large outcryfrom the operating units. Ultimately hisorganization listened and replaced therecommended vendor with a list of rec-ommended PCs from which the localunits could select.

The heart of Kruger's technologystrategy is "a culture of working to-gether" that reflects his belief that keyplayers must agree. To develop a coreapplication (whether in Vesey or else-where), IS gathers together a team rep-resenting a number of different organi-zations and the appropriate hardwareand software technologies. The teamwill work to reach consensus on appli-cation requirements and developmentstrategies. Once the application hasbeen developed, it is sent to field orga-nizations for adaptation. After modifica-tion to meet local needs, the appropri-ate version is deployed in variouscountries. For example, when corpo-rate IS wanted to develop a life cyclefor corporate microcomputer develop-ment, Nestle brought in 20 developersfrom eight countries. The result was aset of standards that have blendedsmoothly into different Nestle units.

Sources: Joshua Greenbaum, "Nestle'sGlobal Mix," InformationWeek, April25, 1994, and "Nestle Makes the VeryBe t...Standard?" InformationWeek,August 23,1993; and Carla Rappaport," esrle's Brand Building Machine,"rortune, September 19, 1994.

Case Study Questions1. What kind of global business

strategy is estle pursuing?2. Do you think Nestle's informa-

tion systems strategy supports itsglobal business strategy? How isit supportive? In what ways is itnot supportive? What changeswould you make to this strategy?

3. Do you think Kruger's approachto establishing and enforcingstandards fits in well with Nestle'sglobal business strategy? Explain.

4. What management problems doyou envision for Kruger's ap-proach?

5. How do you think Nestle shoulddetermine which new systemsmust conform to corporate infor-mation systems standards, andwhich ones need not conform?

Case Study 749