Competitive Environment and Business Level Strategy of Nestle - Case Study Example

A study оf thе Соmреtitivе Еnvirоnmеnt аnd Businеss Lеvеl Strаtеgy Name Institutional Affiliations Table of Contents A study оf thе Соmреtitivе Еnvirоnmеnt аnd Businеss Lеvеl Strаtеgy 1 Name 1 Institutional Affiliations 1 1.Corporation Identification 3 2.Business Unit Research 5 a.Business Unit Identification 5 b.Identification of Product and Service Lines 6 3.Business Unit Revenue 8 4.External Environmental Analysis 9 Political 10 Economic 11 Social 11 Technological 12 Environmental 13 Legal 14 5.Source of Sustainable Competitive Advantage 14 6.Strategic Direction 16 References 19 1. Corporation Identification 3 2. Business Unit Research 5 a. Business Unit Identification 5 b. Identification of Product and Service Lines 6 3. Business Unit Revenue 7 4. External Environmental Analysis 9 Political 10 Economic 10 Social 11 Technological 12 Environmental 13 Legal 13 5. Source of Sustainable Competitive Advantage 14 6. Strategic Direction 16 References 19 1. Corporation Identification Nestle was incorporated in 1905 by the merger of Anglo-Swiss Condensed Milk Company founded in 1866 and Henri Nestle company formed in 1867 in what came to be Nestle Group (Campbell, 1982). Nestle has been providing safe quality nutrition for more than 150 years and now has more than 2000 brands globally. It has over 328000 employees operating in 191 countries. It has 418 factories in 86 countries which recorded CHF sales of $89.5 billion sales in 2016. By definition, a corporation is a legal entity that is discrete and distinct from its owners (Eells, 1960). They enjoy a large portion of the rights and obligations that an individual has; that is, a company has the privilege to go into contracts, advance and acquire cash, sue and be sued, procure workers, possess resources and pay charges. It is regularly alluded to as a "legal person”. Most corporations are have limited liability considering that their shareholders have the right to participate through dividends but are not personally held liable to company debt (Donaldson and Preston, 1995). Nestle require that is business units adhere to strict compliance to the law and provide a guide where there is no applicable law. It is flexible religious practices, culture and legislations of the host countries. Nestle has several business units which include Nestlé Waters, Nestlé Nutrition, Nespresso, Nestlé Health Science and Nestlé Skin Health. It also has contracts with Beverage Partners Worldwide and Cereal Partners. Its organizational chart is as shown. As could be seen in the chart above, Nestle has a rich product and service portfolio. By definition, a product portfolio is a collection of products offered by a company whereas a service portfolio is a complete list of services which the company offers including the retired services, future services and what is offered currently (Henderson 1970; Vom and Lidner, 2004). The product and service portfolio of Nestle are broadly categorized into Nestle Nutrition, Nestle Waters and Nestle Health Science. Their products and services are tied to snacks, pet foods, frozen food, ice cream, dairy products, confectionery, tea and coffee, breakfast cereals, bottled water and baby food. Product portfolio provides Nestle insights operational risk, market leadership, income contributions, profit margin drivers, company growth prospects and stock types which is very instrumental in equity analysis for internal corporate financial planning (Day, 1977). It is used in financial analysis for granularity and context such that investors can distinguish between short-term growth opportunities and long term value stocks besides financial performance which influences design. On the other hand, service portfolio serves to provide an historical view of where Nestle has been, where it is currently and its future direction (Rosemann, 2010). Therefore, it comes in handy in budgeting, prompting customer interest in new products and generating excitement for upcoming services and products. 2. Business Unit Research a. Business Unit Identification Nespresso came into being in 1986 due to a simple revolutionary idea which was geared towards enabling everyone to create the perfect cup of espresso coffee. Currently, the company is redefining and revolutionizing the manner in which millions of people take their espresso coffee. The company introduced the coffee capsule system to the market. This revolution was meant to mitigate the disadvantage of the ground or loose coffee capsules which usually have a tendency of losing flavor and aroma when exposed to air. The capsule technology ensures that the coffee remain fresh due to its seal which can enable it remain fresh to as long as one year. There are Nespresso coffee machines which are specifically designed to accommodate these capsules and hence, the consumers will get some perfect espresso at the push of the button. Having noted it its brief history, it is prudent to indicate the Nespresso is a business unit of Nestle categorized under Nestle Nutrition. A business unit is a fully-functional unit of business having its own direction and vision, operating as a separate which is important to the company (Gupta and Vijay, 1984). It reports to the headquarters about its operational status. Nespresso operates as an independent entity having its own headquarters in Lausanne, Switzerland. It reports to Nestle about its operations. It operates independently and is focused in target market which is coffee. b. Identification of Product and Service Lines Since its inception, the Nespresso espresso machine and container framework has won various prestigious honors including iF International Product Design Award in 1998 and 2007, the Red Dot Best of the Best honor in 2002 and 2005 and the Australian International Design Award in 2011. Nespresso Australia gives clients an extensive variety of Capsule espresso machines and going with capsule to suit any taste. From conservative capsule coffee machines, to case machines with an inherent drain frother, Nespresso espresso machines and cases convey awesome tasting espresso with negligible effort. This implies that the entity has excellent product and service lines. A Product line is a group of related products under a single brand sold by the same company (1984). Nespresso has different coffee capsules which coffee categories including espresso, decafeinato, lungo, intenso, pure origin and its variations. It also have accessories which include cups and saucers, glasses, dispensers, milk frothers and take-away plastic cups. This also includes the espresso machines together with the recipes. Nestle continually expand on its product line considering that clients are more likely to purchase from brands which they are more familiar with. The Australian product line for capsules alone is 24 and this can be seen as marketing strategy meant to capture sales of customers who are already buying the brand. The basic operating principle of Nespresso here is that consumers are have a positive response to the brands they love and know and hence, are willing to buy new products based on their positive experience with the brand. A service line is a conglomeration of service related services offered under one brand name (Lei et al. 2008). In quick survey of Nespresso website, it has an excellent service line. It has delivery clubs which take the products wherever the customers are, ordering options with specialist to help in that, machine assistance, the recycling and customer care. Customers are always helped with machine selection and coffee selection. It gears its service line towards the maintenance and increment of the customer satisfaction in order to ensure repeat business. 3. Business Unit Revenue Revenue is the income generated from the sale of services and goods, or some other utilization of capital or resources, related with the fundamental operations of an organization before any expenses or costs are deducted (Levi, 1989). Income is demonstrated generally as the top item in profit and loss statement from which all charges, expenses, and costs are subtracted to touch base at net income. Revenue is different from sales considering that as sales are only indicative of the proceeds from the provision of goods and services to customers, revenue encompasses all the diverse sources which include donations, fees, royalties and interests besides services and goods and hence, is a good indicator of cash flow which the company generates (Talluri and Van, 2006). According to IBIS World (Online), there is an increased demand of coffee which as seen the industry generate $37 billion. It estimates that the revenue from coffee shops and cafes in Australia to be $4.3 billion as at 2014 whereas the Australian Bureau of Statistics, in a research, indicated that 46% of Australians including young children and about 66% of adults between 51-70 years have at least one coffee daily (Louis, 2015). According to the Roy Morgan research of 2013, 56% of Australians visits a café more than once in a week while the number of people owning coffee makers is about 36%. Euromonitor notes that there were 1.7 million coffee machines sold over the last three years with capsule sales amounting to $200 million, a figure which is expected to double projected in three years. Since Nestle launched Nespresso three decades ago, the brand has turned out to be one of the Swiss organization's most beneficial items. As of late, however, Nespresso has blurred as opponents have eaten into the market and upstarts offer more affordable units that fit Nestle's machines. Nespresso's development has moderated from around 30 percent yearly in the most recent decade to 7 percent in 2015, Bank Vontobel AG gauges. In spite of the fact that Nestle in 2012 quit breaking out Nespresso income, citing competitive condition, experts appraise sales were around 4.4 billion Swiss francs ($4.5 billion) a year ago. Revenues of Nespresso are affected by the falling shares by 25% from 32% between 2010 and 2015. Another reason explaining the decrease in revenue is the relatively high price of coffee capsules. However, the customers who have the machines are unlikely to switch. Lawsuits worth $2.8 billion from the Ethical Coffee Company is likely to drive down revenue too. The Revenue of Nespresso is dependent on supply, duration, market segments and capacity. The unit strive at managing the source of income in order to maximize profit by the use of revenue management which entails perishable inventory, predictable demand and fixed capacity. These strategies are fine-tuned to make sure that they are logical and circumspect every single historical data and decision making geared towards increasing revenue to Nestle. 4. External Environmental Analysis There are combination of external and internal factors which influences the operating situations of a company. This can include the socio-economic trends, markets, government and legal activities, technological improvements, owners and competition or even the suppliers and customers. The operating environment denotes the factors, events, entities and conditions which influences the choices and activities influencing risks and opportunities. This refers to some specific outside stakeholders with whom business interact with while conducting their businesses. They are made up of stakeholders external to the business who directly impacts the operation of some business. The operating environment of Nespresso is best analyzed using the political, economic, social, technological, environmental and legal environment which the business unit interact with. Political The political element of environment assesses the legal factors and the government regulations in terms of how they affect the trade markets and the business environment (Yuksel, 2012). Nestle was selling instant coffee whereas Nespresso was designed particularly for the young and wealthy urban professionals as it was positioned as a high end brand. It adopted a business model akin to that of luxury goods. This marketing model conflicted with the attitudes and values of the organization as was seen to phase away Nescafe. The political rift was what prompted the management to separate Nespresso from Nestle. Perhaps, they borrowed a leaf from the subsidiaries of Unilever and Philips which enjoyed some considerable operational autonomy and hence, breeding diffusion, creation and innovation. The move is meant to decentralize the organization to foster innovativeness. The separate company would provide dynamic which is flexible and has freedom to experiment. This organization comes as a critical success factor for the business unit in terms of development of their policies, workforce, distribution and commercial structures. Economic The economic aspect of the environment is meant to analyze the economic issues which are bound to impact on the company through long-term resonating effects such as inflation, prices and business cycles which would affect the consumer power and the company at large (Gillespie, 2007). Cafes stimulated the development of coffee drinking. Nespresso created interest in the provenance and process of coffee together with adding value through Grand Cru offerings. Whenever a customer buys the machine which would vary from $166 to $2100 they are tied to using the Nespresso capsules whose prices are fixed between $0.378 and $0.434. This price is much higher than that of any coffee in the home and it is interesting that the entity and its brand communications would rarely make any references to price. Social This element examines the socio-economic environment of the market through aspects such as education, attitude, lifestyle, cultural limitations and customer demographics (Jurevicius, 2013). In the five dimensions of brand personality identified by Aaker (1997), sophistication is relevant to Nespresso as it reinforces its sophistication position which makes it exclusive and differentiates from other brands and at the same time, adding some style for the feeling of elegance. Nespresso has segmented its market target group by further developing machines which appeal the whims of customers from this segment. This includes the slim machines which easily fit the smaller spaces and those with some daring urban vibe. Recently, it launched a machine for couples which demonstrated its flexibility and adaptability and at the same time, maintaining its trademark elegance. The business unit has utilized celebrity endorsement of George Clooney, who has a public image, for an ambassador considering that the person has matching characteristics of style and good living which has a big influence in the fans. Technological This is an environmental factor which pertains innovation in technology which may affect industry operations and the market either favorably and unfavorably (Yuksel, 2012). Nespresso machines were developed due to the innovative culture and the environment which allowed an innovative culture. It has concentrated on innovation success factors which include protection of intellectual property, product launch and new products by way of developing technological bearings with exceptional manufacturers which have seen the company win several awards since 1996. The competency of Nespresso depends on their development of policies which intensify cooperation in R&D with universities, companies and institutions. This is based in the fact that collaboration with others yields new insights to the development of the necessary experience. It is worth noting that Nespresso should continue attracting and working with industry leaders in the machine and capsule developments. Environmental This is an element which takes into consideration the environmental and ecological factors which influence the surrounding environment of a business unit (Gillespie, 2007). For the Nespresso product, there are large wastes per cup. The capsules and plastic containers could take more than 500 years to degenerate which is worrying considering that Nespresso offers recycling options to few markets to do with collection of capsules. It has attempted to counteract criticism by participating in various sustainability programs which include collection of rainwater, the local community heat exchange and the development of automatic standby functions which are meant to reduce energy consumption. It is worth noting that Nespresso is aversive of its ecological claims. It doesn’t participate in the fair trade and hence, can remain profitable even while investing in sustainable practices of the farming associated with traceable coffee beans farms supplying Nestle beams. Farmers are awarded with high prices for their products. Legal This examines the laws which affects the business environment in countries where the business is operating from (Jurevicius, 2013). Nespresso commercialize the machines under a license and at the same time, the capsule content remain a company secret. Its pod technology implies that no drinks other than Nespresso machine and hence, such control of license creates some exclusivity. The concept of Nespresso, service, capsules and the machine is protected by about 70 patents which provides a solid barrier against competitors. The suppliers would be restricted to some standardized designs an level of control making it gain leverage from respected machine manufacturers such as Miele. However, the company is currently facing lawsuits on patenting worth $2.8 million due to development of harpoon technology which stopped rival capsules from working with Nespresso Machine. 5. Source of Sustainable Competitive Advantage For a company which is hinged in the food industry and any company anyway, it just strive to ensure that its competitiveness is sustainable. Nespresso’s sustainable competitiveness can be established by utilizing the VRIO model. VRIO stands for valuable, rare, imperfectly imitable and organization specific (Xue, 2009). Resources can be seen to be valuable if it enables a company defend against threats and exploit existing opportunities. The value of Nespresso’s products come from the fact that its core competency is valuable resources in the form of new products and process technologies which serves to enhance the efficiency strategy (Grant, 2013). It is this perspective which helps the customer increase the perceived value of the product. Due to the constantly changing environment, the company is constantly broadening differentiation and the price of the product. For resources to be rare, they can only be acquired by one or very few companies. However, rare resources only grant a company some temporary competitive advantage. Here, it is worth noting that the company’s capabilities/resources are rare considering that the company possesses 1700 patents which according to Alich (2013), are meant to protect the products of the company, the brand and processes. Additionally, its advertising strategy is meant to position the company as an aspirational lifestyle brand with George Clooney ambassadorship contributing to its uniqueness. Another key competitiveness is the idea of imperfectly imitable. A resource is costly to imitate if the companies who don’t have the product can buy or substitute or buy or imitate it at a reasonable prices. Imitation is usually achieved by direct imitation or substitution. Nespresso is difficult to imitate considering that its strong customer relations and brand reputation are continually grown. According to Markides and Onyon (2000); and Matzler et al (2013), its premium service culture is intensively embedded in the employees which makes it socially complex. Nespresso has some causal ambiquity considering that it doesn’t come out clearly what attribute attracts customers to Nespresso among the aspirational lifestyle image, the advertising, the service, the quality of coffee a combination of these features or even completely different factors. Finally, the organizational specific factor of the company makes it sustainably competitive. This implies that the resource may not convey any advantage in case it is not organized to capture value for the company. Nespresso strategizes and exploiting its resources and capabilities and strives to make sure that there is no strategic equivalent in the market due to development of the pod technology. The company has exemplary managers and CEO’s which include Gaillard whose commitment aligned the Nespresso’s strategy and market position to the target market. The leaders have strongly founded the company’s operations which makes it a powerful resource 6. Strategic Direction By definition, strategic direction is a course of action which leads to the realization of goals of the strategy pf an organization (Donaldson et al. 1983). The following are strategic recommendation for the success of the company. Nespresso should offer home-like comfort in non-residential locations with the aim of increasing the demand. This will be achieved by the introduction of new machines in which customers can either pay or use their own capsules. This will be suitable for exclusive places which are frequented such as private universities, country clubs or VIP lounges. The customers will have the Nespresso Electronic card. This strategy is advisable considering that outside home coffee markers takes the 50% of the total market. This will hence, reach the outside home coffee channels, increase the sales expectations and increase the market share and at the same time keeping the niche target and the luxury brand image. Going beyond geographic expansion by maintaining and strengthening your focus in areas which define ad enhance the consumer experience which is tied to personalized services, design, innovation and quality. This will shape the global coffee culture where consumers are preferring portioned coffee. This will underpin the long-tern corporates strategy which is very key for its sustainability. The following three elements will be adhered to. Despite the fact that the resource should be rare, the firm should the resources that are valuable and common. Maintaining valuable resources and capabilities would not hurt the organization considering that it is very instrumental in making it stay in the market. Adopt an income or yield administration which includes setting costs as indicated by anticipated request levels among various market fragments. The minimum value touchy section is the first to be distributed limit, paying the most astounding cost. Different sections take after at dynamically bring down costs. As higher paying sections regularly book nearer to the season of real utilization, firms require a restrained way to deal with spare limit with respect to them as a substitution of basically offering on a first-come, initially served premise. Nespresso does not own the manufacturing plans making their machines. Along these lines, it should invest more in these companies by acquiring part of their production lines and ehance the repair administrations with a tracking system that will permit individuals to check the time when their machine will be accessible Testing pop-up stores in small towns for profitability together with the use of eco-friendly delivery vehicles, featuring hybrids or bicycle deliveries Estrablish services which will enable new users try some machine for a week at a small fee. 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