Curtin University Librar Strategic Management Competitiveness and Globalisation / �. (ENGAGE , . Learning" Australia· Brazil· Japan. Korea· Mexico· Singapore· Spain. United Kingdom. United States Dallas Hanson Michael A. Hitt R. Duane Ireland Robert E. Hoskisson (ENGAGE Learning" Strategic management: competitiveness and globalisation 4th Asia-Pacifc Edition Dallas Hanson Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Publishing manager: Alison Green Senior Publishing editor: Dorothy Chiu Senior project editor: Nathan Katz Developmental editor: Kylie Mcinnes Cover design: Alex Ross Text design: Pier Vido Permissions research: Cara Gould Editor: Elizabeth Watson Indexer: Russell Brooks Proofreader: Greg Alford Indexer: Russell Brooks Cover: Getty Images Typeset by KnowledgeWorks Global limited (KGl) Any URls contained in this publication were checked for currency during the production process. Note, however, that the publisher cannot vouch for the ongoing currency ofURls. First published by South-Western college Publishing as Strategic Management: Competitiveness and Globalization (ffth edition), by Michael A. Hilt, R. Duane Ireland & Robert F. Hoskisson. Authorised adaptation of the fourth edition published in 2002. Second edition published in 2005 Third edition published in 2008 This fourth edition published in 2011 © 2011 Cengage learning Australia Pty limited Copyright Notice This Work is copyright. No part of this Work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without prior written permission of the Publisher. Except as permitted under the Copyright Act 1968, for example any fair dealing for the purposes of private study, research, criticism or review, subject to certain limitations. 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Dewey Number: 658.4012 Cengage learning Australia level 7, 80 Dorcas Street South Melbourne, Victoria Australia 3205 Cengage learning New Zealand Unit 4B Rosedale Offce Park 331 Rosedale Road, Albany, North Shore 0632, NZ For learning solutions, visit cengage.com.au Printed in China by RR Donnelley Asia Printing Solutions limited. 12 345671413 12 11 10 564 CASE 13 Nestle: Sustaining growth in mature markets Dr Sebastian Raisch, Flora Ferlic* university of St Gallen When Peter Brabeck-Letmathe took over as CEO of Nestle in June 1997, he inherited a company that enjoyed the leading position in the global food industry. His predecessor Helmut Maucher, the CEO between 1982 and 1997, had divested the frm's unattractive activities, while establishing its position in higher-margin segments such as pet food and water. Maucher had transformed Nestle from a manufacturer with a strong European base focused on milk and coffee, into a truly diversifed global food company During his 16-year reign, sales had more than doubled, profts had tripled and the total return to shareholders was an excellent 17 per cent annually.! (See Appendices 1 and 2.) Despite Nestle's success, one fundamental challenge would have to be dealt with in the coming years: revitalising the group's organic growth in a maturing market. Maucher had heavily relied on acquisitions to develop Nestle. He had invested more than CHF33.1 billion in a string of takeovers, including those of Carnation in 1985, Buitoni and Rowntree in 1988 and Perrier in 192.2 This expansion strategy had helped the frm reduce its dependence on coffee sales, while gaining suffcient scale and market reach in its new business segments. By 1997, however, the limits of the external growth strategy had been reached with Nestle ranked frst in nearly all the product segments in which it operated.3 Brabeck was well aware of the need for strategic reorientation: * This case was written by Dr Sebastian Raisch and Flora Ferlic, university of St Gallen. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was made possible by the cooperation of Nestle SA. © 2006, University of st. Gallen. No part of this publication may be copied, stored, transmitted, reproduced, or distributed in any form or medium whatsoever without the permission of the copyright owner. All $ amounts are presented in US dollars. Our frst priority is to achieve real internal growth. Internal growth reflects the company's performance and competitiveness better, even more so than acquiring anocer company's turnover. Acquisitive growth requires three people: a manager, a lawyer, and a banker. You need to activate 250000 people for organic growth - the entire organization. However, it is a far more sustainable path to growth4 One of Brabeck's frst actions as CEO was to move Nestle's goal of 4 per cent real internal growth to the top of the company's strategic agenda.5 Compared to an average market growth of just 2 per cent in the mature global food industry, this goat was rather challenging.6 To reach this target , Nestll had to grow at twice its competitors' rate. Nestle frst achieved its 4 per cent internal growth target in 2000 and consistently repeated this performance in the subsequent years. Since 2000, the company has signifcantly outperformed the food sector and realised higher organic growth than any of its major competitors.7 Nestle's success can be related to Brabeck's unique campaign for proftable growth. In this case study, we return to the initial situation in 1997 and retrace the company's development over the following decade. The objective is to outline Brabeck's most important strategic and organisational initiatives that enabled the company to achieve a rate of proftable internal growth that was far above its competitors. Nestle in 1997 In 1997, Brabeck took control of one of the oldest and most truly global companies in the food industry, with international activities dating back to its beginnings in 1866. Over the previous 130 years, Nestle had acquired profound knowledge of markets all over the world, and enjoyed great success in adapting its products to local tastes. The company operated factories in 77 countries and sold its products on all six continents. Offering thousands CASE 13 NE STLE: SUSTAINING GROWTH IN MATURE MA RKET S of local products, Nestle is often referred to as a role model company that thinks globally but acts locally In 1996, the year before Brabeck took control, Nestle had generated sales of CHF 60 billion and a net income of CHF 3. billion.s At the time, its product portfolio comprised 19 categories from coffee, milk and confectionary to pet foods, clinical nutrition and mineral water. The company was either the market leader or held a strong second position in most of its product segments. Businesses in which Nestle had failed to reach a dominant position had largely been divested under Maucher's reign. Its core food and beverage businesses contributed to more than 95 per cent of the company's 1996 sales. Its top fve product categories (coffee, milk products, confectionary ophthalmics and dehydrated cooking aids) accounted for 60 per cent of group sales and more than 75 per cent of operating profts.9 Despite Nestle's leading position, Brabeck was faced with considerable challenges that stood in the way of his objective of 4 per cent real internal growth. The most important of these challenges was that the company generated more than 70 per cent of its sales in mature markets with a limited potential for organic growth.1O The leading countries in terms of market size, such as the United States, Russia, and Japan, were also the ones yielding the lowest growtyates. Besides the challenging market conditions, Nestle was increasingly facing ferce competition as many food-producing rivals had achieved signifcant improvements in their operating effciency Although the number of truly global competitors was limited - the most notable being Kraft, Masterfoods, and Unilever - Nestle was also facing strong competition at the national and regional level. II The growing competitive pressure was exacerbated by Nestle's relatively weak proftability whose root causes could be traced to Nestle's various acquisitions. Although strategically important, the acquisitions had required massive investments and their integration had negatively affected operational effciency The EBIT margin in the core business was roughly 12 per cent, but the acquired businesses' margin had sunk to 6 per cent. 12 Furthermore, Nestle's portfolio included several low-margin product segments that negatively affected proftability In 1997, the company ranked eighth among the world's top 12 packaged food companies in terms of returns on capital. Its net margin was only half that of its major rival Unilever.13 Earning the right to grow Brabeck had to identify new growth opportunities to realise his goal of 4 per cent internal growth. Organic growth in mature markets could only be reached by strengthening Nestle's innovative capacity This approach required signifcant investments in the group's R&D and marketing capabilities. Because Nestle has always been a model of rock-solid accounting, Brabeck intended to generate the massive cash flows required for a large-scale growth offensive by improving the company's capital effciency His strategy was to force the businesses to become more effcient by cutting back on their investment budgets: 'The investment budget is declining. Our efforts must switch to maximising existing assets, maximising capacity utilisation and maximising distribution logistics'.14 Paradoxically the frst task on the road toward achieving the internal growth target was thus to strengthen the company's operational effciency Lars Olofsson, the fonner head of Nestle Europe, explains: 'The real objective is to generate growth. To reach this objective, however, costs have to be reduced so that we can have more resources that can be used to strengthen the brands, spur innovation and thus allow us to remain competitive'. 15 Initially Brabeck launched a manufacturing effciency program called MH97 The objective was to reduce raw material costs and to optimise production processes. Between 1997 and 2002, 165 factories were closed, which generated savings in excess of CHF 4 billion. 16 MH97 was followed by a program called Target 2004+ that focused on improving operating performance by creating a regional manufacturing network. The project relied strongly on benchmarking and best practice transfer. By refocusing on a small number of high-performing factories, the program generated savings of more than CHF 3 billion between 2002 and 2004.17 Target 2004+ was succeeded by a program called Operation Excellence 2007 that redeploys many of the prior projects' concepts. This program's key objectives are to improve supply chain productivity optimise planning, eliminate overheads, and reduce product complexity In addition to the manufacturing-related effciency programs, Nestle initiated the FitNes initiative to drive effciency in the group's administrative processes. FitNes was launched in 2002, and it is predicted to incur savings in excess of CHF 1 billion. IS Wolfgang Reichenberger, former CFO of Nestle, comments on FitNes: 'It's an area that the group has not addressed in the past, it's uncharted territory and it's fascinating'. 19 565 566 CASE 13 NE STLE: SUSTAINING GROWTH IN MATURE MA RKE TS The most important business transformation initiative in Nestle's 140-year history is, however, the Global Business Excellence (GLOBE) initiative, launched in 2000. Although it covers a broad range of strategic objectives, the program is also designed to improve operational effciency by integrating the company's businesses on a global scale. The project's major objectives are to establish best practices in business processes, to align data standards, and to install common information systems. Due to Nestle's highly decentralised structure and its large number of acquisitions, it runs multiple versions of accounting, planning, and inventory software. Sharing information between markets and operating units is thus diffcult. The project's impacts range from the way raw materials are bought, to production, marketing, and sales. 'We're now transitioning to become a genuinely global food company, to behave as one', says the former CFO Reichenberger. He describes the program's main benefts as follows: 'When GLOBE has been introduced in the most relevant markets, all inter-market systems will communicate much better with each other than they do now. Through these aligned systems we should achieve substantial improvements over the years to come' .20 By the end of 2005, GLOBE had been rolled out to 30 per cent of the businesses.21 It is projected that GLOBE will enable total savings of CHF 3 billion.22 Besides these programs directed toward increasing Nestle's operational performance, Brabeck also worked on reducing marketing expenditures by better exploiting the synergies between brands. Brand strategies were centralised as far as possible to drive synergies and increase control. The most important strategic initiative was to allocate as many of the company's 127 000 products as possible to six strategic brands: Nestle, Buitoni, Maggi, Nescafe, Nestea and Purina. By 2005, more than 70 per cent of the company's portfolio belonged to one of these six brands.23 These strategic brands deliver higher margins, occupy more shelf space, and help retailers generate top­ line growth. Nescafe, for example, has a brand value of nearly CHF 15 billion, a name recognition of almost 100 per cent in the world's leading markets, and margins of about 18 per cent.24 The remaining local brands have been complemented with the Nestle logo, a bird's nest with a parent bird and two hatchlings, to strengthen product identity and to communicate product characteristics such as quality taste, and safety25 (See Appendices 3, 4 and 5.) The effciency initiatives' combined outcome has been impressive. Nestle's net margin rose from 5.7 per cent in 1997 to 8.7 per cent in 2005. The various cost initiatives incurred total savings of CHF 12 billion. Net income soared from CHF 4 billion in 1997 to CHF 8 billion in 2005, while the free cash flow nearly doubled.26 The nutrtion and wellness initiative Nestle's effciency improvements were the basis for further strong investments in internal growth. Brabeck's primary task shifted toward generating new sources of growth for the company's future expansion. 'It was clear that with tomato paste, oil and dry pasta, we were not going to create value in the long term', Brabeck said, referring to the low­ growth products that Nestle had largely divested in the past decade, 'We had to identify areas from which new growth could come'Y Early on, Brabeck sensed that the growing demand for wellness and nutritional products could provide an excellent opportunity for sustained growth in Nestle's mature markets. 'Brabeck was on a nutrition kick long before it was fashionable', says John McMillan, analyst at Prudential.Z8 One of Brabeck's frst offcial acts as CEO was the creation of a dedicated unit engaged in nutrition related to performance, infants and diet. The rationale behind the new unit was to develop an innovative product segment with a strong potential for future growth and considerably higher margins than traditional products in the food industry. Building on this frst initiative, Brabeck announced his vision of transforming Nestle from a food company into a food, nutrition, health and wellness company in 2000. An entire package of measures, which included strategic initiatives and organisational changes, was implemented to integrate nutritional thinking into the group as a whole. In pursuit of a strong internal growth potential, Brabeck aimed at two main strategic goals. The frst objective was to develop nutrition and wellness as a value-added feature in the mainstream food and beverage business. The second objective was to reinforce the company's leading position regarding specialised nutritional products. The creation of two dedicated business units, the Corporate Wellness Unit and the Nestle Nutrition Unit, reflected these twin objectives. The creation of the Corporate Wellness Unit was directed at fulflling the frst strategic objective, namely CASE 13 NE STLE: SUSTAINING GROWTH IN MATURE MARKE TS spreading Nestle's nutrition and wellness orientation throughout the group and across all product categories. Matt Hall, head of the strategic unit 'Generating Demand', describes the strategy: 'Nestle remains within its traditional products and categories, but starts leveraging these products. We increase their value by adding health and nutritional elements'.29 Aspects of health, wellness and nutrition are incorporated into a vast array of product categories, ranging from ice cream, frozen foods and confectionaries to pet food. The elements added to the existing products promote digestive health, improve the immune system and skin's defences, positively affect weight management as well as physical and mental performance, and contribute to healthy aging. To date, Nestle has modifed more than 700 products by adding nutritional functionalities.30 An example of such a nutritional value added is Prebio, a supplement that promotes intestinal health and is added to infant nutritional products. Other examples are Calci-N, which promotes bone health, and ActiCol, which lowers plasma cholesterol. The company refers to these add-ins as 'branded active benefts' (BABs). The frst products enriched with BABs were introduced as long ago as 1998. The Nestle Nutrition unit is focused on the core nutrition business. The Nutrition unit provides products for those consumers whose primary purchasing motivation is the products' nutritional vaL e, while taste is simply a value added. The product portfo io encompasses infant formulas, hospital nutrition, baby cereals and sports nutrition. These products operate in a medical environment and require strong scientifc support and long-term research and development. Nestle devotes about one-ffth of its overall R&D budget to nutrition research. Three-quarters of the current projects at the central Nestle Research Centre (NRC) in Lausanne focus on health and well-being.3l Besides these two dedicated units, Nestle established a number of ventures for growth into new areas related to wellness and nutrition. In cooperation with L'Oreal, one of the world's largest beauty and cosmetics companies, Nestle moved into the area of nutricosmetics. Under the brand name Inneov a joint venture by Nestle and L'Oreal, a range of products has been developed that combines Nestle's knowledge of nutrition with L'Oreal's expertise in beauty products. The products are aimed at improving the quality of skin, hair and nails by supplying nutrients that are essential to their care. Inneov quickly gained a leading position in this high-growth segment. By 2005, Inneov had already achieved an 11 per cent market share in Europe.32 Nestle's nutrition business contributed signifcantly to the company's success. Sales generated by products with added nutritional benefts grew from CHF 200 million in 1998 to CHF 3 billion in 2005. Furthermore, these products' proft margins are twice as high as those of traditional food products, and thus contribute strongly to Nestle's margin improvements.33 Strengthening innovation Nestle is considered the innovation leader in the global food and nutrition sector. The driving force behind the innovation is the company's extensive research and development (R&D) network. More than 3500 scientists work on improving existing products and creating tomorrow's nourishments.34 Strengthening the company's R&D success was a key objective in Brabeck's quest for internal growth. Three strategic measures contributed to this objective. First, Brabeck set the company's R&D activities a challenging target: one-ffth of the entire product portfolio has to be innovated or renovated every year. Innovation refers to moving the group into promising new product segments, whereas renovation relates to improvements to existing products, such as changes in the packaging, shape, taste, or quality. The distinction is an important one for Nestle, as explained by Herbert Oberhaensli, Head of Economics and International Relations, 'You always need to renovate your existing offer in order to keep the products alive. However, renovation and innovation do not contradict each other. Improving our products is a process of many small steps and a few big leaps. We have to do both if we want to be successful'.35 Especially in mature markets where Nestle generates the bulk of its sales, the continuous upgrading of existing products is an important source of internal growth. As Brabeck puts it, 'There are no 'mature markets', only mature managers'.36 Two-thirds of the company's R&D activities are dedicated to renovating existing products, while the remaining third is reserved for more radical product innovations.37 (See Appendix 6.) Second, a strong budgetary increase as well as improvement in its operating effciency enabled the R&D to achieve these challenging targets. Nestle's R&D expenditures nearly doubled, increasing from CHF 770 million in 1997 to CHF 1.5 billion in 2005.3 8 At the same time, the R&D effciency increased through improvements 567 )68 CASE 13 NESTLE: SUSTAINING GROWTH IN MATURE MA RKETS on the operational leve!. Rupert Gasser, who was in charge of Nestle's R&D activities when Brabeck took over, said, 'We eliminated a number of R&D units that were dealing with issues with resources that were below a critical minimum required to do an effcient job. We then redeployed their resources to established centres that had all the technical and scientifc know-how needed to support the renovation and innovation process in a given business area' 39 Third, a number of organisational changes were made to improve the R&D's connection with the markets in which Nestle operates. The most relevant of these organisational measures were the creation of Product Technology Centres, Local Application Centres and Clusters. The Product Technology Centres' (PTC) objective is to transform research concepts provided by Nestle's fundamental research centres into consumer products. These centres are closely linked to the company's strategic business units and are located in key consumer markets. The PTCs allow ground-breaking innovations to be transformed into marketable products more swiftly Currently there are nine PTCs located in France, Germany Great Britain, Switzerland and the United States.40 Local Application Centres work inside the most relevant regional markets and are concerned with adapting global products to local tastes and requirements. Local tastes in respect of culinary products, such as prepared dishes, cereals, or confectionary vary widely For a global company like Nestle, market success depends heavily on the ability to adapt its products to local needs. Apart from adaptations in taste, colour and shape, the form and/or packaging of products are also frequently changed. There are, for example, more than 100 local variations of Nescafe offered around the world. As Jean-Daniel Luthi, senior vice president and group controller, explains, 'You have to know the consumer in different places of the world; you need the capabilities to make your products in one place and sell them many thousands of kilometres away'. 41 Clusters are cross-divisional project structures designed to improve the communication and knowledge sharing between the R&D and the rest of the company. Clusters unite researchers with the heads of business and regional units that face similar market environments. The objective is to jointly launch R&D initiatives with respect to new product development. Cooperation in clusters results in synergies, shared investments, and faster product roll­ outs. Products developed witl1in these clusters are either implemented as global solutions, or as 'cluster solutions' in the participating regions. If necessary the company's local application centres adapt the provided solutions to the specifc market requirements.42 Nestle's seven strategic business units are the driving forces behind the clusters and, more generally behind product development and consumer-oriented renovation and innovation. Contrary to geographical zones that are operationally responsible for their businesses, and have clearly set annual proft targets, strategic business units are free from such short-term targets and thus free to fully concentrate on sustainable long-term development. They develop global business strategies for their respective categories in which they describe how the product segments should evolve over the next three to fve years, what innovations are required and how much of the portfolio should be renovated. In close cooperation with the markets and R&D, the strategic business units lead Nestle's innovation process and ensure cooperation and communication between the company's disparate units.43 External growth as a platform for organic growth Despite his dedication to internal growth, Brabeck did not entirely turn away from acquisitions, but used external growth as a means to spur and enable Nestle's internal growth. Luis Cantarell, executive vice president of Nestle Europe, clarifes: 'You cannot establish a company on external growth; however, you can use external growth to support internal growth'.44 Similarly , Brabeck understands acquisitions as frst and foremost a platform for further organic growth: 'The emphasis is clearly on organic growth, with acquisitions being used to accelerate it'45 One motivation behind Brabeck's acquisitions was to gain a critical mass in terms of market share in businesses in which scale is vital for success. As in many other industries, size provides considerable economies of scale in the food industry Brabeck had always asserted that he wanted Nestle to be the market leader, or at least hold a strong second position in all product categories. Although the company had indeed reached a critical mass with the majority of its businesses, some segments still had a poor geographical reach. Consequently , the acquisition of Dreyer's, for example, helped Nestle to become market leader in the U.S. ice cream business.46 The Ralston Purina CASE 13 NESTLE: SUSTAINING GROWTH IN MATURE MA RKETS acquisition in 2002 made the company the global leader in pet care. Most recently the acquisition of Jenny Craig, a weight management company reinforced Nestle Nutrition's presence in the United States, the world's largest nutrition and weight management market.47 Besides the objective of reaching a critical mass in terms of market share, Brabeck used external growth to gain expert knowledge for further expansion into new product segments. Nestle introduced two venture funds to gain access to new expertise, thus giving the research and development additional impetus. The company founded the Life Ventures fund (capitalised with CHF 235 million) in 2002, and the Nestle Growth Fund (of CHF 790 million) in 2005. Both funds use acquisitions, as well as minority investments, licensing and joint ventures to give Nestle access to new technology and knowhow. They both invest on a global scale and focus on long-term capital growth.48 The rationale behind the creation of the Life Ventures fund was to accelerate Nestle's innovation process. By investing in start-ups in the area of nutrition and food science, Nestle gains access to leading-edge know-how and may incorporate these ideas into its own R&D network. In 2003, for example, the fund invested in eight businesses in the felds of naturally derived bioactives, phytonutraceuticals and health care nutrition.49 The Nestle Growth F hd invests in companies on the verge of entering the market with their products. 'This fund will contribute signifcantly to fostering and accelerating the group's expansion into health, wellness and nutrition, as it will be investing in companies with products or processes in the fnal testing stage or about to enter the market. The idea is to accelerate Nestle's strategic repositioning as a health, nutrition and wellness company', said Francois­ Xavier Perroud, a group spokesperson. 50 The idea is to grow these companies until they are large enough to integrate their products into Nestle's mainstream business. It should be noted that Nestle is one of the most successful companies regarding the effective integration of acquisitions. Its secret recipe is its patience. There are, for instance, no rules whatsoever limiting the amount of time invested in integrating an acquired company This slowness provides ample time to identify synergies and select the most appropriate integration approach. Additionally great importance is accorded to retaining as many of the acquired company's employees as possible. Besides patience and the willingness to accept the acquired company's distinct culture, Nestle's readiness to promote managers from the acquired company to its head offce is regarded as a main success factor.51 The CEO of Rowntree, a company that Nestle bought in 1988, was, for example, appointed to its head offce and became the general manager of its chocolate and confectio nary business. As Tom Coley head of Nestle's dairy SBU, puts it: 'You obtain additional sales and, what is a lot more important, you obtain additional competencies if you acquire a business'. 52 Besides acquisitions, divestitures played an important role in aligning the group's product portfolio to the objective of sustainable organic growth. Between 1997 and 2005, Brabeck divested numerous activities that either yielded low margins, or offered only limited growth opportunities. The divestitures were related to canned foods, cheese and meat and parts of the frozen food and the confectionary businesses. In addition, Brabeck moved Nestle from commodity food processes, such as raw material conversion, toward the consumer and added­ value areas of the food industry's value chain by divesting manufacturing assets and processes. The proceeds of these divestures were reinvested in acquisitions and product development in areas promising higher growth and returns. 53 (See Appendices 7 and 8.) Nestle today Currently Nestle commands a product portfolio comprising food for every eating occasion, for every age and for every evolutionary stage within a country In 2005, the group posted sales of CHF 91 billion and record profts of CHF 8 billion. 54 Under Brabeck's tenure, the 140-year-old food giant has been revitalised and well-prepared for future challenges. Brabeck will hand over the company's reins in 2008. His successor faces the task of maintaining the successful company's momentum. Further efforts will be required to boost the health and nutrition sales in the face of tough competition. Relentless renovation and innovation are essential to retaining and improving the frm's position. (See Appendix 9.) In the words of Luis Cantarell, executive vice president of Nestle Europe, I think that the main challenge is a question of ambition. It is about people not accepting that our job is done. I think it is also a question of mind-set. We need to make sure that Nestle's people are thinking about how we could be delivering better grow tll , because growth is the basis of everything we do.55 569 70 ESTLE: SUSTAIN ING GROWTH IN � ,�. more detailed information about Nestle's development under its former CEO Helmut Maucher, please refer to E. Ashcroft and R. A. Goldberg, 1996, Nestle and the TWenty-First Century, Harvard Business School cases. 2 W. Hall, 1997, 'Maucher steps aside at Nestle', Financial Times, May 7. 3 G. von Pilar, 1996, 'Nestle erwartet Nachfragebelebung'. Lebensmittel Zeitung, November 22. 4 Personal interview with Peter Brabeck (November 19, 2004; vevey, switzerland). For related quotes, please also see Brabeck's interview with S. Wetlaufer, 2001, The business case against revolution, Harvard Business Review 79: 112-119. 5 Real internal growth equals sales growth less impact from acquisitions, divestitures, price changes, and foreign currency exchange rates. At Nestle, real internal growth of 4% equals an organic growth of roughly 6%. 6 For more details about the food industry'S specific characteristics, please refer to M. O'Bornick, 2004, The top 10 global leaders in food, Business Insights ltd. 7 Transcript of a presentation on Strategic Demand Generation held by Ed Marra at the Nestle Investor Seminar 2005. 8 Nestle Annual Report, 1996. 9 K. Mahon and A. Smith, 1998, NestJ Schroders Broker Report. 10 E. Ashcroft and R. A. Goldberg, 1996; op. cit. 11 M. O'Bornick, 2004; op. cit. 12 K. Mahon and A. Smith, 1998; op. cit. 13 Data taken from the Thomson One Banker database. 14 K. Mahon and A. Smith, 1998; op. cit. 15 G. von pilar, 2004, 'Effizienz ist Treibstoff fOr Dynamik'. Lebensmittel Zeitung, October 29. 16 N. A., 2004, Nestle's future, The Economist, August 7. 17 http://www.ir.nestle.com. 18 Ibid. 19 B. McLannahan, 2003, Nestle's crunCh, CFOEurope.com, February. 20 B. McLannahan, 2003; op. cit. 21 W Ackerman, A. Smith, S. Peterson, and J. Stent, 2006, Nestle SA, Citigroup Broker Report. 22 N. A., 2002, 'Financing the future at Nestle', corporate Finance, November 1. 23 Personal interview with Matt Hall (September 21, 2005; vevey, Switzerland). 24 R. A. Goldberg and H. F. Hogan, 2002, Nestle SA, Harvard Business School Cases. 25 Personal interview with luis Cantarell (January 16, 2006; vevey, Switzerland). 26 We calculated these figures based on data published in Nestle's annual reports. MATURE MA RKETS 27 D. Ball, 2004, 'With food sales flat, Nestle stakes future on healthier fare', Wall Street Joumal, March 18. 28 J. Caplan, 2005, 'Nutritious Nestle', Time Magazine, April 11. 29 personal interview with Matt Hall (September 21, 2005; Vevey, Switzerland) . 30 M. Kowalsky and E. Nolmans, 2005, Peter Brabeck: Der prophet des Wachstums, Bilanz, March. 31 D. Ball, 2004; op. cit. 32 Nestle Annual Report, 2005. 33 W. Ackerman et ai, 2006; op. cit. 34 N. A., 2002, 'Forschung ist die Grundlage des Erfolges', Die Presse, May 13. 35 personal interview with Herbert Oberhaensli (October 12, 2005; Vevey, Switzerland). 36 personal interview with Peter Brabeck (November 19, 2004; Vevey, Switzerland). 37 Personal interview with Matt Hall (September 21, 2005; Vevey, Switzerland). 38 Data taken from the Thomson One Banker database. 39 R. A. Goldberg and H. F. Hogan, 2002; op. cit. 40 personal interview with Herbert Oberhaensli (September 12, 2006; Vevey, Switzerland). 41 Personal interview with Jean-Daniel luthi (September 21,2005; Vevey, Switzerland). 42 Personal interview with Tom Coley (October 17, 2005; Vevey, Switzerland) . 43 Personal interview with Tom Coley (October 17, 2005; Vevey, switzerland) . 44 Personal interview with lUis Cantarell (January 16, 2006; vevey, switzerland). 45 M. Gelnar, 2006, 'Nestle will continue to look for acqUisitions', Dow Jones Interational News, April 6. 46 N. A., 2003, Nestle: 'Beh5rde gegen Fusion mit Dreyer's', Lebensmittel Zeitung, Marz 5. 47 Datamonitor Company Profiles, 2004, Nestle S.A. - SWOT Analysis, Datamonitor PlC. 48 Nestle Annual Reports (2003; 2005). 49 Personal interview with luis Cantarell (January 16, 2006; Vevey, Switzerland). 50 T. wright, 2005, 'Nestle surprises with new finance chief and a fund', Intemational Herald Tribune, September 27. 51 A. J. Parsons, 1996, Nestle: The visions of local managers, MCKinsey Quarterly, February. 52 Personal interview with Tom Coley (October 17, 2005; vevey, switzerland). 53 R. A. Goldberg and H. F. Hogan, 2002; op. cit. 54 Nestle Annual Report, 2005. 55 Personal interview with Luis Cantarell (January 16, 2006; vevey, Switzerland). CASE 13 NESTLE: SUSTAINING GROWTH IN MATURE MA RKETS A P PEN 0 I X 1 Nestle's sales and net income development Total Sales 1997-2005 (in CHF millions) 95,000, 90,000 f------------:----�£ . ' 85,000f---------- t� ---------_ 80,000 1------- �< ------------_ L 75,000 I-� ---- �- ---------------- 70,000 f+=------------------- 65,000 f 60, 000 �:- ::��_:__:: __ __: _== 1997 1998 1999 2000 2001 2002 2003 2004 2005 Net Income 1997-2005 (in CHF millions) 9,000 8,000 7,000 6,000 5,000 �OOO 3,000 2,000 � / / � L � 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Worldscope. Source: worldscope. 571 ' N :.'-�"� ( ) ( m . w z APPENDIX 2 Nestle financial informat ion, 1997-205 m ( - r m, Sales 69998 71747 74660 81422 84698 89160 87979 86769 91075 3.34% ( c ( Tot al operat ing Expenses 62758 64423 66344 71924 75622 80530 79108 78082 79706 3.03% - > Cost s of Goods Sold 33127 33354 33223 35205 35025 35790 34920 33362 35218 0.77% z z Research and il 777 807 893 1038 1162 1208 1205 1413 1499 8.56% G Development Expenses G : 0 EB IT 7245 7787 8331 9701 9647 10778 9214 8769 11055 5.42% : - Net Income II 4005 4291 4724 5763 6681 7564 6213 6717 7995 9.03% I z Total Asset s 53727 54401 56646 62955 91868 85833 88163 85648 101700 8.30% S > Current Asset s 25586 26562 27080 30662 39008 35342 36233 35285 41765 6.32% - c Total Liabilit ies 28396 30805 31568 32442 57639 50201 50340 45372 50265 7.40% : m Current Liabilities 20985 22591 22182 23174 41492 33 737 30365 29117 35818 6.91% S > : Cash Flow 6999 7201 7797 9093 9906 11733 10447 11100 10723 5.48% ; m - ROE II 16.41% 18.64% 19.32% 19.27% 19.85% 21.72% 16.85% 17.13% 16.04% ( ROA 9.89% 10.03% 10.47% 11.76% 11.97% 9.25% 8.16% 8.43% 10.24% Number of Personnel 225808 231881 230929 224541 229765 254199 253000 247000 250000 1.28% Source: Worldscope. CASE 13 NESTLE: SUSTAINING GROWTH IN MATURE MA RKETS A P PEN D I X 3 Nestle's sales per reg ion and product segment, 2005 Nestle Sales per Region, 2005 13% Nestle Sales per Prduc segment, 2005 12% / 6% 1% 3% 3% 31% o Europe • USA and Canada o Asia o Latin America and Caribbean • Africa o Oceania • Beverag es • Milk Products, Nutrition, and Ice Cream o Prepared Dish es and cooking Aids o Ch ocolate, Confectionary, and Biscuit s • Pet Care o Pharmaceutical and Cosmetic Joint Ventures o Oth ers A P PEN D I X 4 Nestle EBITA marg ins per reg ion and product segment, 2005 Nestle EBITA Margin per Region, 2005 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Europe EBIT A Margins 2005 Americas ASia, Oceania, and Africa Source: Worldscope. Source: worldscope. source: Worldscope. 573 :74 CASE 13 NE STLE: SUSTA ININ G GROWTH IN MATURE MA RKETS Nestle EBTIA Margin per Product segment, 2005 EBITA Margins 2005 35% , 30% r 25% r 20% r 15% 10% 5% 0% A P PEN D I X 5 Nest le's corporat e sig n and the six st rateg ic brands I :/./�� : . : : --- .. --.... . \ . : � � • I . . Nesle ,/ "" .. ' Source: Worldscope. C . C A P PE N D I X 6 Nestle's worldw ide research and development netw ork Solon (R&D) - Marysville (R&D) - ONRC • PTCs(8) R&D Centres (9) Amiens (R&D) York (PTe) Vittel (PTe) Tours (R&D) � , . � Konolfing en (PTe) Orbe (PTe) �'' Sing apore (R&D) � . Sh ang hai (R&D) . Lausanne (Nestle Research Center) 1 Parma (R&D) ' Casa Buitoni (R&D) Source: www.ir.nestle.com/News_Events/Presentations/Group_presentations/Group_General/. n : U m . w Z m V - r m- V C V - : z Z G G ; o � - I z S : - C ; m S : ; A m - V 76 CASE 13 NESTLE: SUSTAINING GROWTH IN MATURE MA RKETS A P PEN D I X 7 Total Shareholder Return (T SR) development in healt h, wellness and food & beverag es market s, 1995-2005 10-year (T SR) 08/95 = 100 700 . 600 � 500 � 400 � 300�---------��r�=��--- ���----�� 100���= --------------------� OL_ �L _ � __ � __ � __ � __ _ __ _ __ _ __ � _ � 1995 1996 1997 1998 1999 2000 2001 2002 2003 -Healt h -Wellness - Food & Beverages I 2004 2005 Source: www.ir.nestle.com/News_Events/Presentations/Group_presentations/Group_General/. A P PEN D I X 8 Total shareh older return of Nestle and it s main compet it ors Food 1 Year 3 Years 5 Years 10 Years Hersh ey 1% 73% 88% 306% Nest le 35 44 15 267 Danone 32 46 20 248 Procter & Gamble 7 43 64 235 Unilever 22 10 0 190 Cadbury Sch w eppes 16 56 37 177 General Mills 2 13 26 127 Heinz -11 13 -6 57 Campbell 2 36 -2 31 Coca Cola 3 -2 -27 26 Kraft -19 -22 N/A N/A Source: www.ir.nestle.com/News_Events/Presentations/Group_Presentations/Group_General/. U . . " A P PEN D I X 9 Timeline of Nestle's ma j or strategic and org anisat i onal chang es on th e road to sustain ing gr owt h in mature mar k ets Announcement Brabeck beats of 4% RIG targ et of 4% RIG targ et Launch of first Launch of GLOBE Foundation of manufacturing in i tiative Life Ventures efficiency Fund pr og ram MH97 Creation of a Introduction of first Announcement of Launch of Foundation of ded icated unit products enriched transforming Nest l e efficiency Nestle Nutrition eng ag ed in with BABs into a food , prog rams and the performance, nutr ition , health , Targ et 2004+ Corporate infant, and and well ness and Fit Nes Wellness Unit cl inical company nutrition • 1997 1998 2000 2002 2004 Cr eat i on of clusters to spur innovation Foundation of Nestl e Grow th Fund 2005 o ) ( m . w Z m U - r m· U C U - l z z G G : o � - : z s l - C : m s l : A m - U