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Analysis of Nestlé’s Business Environment

| January 17, 2017

Company Overview

Nestlé, based in Switzerland, is the world’s leading food and nutrition company measured by revenues (Nestlé, 2013). The company sells baby foods, breakfast cereals, coffee, confectionery, frozen food, pet foods, yoghurt and snacks through extensive distribution channels all over the world spreading out from facilities run by the company in over 100 countries. It owns several major consumer brands such as Stouffers, Nescafe, Kit-Kat, Carnation, Nestlé water, among many others used by millions each year and which have established Nestlé’s successful global brand image (Interbrand, 2013). This success can be attributed to clear focus and vision, as well as success in its continual differentiation and brand positioning which strengthen its market position (Jones, 2012).
To sustain this success and thus maintain leadership in its market, the company must often audit and review its strategic position in light of changing factors in its business environment. This paper undertakes this strategic assessment employing the PESTLE framework of analysis.

PESTLE analysis

The PESTLE framework is a strategic tool used to measure market potential and situation of company (David, 2009). It focuses on factors in the external environment which encompass effects from the political, economic, social, technological, legal and environmental spheres.
Political factors
With operations spread out across the globe, Nestlé is liable to political influences unique to various jurisdictions including applicable laws and regulations governing business operations, as well as stringent international health and safety requirements of significance in the food and nutrition sector, such as the ISO 9002 and HACCP (Hazard Analysis Critical Control Point) preventative food safety systems. The primary goal of these regulations is the protection of consumers from poor quality, potentially health averse/harmful products (Hill, 2006). The company has suffered challenges related to contamination of its products and poor quality supplies which have led to product recalls and market concern. This has hurt the company’s image and impacted sales as well as challenging it with regard to quality control (Nestlé, 2013). The company has responded appropriately to address these, to ensure quality and safeguard confidence in its products (Jones, 2012). For successful engagement internationally, Nestlé should endeavour to meet these expectations and to conform to the requisite legislations and regulations applicable.

Economic factors

The global business environment has recently been significantly hindered by economic setbacks due to downturn and global recession. These have adversely affected demand for products through its effect on consumer spending. However, recovery has been swift and the continuing globalization and consolidation has further enhanced growth and demand for product with the convergence in consumer tastes and preferences globally (Hanson et al., 2011). The rise in emerging market economies portends surplus buying power, as well as economies of scale which proffer added economic advantage (Vandewaetere, 2012).
The leverage of huge resource capital and R&D capability into continual introduction and redesign of products enables Nestlé to strengthen its competitive advantage. Through the localisation of operations in over 100 countries across the globe, the company manages to address the impact of foreign currency fluctuations on import and export aspects of trade (Jones, 2012).

Social factors

As a producer of finished consumer goods, Nestlé is hugely dependent upon customer satisfaction and desirability of its product range to achieve success (Jones, 2012). The company, thus, chooses to embark on huge spending in its competitive sectors to maintain its brand image and to enhance product desirability. Competitive advantage in the sector requires continuous research and development leading to the frequent introduction of new products and redesign of products (Interbrand, 2013). This is a significant strength of Nestlé and among the notable factors upon which its industry, sector or market leadership is based (Nestlé, 2013).
There is an increasing trend towards healthy eating which is increasing demand for healthier food products. This is laden with potential to affect product lines such as chocolate drinks (Jones, 2012). The company has taken specific steps such as the acquisition of specialised start-ups, and successful partnerships to meet the needs of health conscious consumers and thereby to take advantage of emerging market trends and opportunities (Vandewaetere, 2012). Nestlé is therefore considered to be well adjusted to its market segments given its focus on this growth driver as well as its focus on popularly-positioned products which aims to provide a brand to meet every need. Its more than 8,000 brands enable it to achieve this strategic focus and to compete successfully against corporate rivals (Interbrand, 2013).

Technological factors

The fast pace of technological development and associated capabilities portend significant challenge for competitiveness in modern industry. Nestlé has endeavoured to keep up through enormous investments in research and development to enhance its capability, as well as process efficiency which have enabled its successful differentiation and enhanced competitiveness (Nestlé, 2013). However, the company still experiences challenges in its quality control with its inability to provide consistent quality in food products hurting company image and affecting sales (Jones, 2012). The company’s response in this regard has been quite appropriate enabling it to weather this challenge successfully. It has endeavoured to ensure quality in the foregoing and to safeguard confidence in its products through its seal of guarantee initiative (Interbrand, 2013).
Environmental factors
Nestlé is involved in numerous programs aimed at making the company more eco-friendly which are inherent in its CSR initiatives. However, the company is criticised for its weak approach and over the effectiveness of their programs (Jones, 2012; Interbrand, 2013). With the scale of their operations across the globe and massive quantity of output, it is imperative that the company should enhance focus on its environmental impact which is a notable concern in modern industry. This factor has capacity to ruin reputations and affect performance (Hill, 2006).

Legal factors

Global operations in diverse jurisdictions require astute legal capabilities which Nestlé seems to be endowed with. The company’s successful operations in over 100 countries attest to this giving it an edge in unmatched geographical presence in the industry. It also has notable competency in mergers and acquisitions which have enabled it to diversify and to successfully enter new markets thereby sustaining its competitive edge (Vandewaetere, 2012).

Major challenges affecting the company
Three major challenges are identified and explored to gauge their effect and to find out ways in which they might be addressed.

Quality of products and supplies

A major challenge with huge capacity for adverse impact on Nestlé’s business potential concerns the quality of products delivered and thus the quality control schemes for its products. There have been instances of contamination of products as well as poor supplies which have led to a number of product recalls from the market (Interbrand, 2013). This challenge is fundamental particularly with regard to operations in the food and nutrition industry which is subject to stringent quality, as well as health and safety regulations. The company is subject to a high bargaining power of customers for the most part due to the availability of a wide range of substitute and alternative products in the market and fierce competition from worthwhile rivals (Carpenter and Sanders, 2007).
Flouting of health and safety regulations also portends risk for operations in various jurisdictions and may lead to bans in markets and/or restrictions on the use of concerned products. This would definitely be a hindrance to business and would not only adversely impact sales but also would hurt company image and brand positioning which are vital intangible assets in a highly competitive market (Hanson et al., 2011).
To reduce the negative impact of this challenge, the company needs to tighten its quality control procedures and schemes for products and also needs to enforce stringent procedures in the choice of suppliers and in the procurement of raw food items from them (Interbrand, 2013). This would not only guarantee conformance with requisite legislation but would also ensure that quality is maintained and adhered to across the entire supply chain. Also essential are measures to ward off loss of consumer trust and drop in confidence in products offered. Assurances in this regard are critical for the maintenance of brand image and reputation, and as well serve to guarantee product performance in the market (Jones, 2012; Vandewaetere, 2012).
Weak implementation of eco-friendly initiatives
Nestlé pursues eco-friendly initiatives as constituent in its corporate social responsibility (CSR). Yet, these initiatives have been subject to extensive criticism over weakness in its approach and over the effectiveness of their programs (Vandewaetere, 2012). Environmentally friendly initiatives are particularly of concern for such entities as Nestlé given their scale of operations across the globe and quantity of product output considering its 8,000 product brands (Interbrand, 2013). The primary objective of the company is the delivery of the best quality in everything from primary produce, choices of suppliers and transport, to recipes and packaging materials (Nestlé, 2013). However, every stage in its supply chain is bound to have adverse environmental impact which is a notable concern in modern industry given the drive to environmental responsibility. Disregard of such concerns exposes the company to risks to reputation which could have a direct impact on performance (Hanson et al., 2011).

Increasing trend towards healthy eating

With the rise in diseases associated with sedentary lifestyles, food choices, and eating habits, there has emerged global awareness of their impacts on individual health. This has engendered health consciousness and regard for choice of foods and their nutritive value or possible consequences. This has led to a trend towards healthy eating which continues to drive consumer preference and demand for healthier food products (Luthans and Doh, 2012). Such a trend is bound to affect popular product lines, such as chocolate drinks, that Nestlé offers impacting demand and therefore market performance (Vandewaetere, 2012).
In its consumer goods business, Nestlé is hugely dependent upon customer satisfaction and desirability of its products to achieve success. It is thus immensely susceptible to market dynamics and trends such as eh above which it can do very little to control and manage (Kazem and Richard, 2008). The problem is further exacerbated by the emergence of social media and global networking through the internet which continues to drive globalization and which is causing a global convergence of consumer tastes and preferences (Hanson et al., 2011; Luthans and Doh, 2012).
To counter this challenge, the company needs to embark on initiatives to develop a healthier range of products to cater to health conscious consumers and thereby to take advantage of the emerging trend and opportunities. Nestle should be keen to note the various dynamics and their impact on performance, and should develop flexibility which would enable faster response and adaptability to changes in the market (Jones, 2012). With a sound financial resource base, it is prudent for the company to pursue mergers and acquisitions, which it has done quite successfully, leveraging on its competence in that regard (Vandewaetere, 2012). This way, it is able to hasten its learning curve and guarantee success of initiatives (David, 2009) particularly in light of the fact that the company has an immense range of brands and a complex operational matrix which are in themselves quite a challenge to manage successfully.

Conclusion

Several factors affect Nestlé in its international operations among them political, economic, social, technological, as well as environmental and legal factors, which are significant influences determining the success of operations in modern business environment. Three particular challenges are identified as having substantial impact on Nestlé’s operations and business potential. They include: quality of products and supplies which portends loss of confidence in product; the company’s weak implementation of eco-friendly initiatives which are essential not only to check the environmental impact, but also serve as proof for goodwill to society; and, the increasing trend towards healthy eating which is a concern for future competitiveness of the company’s products. These challenges should be addressed to guarantee success of products in markets, as well as overall competitiveness.

References

Carpenter, M., and W., Sanders, (2007). Strategic Management: A Dynamic Perspective. Harlow: Pearson Prentice Hall.
David, F. R. (2009), Strategic management: concept and cases (12th Ed). Pearson, NJ: Prentice Hall.
Hanson, D., M., Hitt, R., Ireland, & R., Hoskisson, (2011). Strategic Management: Competitiveness and globalisation (Asia-Pacific, 4th Ed). South Melbourne, Australia: Cengage Learning
Hill, C., (2006) International Business: Competing in the Global Economy, (7th Ed) Maidenhead: McGraw-Hill
Interbrand (2013). Best Global Brands 2012. Accessed 1/9/2014 from: http://www.interbrand.com/en/best-global-brands/2012/Best-Global-Brands-2012.aspx
Jones, S., (2012). Strategic Management at Nestlé. Accessed 1/9/2014 from: http://www.articlesbase.com/management-articles/strategic-management-at-nestle-5907881.html
Kazem, C., and L., Richard, (2008). Sustainable competitive advantage: towards a dynamic resource-based strategy. East London Business School: University of East London, UK.
Luthans, F., and J., Doh, (2012). International Management: Culture, Strategy, and Behaviour, (8th Ed). Maidenhead: McGrawHill
Nestlé, (2013). Annual Report – 2013 (English). Accessed 2/9/2014 from: http://www.nestle.com/asset-library/Documents/Library/Documents/Annual_Reports/2013-Annual-Report-EN.pdf
Vandewaetere, B., (2012). Personal Interview – 28th November, 2012: Responsible for European Affairs, Nestlé. Accessed 2/9/2014 from: www.Nestle.com

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