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PICTURES COURTESY OF NESTL

GLOBAL MARKETING

Nestl: The visions of local managersAn interview with Peter Brabeck-Letmathe, CEO elect, NestlAndrew J. Parsons

McKinsey: How did Nestl begin? Peter Brabeck-Letmathe: A hundred and thirty years ago, infant mortality was high in Switzerland higher than in most emerging countries today. Henri Nestl was a pharmacist who was worried about children dying. He developed an infant cereal to help feed them. This was the rst Nestl product. Henri Nestl had two big visions. First, he immediately went international: the product was in ve European countries four months ater launch. Second, he wanted his own brand. Store brands private labels already existed, but he was one of the rst to create a manufacturers brand. He also established a strong identity for his company through the nest image that Nestl still uses today. It happens that Nestl in Germany means little nest, symbolizing all the good values of nurturing such as family, warmth, and caring. When distributors asked him why he did not put the Swiss ag on his product, he is said to have replied, Anyone can use the Swiss ag, but only I can use my coat of arms. It will be my seal of quality. His house and rst factories were in Vevey, Nestls headquarters. We also have another head oce in Cham, near Zurich, which is where the other part of the company, a sweetened condensed milk factory, began.Andrew Parsons is a director in McKinseys New York oce. Copyright 1996 McKinsey & Company. All rights reserved.Editors note: Peter Brabeck-Letmathe will become CEO of Nestl in June 1997. Helmut Maucher, who is currently both Chairman and CEO, will remain Chairman until 2000.

THE McKINSEY QUARTERLY 1996 NUMBER 2

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NESTL: THE VISIONS OF LOCAL MANAGERS

Was it condensed milk that carried you around the world? Milk at the beginning, then chocolate, then Nescaf. From the outset, we were an outward-looking company. When you make less than 2 percent of your turnover at home, you dont concentrate too much on your domestic market. Our Swiss operating company is only 2 or 3 kilometers from worldwide headquarters, but we visit them as frequently as that of any other market. Unlike US companies, which try to transform local hires into American businessmen, we are not trying to export a lifestyle. We recognize we are foreigners; we dont try to disguise the fact that we are a multinational company based in Switzerland. Many countries are more comfortable with the fact that we are Swiss than if we were from the United States. Coming from Switzerland gives us a denite advantage as we are considered politically more neutral. It would be foolish to pretend to be a Chilean company, or a Chinese company, just because we have a very strong local presence in those markets. Before the arrival of our current chairman, Helmut Maucher, however, our companies looked very local. They were called Indulac or Chiprodal, for example names connected with the local environment. In many markets, Nestl as a company name didnt exist. Then we said, this is absurd. If governments or activists want to attack one of our companies, they only have to look at our annual report to know its true identity. Whats wrong with presenting ourselves as we are? We should be proud we are Nestl, not hide away making believe that we dont want to be a multinational. So we changed our policy and gave every company in the group our own name. Another distinctive aspect of your culture seems to be that you take a long view. You were one of the few that did not bail out of India, for instance.

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THE McKINSEY QUARTERLY 1996 NUMBER 2

NESTL: THE VISIONS OF LOCAL MANAGERS

We didnt bail out of India in the 1970s; we stayed in Chile under Allende. We dont normally quit just because there is a change in the political situation. When you are forever looking out for your short-term interests, you are not a reliable partner. Look at the way American money owed in and out of Mexico if you want to see what devastating efects short-term speculative investment can have on a country. It is bad enough for the investor who loses a lot of money; for the local people, it is even worse. But the company that stays, and carries on investing when things look bleak, and builds up a business, and creates jobs its relationship with the country is quite diferent from that of a company that is forever coming and going. Do you also take a long view nancially? Clearly, we are not driven by quarterly prots. Indeed, our current chairman, Mr Maucher, has given a clear message: we want to be sure our people think long term in order to keep Nestl the worlds leading food company. Short-term performance is important, but we have to balance it against the long-term development of the company. If we wanted to, we could improve our short-term performance overnight. We spend more on food technology and research than anyone else about SFr700 million per year. We also put a lot of money into marketing activities to build up our brands, and we invest heavily in new products.

Our rst priority is to ensure enough growth to double our turnover every ten years, currency shits aside. Of course, we have to watch our nancial performance too, and if we can improve it without jeopardizing growth, ne. But we wont x nancial performance rst and then adjust everything else. We have made it clear that we dont intend to be driven by short-term nancial pressure, but that we will equilibrate it with our long-term goals. We regard our shareholders as investors for the long term. We dont want to become just an item in a nancial investors speculative basket of holdings. Some people buy and sell our shares and thats legitimate, but their speculative behavior is not necessarily in our interest. Shareholder value, economic value analysis, economic prot, and so on are of course all well and good, as long as these are combined with the long-term view. Obviously there are many pieces to Nestl. Do you see it as a portfolio and trim it every now and then if it isnt performing in line with your plans?

We didnt bail out of India in the 1970s; we stayed in Chile under Allende

THE McKINSEY QUARTERLY 1996 NUMBER 2

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NESTL: THE VISIONS OF LOCAL MANAGERS

We never talk about a portfolio. Portfolio management is alien to our culture. Instead, we look at the businesses themselves, which is why we have set up our strategic business units confectionery and ice-cream, cofee and beverages, pet food, milk and nutrition, and so on. Every one of our products has a home in one of these units. We take each business and ask how much growth potential is still there; we look at the shareholder value it creates. We think along the lines of, If this business were an independent company, what would we do with it? Recently, we decided that our investment in the wine business was not strategic. Though our nancial performance was good, we had no core competence. For us, core competence means knowing more about some areas of a business than anyone else in the world. We make this judgment by comparing ourselves with the market leader. To be a major player in pet food, for instance even to be number 2 ater Mars we needed core competence. We reckon we have to spend between SFr500 million and SFr1 billion on research and development to build up core competence in any major activity over time. If you want to enter a new business, you had better make up your mind whether you want to spend this kind of money or not. If you dont, forget it. Do you still have any businesses in which you have not yet achieved core competence? In principle, I can say that we now have a well balanced and focused group of businesses, which covers the main areas of the food and drink business in which we are interested. There are a few minor sectors where we still can improve and increase our core competences. How do you make basic decisions? Are they part of corporate strategic planning? We dont do corporate-level strategic planning in a separate corporate planning department. Instead, we use a combination of bottom-up and top-down approaches in markets, regions, and strategic product groups. We meet once a year at corporate level to discuss the future strategic outline of the group. Dealing with the gures doesnt take more than ve minutes; we know they are wrong. Mainly, we talk about the way our diferent top managers see the future in their respective area. How do you view developments in Asia? What are the Europeans saying? What is your political environment? What product areas are on the priority list? Its all very informal. Then my colleagues and I stand up and say, The strategy we agreed in the food businesses is ne, so we can forget about them. Three or four years

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NESTL: THE VISIONS OF LOCAL MANAGERS

ago, I explained that I felt ne with the main strategies in my area, but I wanted to talk about ice-cream. What opportunities were there? Could we use our core competences from milk and other areas? A lot of questions arose. The Europeans pointed out that Unilever was selling 880 million liters; ourselves, 80 million. The Latin Americans declared, In our market, we are the leaders. Unilever isnt here yet. The Asians said they had never thought about it. So we started a discussion. Eventually, we agreed to explore the idea in more detail. We asked the research manager if we could make a KitKat ice-cream. A lot of technology was involved. How much would it cost? As a team, we decided what direction to follow. Then it was up to the strategic business manager to go to each zone and say, Now we have decided in principle to go forward, lets sit down toWe reckon we have to spend gether and establish a plan for your area. That January, we told the markets to consider how we might get into the ice-cream business. Th