Nestlé’s Strategic Analysis: Internal and External Factors
Internal Factors Evaluation Matrix – Nestlé
Strengths
- Strong Brand Recognition (Weight: 0.20, Rating: 4, Score: 0.80): Globally recognized, helping to maintain the customer base, driving loyalty and visibility.
- Wide Distribution Network (Weight: 0.15, Rating: 4, Score: 0.60): An expansive network reaches diverse customers in different regions.
- Research & Development Capabilities (Weight: 0.10, Rating: 4, Score: 0.40): Investment in innovation to stay competitive, with continuous product innovation.
- Diverse Product Portfolio (Weight: 0.05, Rating: 3, Score: 0.15): A broad range covers various consumer needs and reduces risk.
Weaknesses
- High Operational Costs (Weight: 0.20, Rating: 2, Score: 0.40): Large scale leads to high expenses, affecting margins. A moderate weakness.
- Regulatory Challenges in Different Markets (Weight: 0.10, Rating: 2, Score: 0.20): Complex regulations across different regions can complicate operations.
- Environmental Criticisms Related to Environmental Impact (Weight: 0.15, Rating: 2, Score: 0.30): Concerns over water use and plastic impact reputation.
- Health/Nutrition Concerns Over Some Products (Weight: 0.05, Rating: 1, Score: 0.05): Some products have high sugar, salt, or fat, limiting health appeal.
Internal Score: Strengths Weighted Score: 1.95, Weaknesses Weighted Score: 0.95, Overall Score: 2.90
Nestlé’s strong internal position is driven by brand, distribution, and innovation strengths, though it can improve in areas like costs and environmental impact.
External Factors Evaluation Matrix – Nestlé
Opportunities
- Emerging Markets Growth (Weight: 0.20, Rating: 4): High growth potential in emerging markets as disposable incomes rise. High weight and strong potential impact.
- Increasing Demand for Health Products (Weight: 0.15, Rating: 4): Rising health-consciousness creates demand for nutritious, health-focused options.
- Plant-Based Product Expansion (Weight: 0.10, Rating: 3): The growing trend for plant-based diets offers new market space.
- Digital Transformation & E-commerce (Weight: 0.05, Rating: 3): E-commerce opens new distribution channels and customer engagement opportunities.
Threats
- Intense Competition (Weight: 0.20, Rating: 2): The strong food industry is highly competitive, impacting market share and pricing power.
- Rising Raw Material Costs (Weight: 0.15, Rating: 2): Increasing costs of ingredients affect profitability.
- Regulatory and Trade Barriers (Weight: 0.10, Rating: 2): Regulatory challenges like food safety laws and labeling requirements.
- Customer Concerns on Environmental Impact (Weight: 0.05, Rating: 1): Criticism over plastic use affects reputation.
External Score: Opportunities Weighted Score: 1.85, Threats Weighted Score: 0.95, Overall Score: 2.80
Nestlé has strong growth potential in health, emerging markets, and digital areas. However, competition, rising costs, and environmental concerns pose risks. Strategy should focus on leveraging growth areas and addressing key threats.
SPACE Matrix – Nestlé
Financial Performance (AFP)
Assesses financial health, 1-6 (6 being strong), Y-axis
- EVA (Economic Value Added): Nestlé’s EVA is 11%, higher than the industry average of 8%. This indicates strong capital efficiency. Score: 4.
- D/E Ratio (Debt to Equity Ratio): Nestlé’s debt ratio is 1.2, slightly below the industry average of 1.5, meaning moderate financial risk. Score: 3.
- P/E Ratio (Price to Earnings Ratio): Nestlé’s P/E is 16, slightly lower than the industry’s 18, suggesting quicker returns but less growth. Score: 3.
- Profit Margin: Nestlé has a profit margin of 8.5%, above the industry average of 7%. Score: 4.
- ROE (Return on Equity): Nestlé’s ROE is 8%, slightly above the 7.5% industry average, showing reliable returns. Score: 3.5.
Average AFP = 3.5
Competitive Position (ACP)
Looks at company strength compared to competition, -1 to -6 (-6 being weak), X-axis
- Product Safety Rating: Nestlé’s quality rating is 4.7 stars, above the industry’s 3.6. Score: -1.5.
- Return Product Rate: Nestlé’s return rate is 5%, better than the industry’s 8%, showing good customer satisfaction. Score: -2.
- Employee Turnover Ratio: Nestlé’s turnover is close to the industry average of 13%, at 10%. Score: -3.
- On-time Delivery Rate: Nestlé delivers on time 97% of the time, well above the industry’s 79%. Score: -1.
- % Women Directors: Nestlé has 19% women directors, slightly above the industry average of 17%. Score: -2.
Average ACP = -2.0
Environmental Position (AEP)
Evaluates external factors, -1 to -6 (-6 being weak), Y-axis
- Political Stability: Nestlé operates in stable regions but with occasional challenges; political stability is 3 out of 5 where the company is doing business. Score: -2.5.
- Inflation: Nestlé’s markets have an average inflation of 12%, above the industry’s 8%. Score: -4.
- Unemployment Rate: Nestlé’s locations have slightly lower unemployment (8%) than the industry’s 10%. Score: -2.
- Frequency of Natural Disasters: Nestlé operates in regions prone to natural disasters, with a higher risk than the industry average (Nestlé 30% & industry 20%). Score: -4.
- Foreign Exchange Fluctuation Index: Nestlé has slightly more currency risk (25%) exposure than the industry (20%) average. Score: -3.
Average AEP = -3.1
Industry Position (AIP)
Measures attractiveness of industry, 1-6 (6 being strong), X-axis
- Asset Turnover: How easy it is to enter a given business. Nestlé’s asset turnover is 1.5, above the industry’s 1.2, showing strong efficiency. Score: 5.
- Growth Rate: Nestlé’s growth rate is 5.5%, outperforming the industry’s 3.5%. Score: 4.5.
- Investment Flows: Nestlé’s investments are steady but below the industry average (€5 billion vs. €7 billion). Score: 3.
- Mergers & Acquisitions: Nestlé has a high M&A rate (5-6 major M&A deals per year), showing strong expansion, compared to the average of 2-3 major M&A deals per year. Score: 5.
- Bankruptcy Risk: Nestlé has a low bankruptcy risk (1.5%) compared to the industry’s 3%. Score: 5.
Average AIP = 4.5
Strategic Quadrants
Aggressive Quadrant (Top Right)
Strong financial and industry position; stable and dominant.
Strategies:
- Integration: Acquire suppliers, distributors, or competitors.
- Market Penetration: Increase share in existing markets.
- Market Development: Expand to new areas or customer groups.
- Product Development: Improve or innovate products.
- Diversification: Enter new, related, or unrelated markets.
Competitive Quadrant (Bottom Right)
Strong industry position, weaker finances; in a competitive market.
Strategies:
- Integration: Similar approach as the aggressive quadrant.
- Market Penetration: Gain more share in current markets.
- Market Development: Explore new customer segments.
- Product Development: Differentiate products from competitors.
Conservative Quadrant (Top Left)
Strong financials but weaker industry position.
Strategies:
- Market Penetration: Focus on strengthening current markets.
- Market Development: Expand into related markets.
- Product Development: Make incremental improvements.
- Related Diversification: Add products aligned with core business.
Defensive Quadrant (Bottom Left)
Weak in both financials and industry position; facing decline.
Strategies:
- Retrenchment: Cut costs, focus on core strengths.
- Divestiture: Sell parts of the business.
- Liquidation: Exit the business if unsustainable.
Key Business Concepts
Agency Problem: When managers (agents) act on behalf of shareholders (principals) but may not always prioritize shareholders’ interests, leading to agency costs (expenses from managing this relationship and resolving conflicts).
Information Asymmetry: Occurs when one party (often management) has more information than the other (e.g., shareholders). This imbalance can lead to suboptimal decisions and can create a moral hazard.
Moral Hazard: When managers pursue short-term rewards, like bonuses, without worrying about the future consequences, since they don’t deal with the long-term risks.
- Airline CEOs: Skip on maintenance to get bigger bonuses now, risking safety later.
- Uber Executives: Focus on fast growth for quick rewards, even if it hurts the company long-term.
- Fast Food Managers: Cut quality to boost sales now, risking future customer trust.
- Used Car Dealers: Sell cars with hidden problems for fast profit, leaving buyers with repair costs.
When rewards focus only on short-term results, managers might make risky choices that could hurt the company and customers later on.
Competitive Advantage
Companies can achieve competitive advantage in two ways:
- Cost Advantage: Sell similar products at a lower cost to attract price-sensitive customers.
- Differentiation Advantage: Offer unique, valued products that justify a higher price.