There are days like this when it feels one are at the right place at the right time. This is what happened to me yesterday as I had the privilege to join the Solvay and Vlerick business schools alumni network to meet with Paul Bulke, CEO of Nestlé.
He explained the principles behind Nestlé’s Shared Value Creation program to the group and made a few very interesting comments on business and innovation management.
First things first, Nestlé’s Shared Value Creation program.
“It’s not about philanthropy; it’s not about buying back a social consciousness at the end of the year”.
It’s about establishing a long term development program embedded in the business. Asking and educating farmers to grow high quality coffee grains helps improve Nespresso quality – and farmers can expect higher revenues from their harvest. Reducing the packaging of bottled water by 60% over the past decade had a good financial impact for Nestlé – and it helped reduce pollution from these products by as much. In every part of the business, the company wants to get a win for all parties.
This is part of their long term strategy and over-arching goal to help society development. And to some extent, private companies should have a much bigger responsibility in society development; they have a much longer term view than politicians – CEOs do not need to plan for the next re-election 3 years in the job. An astonishing observation on this point is that some politicians have been caught promoting bio-fuels out of financial or political interests, neglecting the outrageous impact it has on soil productivity and water supply shortage: it takes 20 times more calories to generate the same amount of mechanical energy (bio-fuel) to physical energy (food), and water is the first resource at risk for humanity, before oil. As a responsible company, Nestlé is actively engaging against these misperceptions and mistakes.
In addition, Nestlé has an incredible reach to help with 1.2 billion products sold every day across the world. They can enhance health of consumers by enriching their products with essential nutriments like zinc, iron or iodine, which they know are lacking in big parts of the world.
Having production centres in all parts of the world, they can reach 25 million people directly or indirectly thanks to their presence on the ground.
Now, some of the business and innovation insights Paul Bulke talked about are definitely worth sharing. He mentioned the values which the company is putting forward and how he lives them as CEO.
“Long term inspiration, short term action”
He managed to educate Nestlé’s shareholders to this concept of not rushing towards short term goals to the expense of longer term goals. This is a compromise which in his view should never be made, even if it translates into slight variations in quarterly results. And the shareholders from Nestlé know this; they buy the stock to get a long term profit, not to sell it the next day on speculation. This clientele effect is probably beneficial to Nestlé’s outstanding financial stability and in turn access to low interest debt financing. This doesn’t mean that short term objectives are not needed – “this doesn’t mean come back in 10 years and see what we have done by then”; action needs to take place now, with a sense of urgency like in any FMCG business.
“We are a value company, not a price company”
In recent years, the prices of raw commodities has risen and have become more volatile. What Nestlé aims to do is to keep their head cold and think strategically. Most of the variations are short term and it is important not over-react. Changing prices of products sold should not be the default strategy. They have projects to deliver savings from operations to offset the biggest part of the raw commodities increase. And if a price increase is needed, product superiority enables the company to command these price increases. Being clear and firm with retailers on the value of Nestlé products is something that has to be lived at every level of the organization.
Regarding commodity prices and looking at the bigger picture, the phenomenon is actually fair; over the past decade, prices for these products where going down, fuelling profits in Western economies to the expense of developing regions, further devising the world between the rich and the poor. The latest trend is a rebalancing of profits across regions.
“Innovation is at the core of long term success”
Nestlé is by far the biggest spender in R&D in nutrition with an average spending of about 2 billion CHF every year. Besides their operating cost reduction program and selected price increases, Nestlé business model relies heavily on innovation. “Our business model is no different from what you learn in business schools”, Paul Bulke offered as a wit.
New products fuel top-line growth, and help to grow margin. Innovative and relevant ingredients – in new products and in current lines – increase products value to consumers and justify a price premium. The technology edge cannot be easily copied by competitors and private labels.
To ensure their products are superior vs. competition, Nestlé have established the 60/40+ rule.
No product is launched in the market if it doesn’t meet the criteria. The criteria is based on 2 elements: 1) in blind consumer tests (without brand or concept mention), their product should get a preference of “60/40” or above vs. competitive products. 2) in addition, the company wants to give more to the consumers, not only in taste or experience as measured in consumer testing, but also in extra health/well-being benefits, the “+” vs. competition. This is why they have added iodine to their Maggi condiment in some developing parts of the world where there is a deficiency in this nutriment, providing a better food and a better life to these consumers.