Nestlé is making some bold changes to take advantage of what it believes is the next big growth engine for consumer products: life sciences and healthcare.
Long-time Nestlé chairman and former CEO, Peter Brabeck-Letmathe, has even recruited an outsider health sector CEO, Ulf Mark Schneider, with no food related experience to captain this new journey.
Is Nestlé capable of inventing and growing business models at the intersection of food and health? The strategy sounds exciting but it poses a couple of substantial management challenges I’m not sure Nestlé is aware of. To Nestlé’s credit, the company has already built a health, science, and skin health business that is worth $2 billion today, but that growth is largely because of technology and scientific innovation. That type of innovation can only take you so far.
For Nestlé, this journey into food and pharma will require looking far beyond technology innovation, and toward business model innovation skills. It will also require the appropriate organizational and management structures required to successfully invent and scale new business models. I suspect the company might lack these skills or underestimate the challenges related to business model innovation.
Here’s why I think Nestlé is a great execution business that might struggle to sustain aggressive growth targets while trying to monetize future bets in the health-pharma space.
Growth challenges after 150 years of expansion
Nestlé has done a lot of things really well in its 150 year old history. The existing brand portfolio is astonishing. It’s the largest food company in the world (ranked by revenues), and has 29 so-called “billionaire” brands including household names like Nespresso, Nescafé, KitKat, Smarties, and Maggi that each generate over $1 billion in sales every year.
Nestlé has proven that it’s outstanding at operating and improving its existing business model(s). However, I wonder if the organization is ready and able to create new large-scale business models merging food and health. I suspect, Nestlé will struggle to go beyond what the company already does extremely well.
The organization’s growth goals--known as the “Nestlé model”--target 5-6% year-over-year growth. Even at 5% annual growth, that would mean adding over $4 billion in additional revenue every year. In other words, it’s as if Nestlé has to consistently churn out a $4 billion start-up every year.
Growth of that level will be very hard to sustain without business model innovation. Nestlé knows this, too. The organization missed its “Nestlé model” targets three years in a row. The company’s 2015 earnings report displayed Nestlé’s weakest annual growth in six years, with organic growth at 4.2%. Current Nestlé CEO, Paul Bulcke expects growth to remain soft this year as well.
For Nestlé to continually grow its existing business into double digit billions--alongside its new involvement in healthcare--will require much more than what’s been accomplished to-date.
Intentionally search for and scale business models that monetize new opportunities
Like many organizations Nestlé is world class at managing and extending its existing business model by growing its product portfolio. However, I suspect the company is less well equipped when it comes to entirely new value propositions and business models.
I believe the company is not yet what is often called an “ambidextrous organization”-- something it has to become if it really wants to succeed in new areas outside its core traditional food business. That means Nestlé has to become world class at simultaneously improving its existing business model while creating and operating an organizational space to invent future business models at the same time.
It’s a very hard thing to do and only few companies succeed at being excellent at both so far.
There are examples of business model innovation inside Nestlé, but like in other established companies the new business models were rather accidental occurrences. Nespresso, a business success for Nestlé, did not happen intentionally. The technology innovation was intentional, but figuring out how the company could monetize the product and address the market was accidental. Eric Favre, inventor of the Nespresso machine, spent 10 years perfecting the technology. However, Nespresso’s first business model failed and the project nearly went bust. Nespresso didn’t succeed until Jean-Paul Gaillard was brought in to lead the company and transform its business model.
This whole process took a long time, and I don’t think Nestlé knows how to replicate that type of success. I’m sure this is not because the company lacks talented and smart people or the skillset. I suspect it’s because Nestlé lacks an organizational culture that can create another Nespresso. There is no space inside Nestlé where people can design and test radically new value propositions and business models that differ from Nestlé’s traditional models.
Kodak is an example of a cutting edge company that went bankrupt because it failed to design and scale business models to monetize its technology innovations--they invented the digital camera! Even if this is an overplayed example, it’s a precursor of what can happen to companies that focus solely on technology innovation.
A Nestlé that’s world class at expanding beyond its core
Nestlé’s evolution into a truly 21st century company that can invent and scale new business models will require a transformation of its structure in a similar fashion to what I proposed in my “organizational chart of the future”. In this org chart, one person is responsible for managing the present business, and another person is responsible for managing the future. Who will fulfill those respective roles for Nestlé to achieve its mission?
Recruiting Schneider as CEO with a background in health and sciences is a great start. Recent rumblings suggest that outgoing CEO Bulcke will move into the role of chairman and replace Brabeck. But it’s unclear who will run the food business, and who will explore healthcare opportunities. Will Schneider do both? Or will Nestlé make use of a powerful duo in Bulcke taking care of the food business while Schneider goes off to explore healthcare opportunities. That would be a very real representation of the improve-invent spectrum I outlined earlier.
It’s true that having two people at the very top might not be realistic. The CEO can do both jobs of maintaining the existing business while exploring new ones, but inevitably one is going to suffer. Today, in most companies it’s the future that suffers at the expense of the present.
If Nestlé really wants to win in this field, the company has to churn out and scale winning business models and value propositions. And in this case, the winning business models and value propositions won’t be specific to food or specific to pharma, they are going to be at the intersection of the two different fields and it’s likely these will require models that have never been seen or done before.
More importantly, whatever Nestlé manages to achieve in this “sweet spot” will also uncategorize the company from its food and beverage labelling. That might be a good thing. Apple is an example of a company that has been incredibly successful at designing superior business models that protect and declassify them from any particular industry. Apple reinvented itself as a hardware company and then expanded into business models for music and software which was the foundation for its success with the iPhone. Amazon is another example. The e-commerce player has not only succeeded in the B2C space of online retail, it’s also now leading in the completely different B2B business of selling server space through its Amazon Web Services offering.
The way I’ve assessed Nestlé’s current and future challenges is an approach you can apply to your own organization’s ability to monetize new business ideas.
At our Strategyzer Peer Learning Summit last year, we had attendees fill out an assessment sheet to see how organizations scored on their ability to develop new business models and value proposition.
The framework allows you to measure your organization against three key areas:
- Leadership: How does management or executives support the strategy, allocate resources, give legitimacy and power to the idea?
- Culture & Processes: How does the culture use tools or methodologies to realize the strategy?
- Organizational Design: How is the organization designed to reward and incentivize experiments around business models and value propositions? What is this project’s relationship to the existing business?
Try it out. Use the assessment sheet to score how your organization currently performs in these three areas. This will provide a tangible framework for discussing and capturing your current state internally.
Our Knowledge Library is full of templates, tools and reference material to help you design your business. Grab the assessment sheet mentioned in this blog post for free.