Describe Porter's Five Forces Model

and Porter's Value Chain using real

organization example(s).

Nestle
Prepared by | SABARINA OTHMAN
GP02158

Outline

Nestle
What is Porter 5 forces Model?
What is Porters Approach to Nestle company?
i) Threat of New Entrants
ii) Threat of Substitute Goods
iii) Bargaining Power of Suppliers
iv) Bargaining Power of Customers
v) Competitive Rivalry within the Industry
What is Porters Value Change
Conclusion

Nestle
Nestle is a multinational company which works
as a brand and it has many small companies
working under it.
It was initially introduced in 1867 with the launch
of its first product that was dehydrated kids food
and this was very successful at that time and
thus Nestle got the high profits within no time.
It touched the cruising stage within very few
months of its successful existence and this lead
it to achieve even more and more.

Nestle
Nestl is the worlds leading nutrition, health and
wellness company. It employs around 330,000 people and
has 461 factories in 83 countries around the world;
almost half of these are in developing countries.
Nestle had manage to produce many of brands such as
baby food, cereals, chocolate & confectionery, drinks, ice
cream , petcare, coffee, dairy and many more all over the
world.
Example of products : kit kat, alpo, nespray, nescafe and
butterfinger.
Over one billion KIT KATs produced in the UK every year.

Porter 5 forces Model?

Porters Five Forces Model is a very important tool to
analyze the industrial parameters and to develop
business strategy. Here five different factors would be
discussed to highlight the attractiveness and
productivity of a market.

i) Threat of New Entrants

ii) Threat of Substitute Goods
iii) Bargaining Power of Suppliers
iv) Bargaining Power of Customers
v) Competitive Rivalry within the Industry

 (i) Threat of New Entrants : Low

The food processing industry is very large and
competitive; it is not uncommon for firms within
the industry to do quite well.
As a result, many companies enter into the
market every year in an attempt to gain a
portion of the profitable market. Luckily for
Nestl, the company has been around in China
for decades and boasts a long history of quality
products and consumer satisfaction, which has
allowed the company to obtain a considerable
share of the market.

 It is shown in accelerated investment activity in

the 2000s which indicates showing long term
commitment to China and construction of 16
factories from 1993-2006 in China to meet
consumer demand.
As a result, new entrants into the industry must
attempt to seize a portion of Nestls market
share in order to survive. Essentially, Nestl is
constantly a target, and so the threat of new
entrants is relatively low.

 (ii) Threat of Substitute Goods: High

Due to the nature of the industry, Nestl is best
with the threat of substitute goods. From bottled
water to milk-based products, there are arrays of
similar products that compete directly with
Nestl.
Especially in China, there are many local
competitors in food and beverages industry that
provides similar kind of product like Nestls. It is
vital for Nestl to continuously find new ways to
improve its products because competition is so
fierce.
In recent years, Nestl has focused on the health
and wellness aspects of its products to maintain
its competitive edge and customer loyalty in the
market.

 (iii) Bargaining Power of Supplier: High

Bargaining power of suppliers is very important
factor to be considered in any industry as they are
the main strength of the company.
Nestle is known for strong relations with the
suppliers around the globe due to its immense
buying power and also because of the fact that in
such dairy and agricultural products quality is always
important.
Nestle as always focused over strong and sturdy
business relations to make the ongoing quality
stronger. Additionally, Nestl also presents helpful
guidance to its suppliers on how to work more
proficiently to decrease redundant expenses. And
thus it cares of its suppliers which I return pays them
off in the form of quality products.

 (iv)Bargaining Power of Customers: High

The bargaining power of customers has always
been an important factor in terms of companys
performance so this should be given reasonable
value while accessing the companys position.
Customers carry huge quantity of bargaining
power concerning their utilization of different
Nestl products.
Although a lot of substitute products and
competitors Nestle customers have very
influential choices but still the quality that has
been maintained by Nestle has made it very
successful among the users.

 It is very important to understand the power of

the customers and also their needs so that they
can be better satisfied.
This is what Nestle always cares about and that
is reflected in Nestle health and wellness
programs that have being used wile creation of
new products as society has in progress of
becoming more health conscious.

 (v) Competitive Rivalry within the Industry:

Low
Competition if healthy would bring huge success
but if negative would destroy the whole industry
so it should be critically analyzed for better
future of the company.
Nestle has a very strong position in the food
processing industry but few major rivals do exist
in the industry like Kraft Foods and Group
Danone.

Above mentioned companies are fighting

continuously to get on to each other and
avoid any sort of competition but I is still
there.

 If we talk about marketing and advertising these

companies have spent hell of their expenditures
for the purpose of effective marketing and
advertising and in competition they have always
but performed each other.
Competition is violent in the food processing
industry, and this is a plus point for consumers.
Provided that these companies carry on in
competing with each other, consumers will
persistently enjoy improving product qualities.

Porters Value
Chain
A value chain is a chain of activities that a firm
operating in a specific industry performs in order
to deliver a valuable product or service for the
market.
The concept comes from business management
and was first described and popularized by
Michael Porter in his 1985 best-seller,
Competitive Advantage: Creating and Sustaining
Superior Performance.

Elements in
Porters Value
Chain
Rather than looking at departments or
accounting cost types, Porter's Value Chain
focuses on systems, and how inputs are changed
into the outputs purchased by consumers.
Using this viewpoint, Porter described a chain of
activities common to all businesses, and he
divided them into primary and support activities,
as shown below.

Figure 1: Porters Generic value Chain

 Primary Activities
Primary activities relate directly to the physical creation, sale,
maintenance and support of a product or service. They consist of the
following:
Inbound logistics These are all the processes related to receiving,
storing, and distributing inputs internally. Your supplier relationships
are a key factor in creating value here.
Operations These are the transformation activities that change
inputs into outputs that are sold to customers. Here, your operational
systems create value.
Outbound logistics These activities deliver your product or
service to your customer. These are things like collection, storage,
and distribution systems, and they may be internal or external to
your organization.
Marketing and sales These are the processes you use to
persuade clients to purchase from you instead of your competitors.
The benefits you offer, and how well you communicate them, are
sources of value here.
Service These are the activities related to maintaining the value of
your product or service to your customers, once it's been purchased.

 Support Activities
These activities support the primary functions above. In the
diagram, the dotted lines show that each support, or secondary,
activity can play a role in each primary activity. For example,
procurement supports operations with certain activities, but it
also supports marketing and sales with other activities.
Procurement (purchasing) This is what the organization
does to get the resources it needs to operate. This includes
finding vendors and negotiating best prices.
Human resource management This is how well a
company recruits, hires, trains, motivates, rewards, and
retains its workers. People are a significant source of value,
so businesses can create a clear advantage with good HR
practices.
Technological development These activities relate to
managing and processing information, as well as protecting a
company's knowledge base. Minimizing information
technology costs, staying current with technological
advances, and maintaining technical excellence are sources
of value creation.
Infrastructure These are a company's support systems,

Nestl's Value
Chain

Nestl's Value
Chain
So, how does Nestle organization create value?
How do Nestle change business inputs into
business outputs in such a way that they have a
greater value than the original cost of creating
those outputs?
I took Nestl (Malaysia) as a reference to

this value chain.

 PRIMARY BUSINESS PROCESSES OF NESTLE

(MALAYSIA)
Inbound logistics :
Receiving, storing and distribution of materials at
the warehouse.
Head Office (HO) is located in Mutiara
Damansara.
Nestle receives some of the stocks which is not
available for production in Malaysia at its
respective factories for storage and later
distribution.
Manufacturing facilities are available at Petaling
Jaya, Shah Alam (Selangor), Chembong (Negeri
Sembilan) and Kuching (Sarawak). These are the
only available manufacturing ventre if Nestle in
Malaysia.
National distribution centre is at Bukit Raja,
Klang (Selangor).

 Operations :

Transforming inputs into products or services.

Nestle have a lot of types of food which includes junior
foods, milk, breakfast cereals, hot cereals, creamer,
beverages, coffee, culinary products, chilled dairy, ice
cream,confectionery& chocolate and many more.
For each product that they have, it will have its own
ingredients and raw materials that they need.For instance,
manufacturing of chocolate.
The input are the raw materials needed such as cocoa, milk
and many more.
The process which will be done by the machine such as
whipping of the ingredients then froze the ready made
chocolate in chiller.
Finally, the output are the chocolates that have been
packaged in their own brand which is Nestle.

 Outbound logistics :
Distributing products and services to customers.
Nestle prefers distributing their products by servicing
in landtransportationrather than rail train or short
sea shipping because the possibilities of their product
to deliver in good shape is higher.
Use big lorries that can load more products to avoid
empty runs.
Send the stock to each Nestle branch around
Malaysia.
Distribution are made with many kind of grocery
shops' such as Tesco and Giant.

 Marketing and sales

Helping customers to buy the products or services of the firm.
The most important thing to do with food business in Malaysia is
that the foods must be based with Halal materials and is approved
by higher authorities that it is officially Halal where the Muslims
can consume it peacefully.
All ingredients that contained in the product is all labelled
accurately on the container of the food.
Running a food based business is not an easy task as many
advertising need to be done.
However, Nestle is brilliant in attracting their potential customers
and also existing customers.
Many types of advertisement that is made by Nestle such as
through television commercials and flyers that is passed around at
the shopping mall and many more.

 Services:
Post sale support provided to customers such as repairs
and maintenance function.
Nestle provides its official website for the consumers to
review its products.
It is very helpful as all functions and purposes of product is
stated clearly and is a satisfactory.
The website has a very welcoming vision.
Make people that consume the product feels healthy,
happier and prevent from getting diseases because if the
good nutrition in their food and beverages products.
Sugar content in Nestle product have been reduced to 34%
and salt level has been reduced to 75%.

 SUPPORTING BUSINESS PROCESSES OF

NESTLE (MALAYSIA)
Procurement (purchasing):
Buying the resources needed to carry out the
entity is the primary activities.
Finding potential supplier.
Nestle have a lot of supplier around the world
to keep them always available with raw
materials needed to manufacture products.

 Human resource management :

Recruiting and hiring new employees.
Training, paying salary and employee benefits.
Nestle is not only good in producing nutritional products,
they are good in attracting people to join their company.
Nestle have given many job opportunities to the public
with many different positions.
Advertising of job in website and newspaper.
Nestle have also given useful information in the website
for the one who is interested to work with them.
Nestle is also known as one of the companies that took
care of their employees' rights and duties.

 Technological development
Activity to improve company's product or services.
Nestle have a department of 'Research and Development'
to make sure that they are always up to requirements of
the public.
It is a costly thing to do for company but it pays back the
cost with double profit.
Having the department of 'Research and Development'
helps Nestle a lot in healthy competition aspect.
Nestle also use solar panels in warehouse as energy
consumption.
Nestle is a very economically friendly company.

 Infrastructure
Nestle has a very stable infrastructure. It is all planned
properly by expertise and high education people who have a
lot of experience in the nutrition field.
It have its own accountant, lawyers, administrative and other
officers to do their significant job that has been assigned.
Below are the members in the board of director and is
assigned to its own job.

 In conclusion, Nestle is a very systematic company

that practice five forces Porter and also did the
primary and supporting business processes.

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