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Describe Porter’s Five Forces Model

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What is Porter 5 forces Model?
What is Porter’s 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 Porter’s Value Change

» 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.

» Nestlé is the world’s 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?
» Porter’s 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 Nestlé, 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 2000’s 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 Nestlé’s market share in order to survive. Essentially, Nestlé 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, Nestlé 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 Nestlé.
» Especially in China, there are many local competitors in food and beverages industry that provides similar kind of product like Nestlé’s. It is vital for Nestlé to continuously find new ways to improve its products because competition is so fierce.
» In recent years, Nestlé 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, Nestlé 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 company’s performance so this should be given reasonable value while accessing the company’s position.
» Customers carry huge quantity of bargaining power concerning their utilization of different Nestlé 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.

Porter’s 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 Porter’s 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: Porter’s 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, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage.

NestlĂ©’s Value Chain

NestlĂ©’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 Nestlé (Malaysia) as a reference to this value chain.

» 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). » Factories in Malaysia are available at PetalingJaya, Shah Alam Complex, Batu Tiga (Shah Alam), Chembong (Negeri
Sembilan), Kuching (Sarawak), Perak and 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 land transportation rather 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%.

» 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.


www.nestle.com.my/asset-library/documents/pdf/2012_csv_full_report_eng.pdf http://alfimohammad.wordpress.com/2012/11/22/caompetitive-advantage-and-value-c hain-nestle

http://www.mba-tutorials.com/strategy/1671-porters-five-forces-model-of-nestle.html http://
businesscasestudies.co.uk/nestle/creating-shared-value-in-the-supply-chain/conclusi on.html#axzz3GQRrkSFl
http://www.slideshare.net/BadarAlam/porter-five-forces-27690335?next_slideshow=1 http://news.morningstar.com/classroom2/course.asp?docId=145087&page=3&CN=

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