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Sustainability can occur in two ways: firms may differ with respect to resources and capabilities and the differences persist and isolating mechanisms analogous to barriers to entry may work to protect the competitive advantage of firms.
6.1 Resources and Capabilities
A firm’s resource identifies its capabilities. Resources are the productive assets owned by the firm. Capabilities on the other hand refer to a company’s ability to make use of its resources in a highly productive manner. Individual resources do not confer competitive advantage, they must work together to create organizational capability. It is capability that is the essence of superior performance.
6.1.1 Resources
Tangible Resources
Basically, there are three types of a firm’s resources: tangible, intangible and human resources. Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identified and valued in the firm’s financial statements. According to Nestle Annual Report 2011, Nestle Group reported sales of CHF 83.6 billion and 7.5 percent organic growth on top of good growth in recent years. The net profit on a continuing basis was CHF 9.5 billion, up 8.1 percent. At December 2011, Nestle’s property, plant and equipment were valued at CHF 9041 million.
Intangible Resources
Resources may also be intangible, such as reputation or a stock of patents and copyrights. Brand name is the most important resource among the intangible resources. Brand name and other trademarks are form of reputational assets: their value is in the confidence they instill in customers. The brand valuations involve estimating the operating profits for each brand, estimating the proportion of net operating income attributable to the brand, and then capitalizing these returns. The value of company’s brands can be increased by extending the product/ market scope over which the company markets those brands. Nestle has eight product lines or categories overall. The strategy used by Nestle is the family branding or corporate branding in which word ‘Nestle’ is attached to all the brands in all categories. In 2001, Nestle’s brand value was more than 13000 million US dollars and it has became the largest producer of consumer packaged beverages and foods in the world, which has claimed the 23rd position in the Interbrand’s list of 100 most valuable brands in the world (Nestle Brand Strategy, 2012).
Human Resources
The human resources of the firm are the expertise and effort offered by its employees. For example, the combination of Nestle’s knowledge of biotechnology in coffee with the expertise, Nestle has on the ground in Mexico which will help to achieve sustainable Robusta coffee production in the region (The Nestle People Development Review). In addition, Nestle has a great research and development team. James Gallagher and Andrea Pfeifer were the masterminds behind the research on the La-1 cultures in the LC-1 yogurt. They were also the two that decided on selling LC-1 as a functional food. This enabled Nestle to position the product in a way that differentiated it among the other products in the market (Nestle LC1, 2005).
6.1.2 Capabilities
Capabilities are what a firm can do. Organizational capability requires the expertise of various individuals to be integrated with capital equipment, technology, and other resources. For instance, in Asia, Nestle’s strategy has been to acquire local companies in order to form a group of independent regional managers who know more about the culture of the local markets than Americans or Europeans. The strong cash flow of the company enabled it to engage in wide-scale foreign direct investments and sufficient flexibility for takeovers of local firms able to provide the company with a stronghold in the market. Apart from that, Nestle has employed a wide-area strategy that involves producing different products in each country to supply the region with a given product from one country. For example, Nestle in Indonesia specializes in soymilk products because of the cheaper and easy access to soymilk in the country with soymilk products for distribution in other Asian markets (Nestle LC1, 2005).
Furthermore, Nestle provides an example of a company that has a strong configural advantage in the marketing, distribution and manufacture of food products. Nestle has developed an explicit international brand architecture that consists of 10 worldwide corporate brands, 45 worldwide strategic product brands, 25 regional corporate brands, 100 regional product brands, 700 local strategic brands and approximately 7000 local brands. On the production side, it has 522 factories in 81 different countries providing manufacturing capabilities in key markets. The broad geographic coverage allows Nestle to realize sales from industrialized countries as well as the increasingly important emerging market countries and to transfer information and experience from one market or region to another (Craig and Douglas, 1999). In addition, Nestle has become the first major confectioner to remove artificial colors, flavors and preservatives from its entire range. The company, which is behind leading brands including KitKat, Smarties and Quality Street, has changed the recipe of 79 products to remove suspect chemicals. In total, more than 80 ingredients have been replaced with alternatives, mostly from natural sources such as carrot, hibiscus, radish, safflower and lemon (Poulter, 2012).
6.2 Isolating Mechanism
Isolating mechanisms limit the rivals from eroding a firm’s competitive advantage. There are two different types of isolating mechanism which are (1) impediments to imitation and (2) early mover advantage.
6.2.1 Impediments to imitation
Impediments to imitation are the mechanism that impedes the existing firms and potential entrants from duplicating the resources and capabilities of the incumbent firm. There are four important types of impediments exist which are legal restrictions, superior access to inputs/customers, market size and scale economies and intangible barriers.
Legal Restrictions
We are going to look at the legal restrictions and superior access to inputs/customers of Nestle. Firstly, the legal restrictions such as patents, copyrights and trademarks, as well as governmental control over entry into markets through licensing, control rights and certification can impede imitation. Nestle has files over 250 patent applications per year and manages a global patent portfolio of about 20,000 patents. Nestle has now entered the top 100’s World Intellectual Property Organization (WIPO) list and is the top patent applicant for the food and beverage industry. Leading edge technologies and highly differentiated products, solutions and benefits are key to Nestle’s four growth drivers and its global brands such as Nespresso, Nan, Nescafe, Nido and Purina. Protecting these technologies, products, solutions and benefits significantly contributes to sustaining the competitive advantage coming from Nestle’s unmatched R&D capability and product and brand portfolio. For example, on 22 February 2006, Nestle had applied for a patent on genetically modified coffee plants with a blocked enzyme, designed to improve the solubility of the coffee powder. The patent covers the technical process, genetically modified plants as well as the use of coffee beans for the manufacture of soluble coffee. With this patent, coffee growers will become even more dependent on Nestle (Greenpeace, 2006).
Superior Access to Inputs/Customers
Secondly, superior access to inputs/customers means that the firms can obtain high quality or high productivity inputs, such as raw materials or information than its competitors will be able to sustain cost and quality advantages that competitors cannot imitate. With every bite or sip of a Nestle product, Nestle has to assure the highest possible standards all along the supply chain – from raw materials via manufacturing, packaging and distribution, to the point of consumption. Every Nestle factory has a laboratory that systematically analyses raw materials and ingredients. Nestle products are checked on the production line and in their finished state to ensure that they meet the company strict standards, as well as national and international regulations (The World of Nestle, 2006).
6.2.2 Early Mover Advantage
Early mover advantage is the benefit produce by being the first to enter a market with a new product or service. Early mover advantages include; becoming a market leader in a new; establishing a new leading brand; being able to charge a premium until competitor products appear enhanced reputation, design, and copyright protection and possibly setting an industry standard to which other competitors may have to aspire. There are four different isolating mechanisms fall under the category of early mover advantage which is learning curve, reputation and buyer uncertainty, buyer switching costs and network effects.
Reputation and Buyer Uncertainty
We are going to discuss the reputation and buyer uncertainty and network effect on Nestle. For experience goods, a firm’s reputation for quality provides a significant early mover advantage. Once the firm’s reputation has been created, the firm will have advantage competing for new customers, increasing the number of customers and further strengthening its reputation. The motto of Nestle is “Good Food, Good Life”, so delivering the qualitative products to the customer is their main objective. Nestle Pure Life (NPL) was first offered in Pakistan by Nestle Pakistan Limited in 1998. People felt need of Pure, safe and clean water because of impurities in water especially in the industrialized cities like Karachi, Lahore, Faisalabad etc. Nestle identified this opportunity and launched NPL that satisfied the customer needs and Nestle become market leader in the water industry. The customers of NPL showed interest on NPL because of trust on Quality of Nestle, at the heart of which there are qualitative products and its long term commitment to deliver better products to consumers. Being the market leader, the market share of NPL is 78 percent that is much higher than its competitors (Ahmad, 2011).
Network Effect
The network effect is the result of word-of-mouth testimonials where the customer values the product depending on how many others are using the product. There is many ways for the customers to get the information about a company’s product. Actual networks are where the consumers are physically linked. Nestle, the 144-year-old Switzerland-based food company created a Fan Page on the social media site, Facebook, where its millions of customers can get information and discuss the company and its products. While a simple and seemingly begin move, the company demonstrated foresight in opening a new channel to better communicate with their customers (A Business Lesson, n.d.).
