GTI lab
The Authors
Dr. Daniel Rouach
Olivier Michael Rouach
Managing Technology Transfer and Innovation
THE NESTLE / NESTEC Experience
The authors would like to thank Nestlé/Nestec managers and in particularly Mr. Helmut Traitler, Mr. Gilles Fayard and Mr. Laguna who accepted to share their experience during conferences given from 1995 – 1997 (Les Echos conference, Perspective Europe conference, guest lecturers at the EAP MBA program).
We would like also to thank Nestlé/Nestec management who helped us through our visits at Vevey and especially during an internal conference made with the participation of the author.
All sources used in this chapter were drawn from public documents or conferences. Nestlé cannot be held responsible in any case for the content and analyses expressed in this text.
Introduction
Through more than 130 years of history Nestlé has grown from a two-product company focusing essentially on infant nutrition to be the largest food company worldwide with 1.5% of the world market. The sector, food industry, is a highly competitive market dominated by giants like: Unilever, Danone, Coca Cola, Pepsi Cola, Philip Morris, Grand Metropolitan etc.
The Nestlé portfolio consists of over 22,000 products sold across the five continents and manufactured in more than 70 countries. The total sales on Nestlé in 1997 amounted to more 69,9 billion Swiss francs and the trading profit was more then 6,8 billion Swiss francs which represent a 17,3% growth from 1996. (For more 1997 financial figures see annex 1).
“The improvement in trading profit is due to a policy of accelerated innovation in the product and communication areas, as well as to the extension of the Group’s activities in several countries.” (Nestlé press release 26/03/1998)
Could Nestlé have become a world leader without a strong commitment for innovation ?
In Germany, for example, 25% of Nestlé’s sales are made up with products which did not exist three years ago. These figures emphasize the essential role played by R & D as a drive for innovation. Could this have happed without high investment in R&D?
One cannot raise the question of innovation and R & D at Nestlé without introducing Nestec. Nestec acts within Nestlé as a separate entity in charge of basic research and the transfer of the know how to all Nestlé companies. Could this transnational operation work so well without Nestec or without a well organized Technology Transfer system?
Mastertech, a consulting firm, was hired by Nestec to analyze the current situation of the Nestlé group and to advise on changes to be made. Patrick Lemon, a senior consultant at Mastertech, was appointed head of the team responsible on checking the knowledge management aspects. After studying the materials for a few days he decided to focus on the role of Technology Transfer and to propose best practices to Nestec.
- Nestlé: A world leader
Founded in 1866 by Henri Nestlé, the Swiss origin company had become the world leader in the food industry with 1.5% of the global market with total sales of more then 43 billion US dollars in 1997 and a net profit of more then 2.7 billion US dollars .
Nestlé’s history can be divided into the following milestones (for a detailed history of Nestlé, see annex 2) :
1886-1905Company’s foundation.
1905-1918Milk for the world, merger with the Anglo-Swiss Condensed Milk Company in 1905.
1918-1938Merger with Peter-Cailler-Kohler Chocolats Suisses S.A. in 1929.
1938-1944World War II.
1944-1975Growth and diversification, mergers with Alimentana ( Maggi) in 1947 and with Ursina-Frank in 1971.
1975-1981The grounds shifts, agreement with l’Oréal in 1974.
1981-1998 New directions, new CEO Helmut Maucher (until 1997), acquisitions of Carnation (USA) in 1985, Buitoni-Perugina (Italy) and, Rowntree (GB) in 1988, Perrier in 1992 and Spillers in 1998.
From its early days Nestlé had an global view, through intensive expenditure policy Nestlé today is present in 5 continents and in more than 70 countries.
Exhibit 1 – Transnational companies scale in 1995
(Index for transnationality: the average of ratios of foreign to total asset, foreign to total sales and foreign to total employment)
The company operates 495 factories worldwide and employs more then 225,800 people. Although its origin only 2% of total sales comes from Switzerland and more then 36% in Europe. Today Nestlé focalize on two regions: Asia and Eastern and Central Europe. Inside the Asian market countries like India and China attracts must of Nestlé’s attention as the best potential emerging economies (1/3 of the world population).
Exhibit 2 – Sales analysis by geographic area.
(In millions of Swiss francs)
The global approach by Nestlé led to product diversification. Less then twenty years ago, coffee accounted for about half of Nestlé’s profits; today, this proportion has shrunk to less then 30%.
There are more 22,000 different products under Nestlé network worldwide. 8500 Local brands which are under the responsibility of local markets. 140 Regional strategic brands are under the responsibility of SBU’s and regional management, for example: Vittel . 45 Worldwide strategic brands, are under the responsibility of general management at SBU level, for example Kit Kat. 10 Worldwide corporate brands, for example: Nestlé, Perrier, Maggi, Buitoni.
Exhibit 3 – Sales analysis by product group.
(In millions of Swiss francs)
1.1 More 130 years of permanent innovation
The food industry is highly innovative : about 5000 new products are launched every year. Thus innovation is regarded as a major source for competitive advantage.
In the food industry product renovation is as important as new inventions. Thus the two major drivers for innovation within the industry: technology–push and market–orientation.
Since its creation, Nestlé had built its success on technological innovation. Technological breakthroughs introduced by Nestlé include such early products as lacteal flour Henri Nestlé 1867. Innovation may also take the shape of new processes (the process to manufacture soluble coffee powder, introduced in 1937), as well as improved product quality (the suppression of carbohydrate support for Nescafé, 1950).
Gilles Fayard, head of Technology Transfer Team, at Nestlé research center gave the following interpretation of the innovation process at Nestlé
Exhibit 4 – the innovation process at Nestlé
OUTCOMECONSTRAINTS
IngredientsCost
FormulationsManufacturer conservatism
ProcessesQuality
AdditivesSafety
PackagingConsumer expectations
MarketingConsumer conservatism
DistributionSociological, Political
PatentLegal
……
MEANS InnovationDRIVING FORCES
RecruitingStrategy
TrainingQuality
R&DKnow-how
Technology watch SOURCESProfit
Technology transferMarket environment
Information Know-howFashions, trends
… Knowledge…
Creativity
Competition
Academic
Inventors
Suppliers
…
Furthermore, Gilles Fayard, stated the following strategic consideration made by Nestlé throughout the Innovation process:
- Long term strategy - anticipating business and future needs (water shortage,…), geographical developments (emerging market in south east Asia, …).
- Building and strengthening of competencies - science, technology, nutrition, marketing, manufacturing, …
- Strict respect of local legislation – modify product and process accordingly.
- High commitment to environmental issues – “the Nestlé policy on the environment” dating from 1991.
- High quality products – the “3A” rule: Appealing, Available, Affordable.
- Strong technical know-how – competitive edge (coffee,…).
- Cross-fertilization – benefit from multidisciplinary expertise, learn from other product areas.
- Strong scientific support to meet different claims – infant nutrition, LC1, coffee,…
- The “3P” rule – Nestlé new products should be Proprietary, have a Perceivable value and be Protectable i.e. patentable.
Peter Brabeck-Letmathe, Nestlé’s CEO: “The constant improvement of existing products is just as important as the invention of new once. Innovation and renovation go hand in hand”. “One of the best defenses Nestlé has against the might of the retailer is innovation in your product offering”.
On the other hand, Roland Meyes, President and CEO of Nestlé Brazil says: “We have a huge network of R&D centers, but what comes out isn’t quite equal to the investment we put in. … I feel that real breakthrough innovations are still rather scarce, or sometimes too sophisticated and, as a result, often too costly for placing the products successfully in the market. …I would like to see more emphasis on the practical side, for example, local applications of existing technologies from elsewhere, or being more innovative in relation to today’s local practices and standards. In emerging countries, there is still a lot which can be done in this way in order to get a competitive advantage, instead of just waiting for pure advanced R&D results which might require high additional investment, and increased production cost and final consumer prices”.
II. Nestec as a Knowledge Management system.
Nestec SA was create in 1969 by Nestlé (100% ) in Vevey Switzerland. Nestec’s primary mission is: to give technical assistance to all the Nestlé’s companies, to transfer the know how to all the Nestlé’s companies.
Nestec is essentially an internal consulting company which operates at all levels of Nestlé’s value chain. It provides services to Nestlé’s subsidiaries in the following fields : R & D, Technical matters, Information Systems and logistics, Marketing, Finance, Human Resources and Administration & legal. “Nestec is like a consultant company owning all the technology, all the patents and all the brands for Nestlé products”, Jan Ekholm, vice president of Nestec ,explains.
The R & D Division of Nestec is the corporate R & D resource of the Nestlé group, serving all group companies. Nestec holds 50% of the Nestlé research center in Lausanne, all of Nestlé’s research center worldwide and Nestlé’s training center in Vevey.
Nestec is a self-financing business unit which contributes to the profitability of Nestlé. The management of patents is a substantial source of profit. Royalties of up to 5% are paid out by the subsidiaries for the use of new technologies or processes.
In addition, although the RECO’s have a positive view on Nestec as a whole, subsidiaries have a different perspective. There is a belief within the subsidiaries that Nestec takes too much of a global perspective and is often unaware of true market conditions in various geographical areas.
Exhibit 5 – Nestec’s inside Nestlé’s value chain
Nesltlé
Purchasing Logistics R&D Production Marketing Distribution
NESTEC
Nestlé world trade company
2.1 Technology Transfer as Managerial tool for Nestec.
A key element of Nestlé’s strategy lies in the globalization of its products. Achieving the objective of having the same products manufactured the same way around the globe requires a considerable amount of Technology and know-how Transfer (TT) among subsidiaries and between subsidiaries and Nestlé’s R & D centers. This unable Nestlé to maintain its quality standards throughout all its location worldwide. In addition, Nestlé has practiced the acquisition of brands in the food industry to reduce the costs of developing and marketing new brands. The harmonization of production processes and quality standards among acquired brands, as well as their development, imply some further TT. Recent examples include Rowntree (1985) and Carnation (1988).
The active role played by TT in all aspects of Nestlé’s business is embodied by Nestec.
Nestec’s TTT (Technology Transfer Team) has defined for main missions to actively play the turning plate role which includes 4 elements:
- Identify, evaluate, learn and transfer new, emerging technologies for potential applications in all product groups.
- Study, adapt and transfer existing, traditional technologies for new applications in other product areas.
- Insure an efficient transfer of technological competences and information within the R&D system.
- Transfer know-how to all CRN and R&D staff by preparing and performing technological and concept trials.
The services offered by Nestec are ruled by Technical Assistance Agreements which are concluded between Nestec and the subsidiaries. Transfers are agreed upon based on various types of contracts, which cover from small to large technology transfers according to the needs of the subsidiary.
Subsidiaries gain access to :
- Knowledge acquired through basic research / inventions.
- Processes, facilities and products developed through applied research.
- Norms and quality standards prevailing at Nestlé.
- Industrial know-how, including assistance by skilled engineers.
Nestec’s role in TT offers several advantages for Nestlé :
- It allows Nestlé to keep a tight control over technology in phases such as the foundation of a subsidiary or the transfer of production to a third country.
- It circulates technological innovation and processes throughout the group at a global scale, and ensures cross-fertilization between the group’s various businesses.
- It provides central R & D with technological feed-back from the various parts of the company.
- It guarantees an effective allocation of resources and know-how.
The formalization of TT by Nestec thus creates an effective system for innovation management. However, applying procedures to a creative and entrepreneurial process carries the risk of curbing creativity, dynamism and motivation of staff in charge of technological development within the subsidiaries.
2.1.1 Feeding the R&D
After some years in laboratories some young scientists can move on to tasks in the field of marketing, and with them transferring their know how . Internal turnover has been turned into a management philosophy, as well as work in multidisciplinary teams. “We have built up a core competence network that brings very competent people from other parts of the organization together with R & D people”, affirmed Jan Ekholm.
Nestlé endeavors to make its researchers close to consumers’ needs : “We do our best so that our scientists be as much in tune with consumers’ demand as possible”, asserts Werner J. Bauer, head of Nestlé’s research.. “In this respect marketing department plays an essential role of driving belt”. Scientists are made aware of market trends. But the river flows both ways : they are increasingly involved in the market analysis process. “Many scientists feel under consulted by the rest of the business, especially marketing”, says Jan Ekholm. In order to integrate a number of different people more effectively, new mechanisms have been established. “It’s a question of bringing in the scientists, not leaving them out in the cold”, Jan Ekholm continues. Andrea Pfeifer has been appointed head of the CRN in early 1998 after having successfully launched the “probiotic” yoghourt LC1. “It is the first time that our scientific teams have been so deeply involved in the market launch of a product”, says Andrea Pfeifer. R & D costs for LC1 have been amortized by the end of the first year of sale. This type of experiment might happen more and more often in the next future with the advance of “functional food” such as LC1.
Exhibit 6 – Nestlé R&D matrix a base for technology transfer
(Source: The Nestlé international research center in Lausanne, Vision – Profiles.)
2.2 Learning from the environment: competitive intelligence and technology watch.
Nestec is open to its environment and considers technology as an asset. Therefore, acquiring additional knowledge constantly appeared as a key factor in ensuring competitive advantage.
The innovation process, for example, depend on information coming from the outside; information about: markets, fashions, competition, technology, consumer behavior, political, sociological and legal factors.
Jan Ekholm opinion about market intelligence, innovation and the information flow: “For me the most important things are to try and create a culture of innovation in your company, and knowing your consumer, so you have to have a focus on cultural development and senior management involvement, linked to an information system that feeds into the system information about what is going on outside, technological breakthroughs, etc., so that they can be worked on in the company”. Nestlé customers and suppliers are also an useful source for information: “In France we have put a Nestlé man inside a customer organization to try to really understand what that customer needs …it gives important feedback to us so that we can adjust our products and develop things to fit the trade’s needs”.
Nestec’s TTT (Technology Transfer Team) is not only responsible for transferring information throughout the Nestlé group but, it’s also in charge of technology watch (term used to describe one aspect of competitive intelligence which focuses only on technology). Infect they are responsible for all the phases the intelligence process.
Exhibit 7 – TTT as an competitive intelligence unit specializes in technology
identify evaluate transfer
The TTT collects information from various sources external as well as internal (RECO’s, SBU’s, CRN), for Nestec is also looking for new adaptations of traditional technologies available within the Nestlé group. Research institutes are an important source of information and indeed Nestec co-operates with many laboratories and universities around the world. The Research Center in Lausanne alone has about 130 bilateral research agreements with universities and research institutes worldwide, 37 of them in Switzerland. Furthermore Nestlé’s participate in a European research project on high pressures along with six universities and three multinational companies, including Unilever and ABB.
Nestec also looks at what can be useful outside its field of activity : innovation in fine chemistry, pharmaceuticals or aircraft industry may be of major interest for agricultural scientists. There is no way to outguess which technologies might prove most useful; the solution lies in experiments of various solutions through exchanges and dialog with scientists and industrials, such as those at EDF (France national electricitc company) or L’Oréal. An annual new technologies workshop is being held at the NRC, where Nestlé’s experts and external speakers (non-competitors) talk about subjects of common concern.
Nestec uses other sources for collecting knowledge, for example: acquisition of companies equipped with laboratories or core competences (done through Nestlé), external recruitment of high-profile personnel, Publications, Markets, Patents, Brokers, Consultants and Suppliers.
Once the information is gathered, then the TTT experts evaluates it and defuse it to the appropriate companies within the Group.
2.3 Nestec as information protection.
The Nestec system enables Nestlé to avoid leakages and preserve its technological patrimony.
The most confidential researches are undertaken by Nestec at the NRC before reaching the stage of development. In order to prevent the dissemination of its know-how, Nestlé avoids partnerships and joint ventures, except in cases where the corporate strategic interest is strong or acquisitions are considered too costly. According to Werner Bauer, “leadership involves the understanding and mastering all the stages of product manufacturing, including aroma extraction and technology, which belong to secret know-how. [...] It is essential to identifying and keeping competences that will enable us to be leader on our market”.