Not long ago, a journalist asked Nestlé CEO Peter Brabeck if his job atop the world’s largest food company bored him. After all, Nestlé epitomizes everything that today’s high-flying, headline-grabbing companies are not. It respects technology but doesn’t consider it central to strategy. It values growth but prefers it controlled. It seeks talented professionals but wants only those who are modest in word and deed. The question about boredom puzzled and amused Brabeck. Puzzled because he has no desire to make Nestlé into a flashy darling of Wall Street. And amused because, like many business leaders today, he is skeptical of the relentless push for transformation heard from every quarter. Isn’t it enough to run a stolidly successful company anymore? Brabeck believes it is, and to that end, he makes the focus of his work identifying and strengthening those aspects of Nestlé that should stay the same. Yes, he acknowledges, all companies must change in order to compete in today’s turbulent marketplace—but they mustn’t change everything, all the time. Such an approach is unsustainable for the business and devastating to the people operating it. Brabeck recognizes that such a stance is particularly easy for a CEO in his position—he leads a company that’s in its best shape in years. But Nestlé has rarely floundered during its 134-year history. Founded in 1867 in Vevey, Switzerland, to sell infant formula, the company grew quickly through an aggressive campaign of acquisitions that continues today. Nestlé now operates in every country on earth, selling thousands of products, from Nescafé instant coffee to Perrier bottled water to Friskies cat food. Its revenues in 1999 were close to $ 47 billion, with profits of $ 3 billion. That’s a return-on-sales of 6.3 % —unspectacular by some standards but respectable nonetheless. If Nestlé has not struggled with performance over the years, it has struggled to rid itself of bureaucracy. The company employs 230,000 people and operates more than 500 factories as well as 17 research and development facilities with a combined budget of close to $ 600 million a year. The corporate inertia caused by such complexity prompted Brabeck’s charismatic predecessor, Helmut Maucher, to restructure and streamline the company’s operations throughout the 1990s. So it was a revitalized, vastly more nimble company that Brabeck inherited nearly four years ago. He was no stranger to the organization. The Austrian-born Brabeck joined Nestlé in 1968 as an ice-cream and frozen-food salesman, after studying economics at the University of World Trade in Vienna. Over the next three decades, Brabeck followed the typical Nestlé management track, running operations around the world, including those in Chile, Ecuador, and Venezuela. In 1987, he moved to headquarters in Vevey to direct the company’s culinary products division and then, in 1992, its strategy-making units, marketing, and communications. He spoke to HBR in his office overlooking Lake Geneva. What’s wrong with radical change? What is so good about it? Not good, but necessary. The markets are constantly changing. So are consumers. And so is technology. One could make a strong case—and many management theorists and executives do—that companies today have to embrace radical change just to keep up. Big, dramatic change is fine for a crisis. If you come in as CEO and a turnaround is necessary, then fine, have a revolution. In that situation, change is relatively easy because the whole organization understands that, just to survive, you need to do things differently. They are prepared for change. They understand when you say, “The cancer is here, where do I cut?” But not every company in the world is in crisis all the time. Many companies are like us—not as big, of course—but they are performing well. Growing, innovating, and so forth—good and fit. Why should we manufacture dramatic change? Just for change’s sake? To follow some sort of fad without logical thinking behind it? We are very skeptical of any kind of fad and of the self-appointed gurus you hear from all the time, making pronouncements. It is easy to be dogmatic when you don’t actually have to run a business. When you run a business, you must be pragmatic. Big, disruptive change programs are anything but that. You cannot underestimate the traumatic impact of abrupt change, the distraction it causes in running the business, the fear it provokes in people, the demands it makes on management’s time. And frankly, you could make the case that any kind of onetime change program is actually a very worrisome warning—it’s a bad sign that a company’s leaders have had to make such an intervention. Think of medicine again. If you take preventive care of your health, and you’ve taken the time for check-ups, you won’t wake up one day to find you have to cut off your leg. That is why we see adapting, improving, and restructuring as a continuous process. We put on our books restructuring charges of up to $ 300 million, before operating profit, as operating expenses, year after year. Most of our competitors—most companies, in fact—would account for these as extraordinary charges. Very different philosophies, no? You know, all this talk about reinvention in business reminds me of 1968, when a whole generation thought you couldn’t have social change without a revolution. Or of the beginning of the century, with the Marxists, when some people felt they needed to kill millions of people because of some great philosophical idea. I hope we’re past that now because it doesn’t make sense. Not for society, not for business. Evolution can happen if you believe in it. You can have slow and steady change, and that is nothing to be ashamed of. Our market capitalization in 1997 was CHF 55 billion (Swiss francs), and today it is around CHF 150 billion. It happened without frenzy, without bloodshed. Just constantly challenging people to be better, day by day, bit by bit. But is there a price to pay for evolutionary change? Yes, you’re unspectacular. There are certainly many companies out there that are very sexy, like a 20-year-old girl. Everyone wants to know all about them. We are not that. We don’t want to be. Our company is more like a 40-year-old, someone who is strong and trim, and who can easily run 10 miles without being pushed or pulled. I take it that this goal is not ideological. Of course not. Then what’s the business case for being a company that performs like a reasonably robust 40-year-old jogger? Look, Nestlé caters to billions of consumers around the world. In our business—food and drink—more perhaps than in others, we need a relationship of trust to be successful. Can anyone trust a company that reinvents itself every few years? Sure, we will act swiftly to change our products and our business methods if need be, and we do our best to improve all aspects of the company each day. But we will never allow our value system, or our focus on quality and safety, to deteriorate. Trust is our most important asset. We must always defend it. That’s why I think one of the main jobs of the leader is to determine what aspects of the company you want to keep. You have to be clear about why the company has been successful in the past, and how you are going to keep those fundamentals from breaking down or disappearing. Nestlé actually has a document that identifies those aspects of the company that shouldn’t change—its “untouchables,” let’s call them. Right. Shortly after it became known that I was to be CEO, I looked back on my 30 years with the company and reflected with Helmut Maucher about what makes this company unique. Then we published this document for everyone in the organization. It is very simple, not a lot of words, no mission statement—just a list of the things we didn’t want to change at all, even as we evolved. The first untouchable has to do with technology—or rather, its lack of importance to the company. There’s a lot of noise and energy swirling around these days about technology. Everybody talks about making it the focal point of strategy. That will never happen here. Nestlé is about people, products, and brands—that’s it. We don’t want to let IT take over this company. We are not a systems company. We use technology to create better products so we can serve our consumers better; we do not let technology lead us. Our company is here to supply food. The word for food in German is Lebensmittel—“means for life.” That is what Nestlé was founded to produce, that is what made this company succeed, and that has to be in the forefront of our thinking. Now, that doesn’t mean we ignore technology. We led the pack, I dare say, in the virtual shopping arena. We were e-tailing before anyone else even knew the word. In 1994, we established one of the first virtual shops for consumers in the world—in fact, consumers could access it only through an experimental interactive television system because there was no Web then. That company still exists; we helped the young entrepreneurs who are running it, and they are doing very well. We were also in at the very beginning with B2B commerce. Remember, we were one of the founders, along with Coca-Cola and several other major U.S. companies, of Transora, the electronic marketplace for suppliers in the consumer goods sector. We even went one step further: I was instrumental in creating CPGmarket.com, a European competitor to Transora. Believe me, some people didn’t like that at all. So you can’t say we are not at the forefront of technology. But we don’t brag about it. We use it as a tool, not as a strategic target. We want people talking about people and products and how we can develop and achieve strategies to serve our customers best. Take a look at this building. Three years ago, it was a modern-looking building with an old-style interior. Everyone had closed, individual offices. Walking through the halls, you wouldn’t see anything—no people, no products. It was almost like we had something to hide. But I wanted the building to reflect our philosophy that people and products come first. I wanted people to see each other and talk all the time about our products and customers. What did we do? We made the whole building transparent. We knocked down all the walls and put in glass. People still have their offices, but everyone can see each other. We also took space away from the individual offices and created areas where people could meet and talk. On the sixth floor, we added a permanent product exhibit, three tasting kitchens, and a coffee bar that employees use as a meeting place. Just today, I tested a series of new soups to be launched soon in Europe. We went as far as installing rooms like those you would find in the homes of our typical customers. There is a teenager’s room, with music playing, posters of rock stars on the walls, and candy wrappers on the floor. And we have a kitchen of a small apartment, shared by two people, showing how many of our culinary products are used. In another area, we display many of the products we are working on in our labs—products that are on the leading edge of what nutritional science can achieve today. The sixth floor sends a clear message to people: we are not here for systems. We are here to serve people through our products. Isn’t there a risk today in rejecting a technology focus? First, we do not lack a technology focus, we just keep technology in its right place—the background. And second, if you are implying we are anachronistic, we are not. Our approach is timeless. We will see how all these “technology” companies are performing in ten years. I wonder, I wonder. I can tell you Nestlé will still be here. Having grown at its own rather controlled pace, right? Yes, because another central principle of Nestlé, which we certainly do not want to change, is our approach to revenue and profit growth. We have never managed for the maximization of short-term shareholder value. It doesn’t make sense. If you want to keep bumping up your top line and fattening up your bottom line, you are forced to make all sorts of extraordinary onetime changes and fixes. We don’t want that. Now, don’t get me wrong: we are committed to making a reasonable profit each year—and I do not believe that a 7 % net return on sales is a sound barrier—but our main goal must be a long-term, sustainable, and profitable development of our business. This makes road shows, especially in New York and London, quite interesting. The analysts and money managers put enormous pressure on you. “What are your goals? What are your targets? What is this? What is that?” They want instant results. I always tell them the same thing. “Look, I will sit here for as long as you want and explain our strategies, and the ideas and circumstances that led to them. But you will not nail me down on an operating profit target, or a net profit target, or any other exact number. Instead, I will show you how long-term optimization of shareholder value will result from our strategies.” I am not going to run a company based on what the market wants at any given moment and make mistake after mistake because I told the analysts one thing one day to make them happy. I’m not saying that it’s easy to withstand market pressure. You need strong nerves—the financial markets can penalize you for taking a long-term view. But you shouldn’t care because, when all is said and done, the consumers’ and the shareholders’ interests must come first. And I know for a fact that the majority of our shareholders prefer a long-term profitable development of our business to a short-term profit maximization that, over time, would hinder growth, or in the worst-case scenario, put the business in danger. Our business is not made for quick ins and outs. It took my predecessors years to build a profitable business in countries like Japan and Korea; the invaluable experience we have acquired in emerging countries took decades to develop. Now we are harvesting the fruits of those long labors, and I believe our shareholders are quite happy about it. It’s one thing for the CEO to announce he will resist market pressures for short-term increases in shareholder value; it’s another thing to make sure that executives throughout the organization have the same attitude. Given how decentralized Nestlé is, how do you make sure your managers are with you? Surely executives in individual companies—say, in Guam or Brazil or the United States—are rewarded for financial results. Yes, of course they are. But there are safeguards that can be built into any remuneration or stock-option scheme, and we have done that. For instance, if a manager has agreed to invest 5 % of sales in advertising to build one of our brands, but he only spends 3 % and tries to realize the rest as profit, forget it. We don’t count it because he cut corners to post a short-term gain. And it won’t be recognized in the bonus payment at the end of the year. So there are mechanisms, you see. More important, we resist market pressures by relying on managers who have been steeped in Nestlé’s corporate culture. They know if you have to make a choice between fulfilling an operating profit and playing with the safety of our products, there is no choice. That’s immutable. What other aspects of Nestlé are on the list of untouchables? Decentralization. We believe strongly that there isn’t a so-called global consumer, at least not when it comes to food and beverages. People have local tastes based on their unique cultures and traditions—a good candy bar in Brazil is not the same as a good candy bar in China. Therefore, decision making needs to be pushed down as low as possible in the organization, out close to the markets. Otherwise, how can you make good brand decisions? A brand is a bundle of functional and emotional characteristics. We can’t establish emotional links with consumers in Vietnam from our offices in Vevey. That said, decentralization has its limits. If you are too decentralized, you can become too complicated—you get too much complexity in your production system. The closer we come to the consumer, in branding, pricing, communication, and product adaptation, the more we decentralize. The more we are dealing with production, logistics, and supply chain management, the more centralized decision making becomes. After all, we want to leverage Nestlé’s size, not be hampered by it. The alternative to radical change, you say, is continuous improvement. At a company as successful as Nestlé, how do you make that happen? Of course, complacency is always a danger when you are doing well—and when you have the CEO stating that he is not going to start a revolution. I am on the record saying it would be the worst day of my life if I had to announce 10,000 layoffs. And people know that we worked very hard last year to keep job losses to a bare minimum when we sold or closed 55 factories. So why should people keep pushing themselves to always improve, right? But there are ways. Think about a sailor. When I started as CEO, I didn’t want to change the heading of the boat, I just wanted to make it go faster. A sailor in that position has two choices: trim the sails or change the crew. I did both. I changed the crew the same day I took over. Each and every member of the executive board—ten people—changed assignments on that day or retired. Together with the new executive committee, we then trimmed the sails a little, fine-tuning our strategy. But even before that, I had put down on paper a blueprint for the future. Normally, my predecessors would have communicated such a plan by speaking with the people involved. But I wrote it out and made it available to everyone in the company. We put it on our intranet, and we showed it to the outside world—our competitors, everyone. Seeing where we were going like that, black on white—well, it scared some people. I couldn’t care less. I wanted to make it clear to people where we were going and how we were going to get there. And with that, we started off. Nestlé Group’s Sales and Net Profit Nestlé is famous for its chocolate and coffee, but the Swiss conglomerate produces practically every kind of food and drink, from pasta to PowerBars. Its products span the human life cycle of nutritional needs from Good Start baby formula to Clinutren shakes for the elderly and infirm. Nestlé controls the world’s market in bottled water and, as if catering to humans weren’t enough, it also produces a multitude of products for pets. Finally, for the sake of diversity, Nestlé owns Alcon, the U.S. eye care company, and 26 % of L’Oreal. Below, a look at Nestlé’s respectable, if unspectacular, financial performance over the past ten years. What was different about the new crew? They are people who will not put up with complacency. The biggest problem with a successful company is that you don’t learn from success. Learning from failure is so much easier. So I appointed people who, like me, constantly challenge their people to give the best of themselves. Great in concept—how about in practice? I go out in the field all the time, meeting almost 4,000 people a year. I am seldom in Vevey—maybe one week a month. Otherwise, I travel to our facilities and gather local management around me. We talk and talk; I explain to them what we are doing, and they question me. I challenge them. To do what? To change their attitudes. I challenge people to be more aggressive, to have more courage, to be self-motivated. That is all I need. (For more on the personal characteristics that Nestlé requires of its managers, see the sidebar “Recipe for a Nestlé Manager.”) The only objective I have publicly stated is the goal of 4 % real internal growth. Now, I haven’t done this for the financial world. I’ve done it for Nestlé’s employees. If all I wanted was growth, I could do that myself with a banker and a negotiator, through acquisitions. But I cannot achieve internal growth by myself. I need the personal commitment of the 230,000 people who work for Nestlé. That is why I put the 4 % internal growth goal out there. It’s a yardstick to measure our-selves by—and a very ambitious benchmark for a big organization like ours. But we will get there. Recipe for a Nestlé Manager Courage, solid nerves and composure, and the ability to handle stress. In this world, there are followers and leaders. Leaders have courage—they can stand up against the barrage of public opinion that comes at them and say, “I have thought about this subject, and I have come to the conclusion that this is the best decision. We are not going to capitulate.” Take genetic engineering, a highly politicized issue. I have seen many companies that, in the beginning, were screaming, “We are for it.” Then when they heard the negative reaction from the public, they crept away apologizing, saying, “No genetic engineering then.” We did not apologize. We asked eminent professors to write their opinions about genetic technology for us—positive or negative. We reviewed what the professors had to say, discussed it, and concluded that genetic engineering is a technology that is good for humankind. We are a global company with global responsibilities. We cannot think only about Europeans. We have to think about the millions of people around the world who are hungry. We have to think about the effect of pesticides and fertilizers on the long-term sustainability of agriculture. For these reasons, we took a stand. We will pursue this technology. The reaction from the press and the public has not been happy—but this is why you need nerves of steel in business today. Otherwise you will never stay the course. Modesty. Our business, basically, is not all that fancy. There is science to it, yes, and know-how. But ultimately, it is not terribly complicated. We are here to make people’s lives better through food. And that’s a sensitive proposition. We do not want to impose ourselves on people’s lifestyles or their tastes; we want to meet their needs and desires. That goal requires us to be modest—humble, to use another word. We are here to serve. Some companies claim that their products will change lives or change the world. We will have none of that. Think about how we market Maggi, our brand for a wide array of soups, prepared foods, dried noodles, and so on, in Europe, Africa, and Asia. We say, “You and Maggi make better meals.” You and Maggi. Not just Maggi. That would be presumptuous. And we don’t want people in Nestlé like that. One way we will get there is through innovation. Right now, in the industrialized world, the basic food needs are easily covered. So consumers are looking for something better—they want, for instance, food that is both pleasurable to eat and good for you. Tasty frozen yogurt, for instance, with nutritional benefits. Unless we are willing to invest heavily in R&D, there is no way we can satisfy that kind of demand. We also are facing very specific demands from some vulnerable consumer groups: babies, of course, the elderly, and people who are sick or recovering. We want to meet those needs—in fact, we want to be able to serve all consumers throughout their whole lives. And all the while, we won’t compromise on safety and quality. That goal, obviously, will take lots of R&D spending. But R&D is part of something bigger—a commitment to finding new ways to do things, every day. Again, an attitude of continuous improvement, of fighting complacency. Let me tell you a story. When I first started as CEO, our performance in Mexico was all right. Our managers were okay. In 1997, sales amounted to CHF 1.1 billion. The people in charge were very correct, very decent, doing a fair job. But they didn’t have the hunger to win. So, we changed management—only the very top, really—and we put in a new leader who was hungry to win. He came up with a new plan—a good, judicious plan. And I remember, I looked into his eyes and said, “Somehow I know you can do more. I’m sure you can achieve CHF 2 billion,” He looked at me. His face was pale. He said, “If you have confidence in me, I will get it.” Anyway, I just got back from Mexico today. We were celebrating reaching the CHF 2 billion target with 240 people, the key staff. It was great. What happened? They became like tigers, each one of them. It was a systemic change—within each person. They decided they wanted to go out and fight and win. They began to believe in themselves. It was virtually the same team that had reached CHF 1 billion only a few years before; they practically doubled sales in three years. The team that had been too easily satisfied suddenly developed a real fighting spirit. The CEO who led them is now on track for a new and bigger appointment. His successor is ready to take his place, and I have no doubt that he will do well because a dynamic has now been created—a dynamic of challenging people, of pushing them further. It goes through the whole organization. Once it starts and you get the right mind-set, it’s like a snowball. It sounds like that mind-set for continuous change is set in motion very informally. How can you institutionalize it? One way is how you promote people. Every time I have to approve a promotion, I ask, “What was the biggest mistake this person has made?” Because if somebody hasn’t made a big mistake along the way, he hasn’t had the courage to make big decisions. Or the chance to learn. So, basically, this approach to promotion encourages risk taking—it steers people away from aiming for decisions that are 100 % safe all the time. It challenges them to try new things, to try harder. Is it really possible to get promoted at Nestlé with a host of mistakes in your past? Not a host of mistakes, of course, but some, yes. Look at me. I’ve made several excellent mistakes—excellent in what they taught me. I mean, I pushed this company into the dry pasta business. It seemed like a brilliant idea at the time—a big market opportunity. There’s a market for the center of the plate, I said, and we should be there. So, we looked for acquisitions, and in 1988 we found Buitoni, which seemed to be a good company to establish us in this new business. It turned out to be a mistake. We didn’t do enough analysis first, we didn’t dig deep enough to realize that the competitive advantage in the dry pasta industry is not in the hands of the pasta producer but in the hands of the pasta machine producer. They have the proprietary technology. There was nothing Nestlé could gain by owning a dry pasta factory. Anyway, I realized that pretty quickly, and I learned a big lesson. You have to push your analysis very hard, trace the sources of competitive advantage to their roots. Business is not just about getting the marketing concept right. We’ve basically been selling off the dry pasta business ever since. Still, Buitoni was a good buy; we gained an excellent brand for our fresh and frozen Italian cuisine products, where our technology really makes a difference. We all make our mistakes. If you learn from them, they make you stronger. Besides its approach to promotions, are there more formalized mechanisms at Nestlé to create an environment of continuous improvement? Many—all of them in the area of professional development. We have a system, for instance, whereby members of the management team closely follow the progress of people in the second and third ranks. We watch them in action, discuss their results—or lack of them—and get to know their families. These are the people who are on the fast track, perhaps to the very top. They do not know we are systematically watching them. We just let them do their jobs as well as they can. By the way, it is generally not the people anxiously waiting for the next star on their shoulder who make it up the ladder but those who show drive, enthusiasm, and determination in whatever assignments they have been given. And leaving them in ignorance about the fact that we are observing them might just keep them from developing the star syndrome. What parts of the Nestlé approach to continuous change stymie people the most? You are going to be surprised—it’s collaboration. Many people like to work in pyramid structures because pyramid structures are clear. Everybody knows where he or she is and who has the power. But continuous improvement doesn’t really thrive in that kind of environment. To grow and learn, people have to collaborate. It won’t work if a few people have all the information and power and the rest do not. Frankly, this is hardest for the people in middle management to accept. This is where we have the biggest resistance and where we have to hammer and hammer and hammer. Getting the message about collaboration across at the top is relatively easy. And it’s easy, too, with the blue-collar workers. It is amazing the way they are committed, the way they are improving—it’s fantastic. But where you have the layer of concrete heads is in middle management. They feel that we are taking away their hierarchy, that they are losing power. Many of them are not willing to collaborate, and some of them don’t know how. Those who lack the skills I can take care of more easily; they can be trained. People who are unwilling to accept that collaboration is necessary for continuous improvement are a different matter. You have to be relentless about getting them out of the organization. How do you know if your message about continuous improvement has permeated the organization? I talk to the lowest levels of collaborators. This can be an informal chat with the employee who serves coffee here on the fifth floor. Or it can be more regular communication than that. Once a month, I sit with 12 or 14 people, and we have lunch. Their bosses are not there. We talk frankly about how their work is going, whether they are getting all the information they need, and whether they have questions about where the organization is heading. These conversations sound very low key. Yes, they are not intended to fire people up to crazy action or incite them to riot. But they know, believe me, that there are still worlds for us to conquer. Many worlds. There is China, for instance. I would not be surprised if, in a decade, China became one of Nestlé’s biggest markets. That’s a huge change. It will take years of hard work, years of continual adjustments to our strategies and operations. And the same is true for improving the company’s performance using e-technology. But that won’t keep us from concentrating on people, brands, and products—in the end these will make a difference. So it will not take a revolution. I know that assertion may disappoint many people, but the truth is, in business, you can win the war without killing off half the army.
