When Medium-Sized and Large Companies Hit a “Boundary Wall”: The Nestlé Case

Verification notes (2026-10-29): 1. Nestlé's official corporate history confirms that, in 1921, falling prices and excessive inventory led Nestlé & Anglo-Swiss Condensed Milk Company to report its “first and only” financial loss. Source: https://www.nestle.com/about/history/nestle-company-history 2. Differences from the post: the post says Nestlé invented instant coffee to escape the 1921 crisis. Nescafé's official history instead traces the product to a request Brazil made to Nestlé chairman Louis Dapples in 1929 to address excess coffee supplies: a quick-to-prepare coffee product that would reduce waste. Nescafé launched in 1938. The post's causal sequence of “making a loss, then inventing instant coffee to break out” does not match the official record and is not treated as established on this site. Sources: https://www.nescafe.com/coffee-culture/knowledge/nescafe-history https://www.nestle.com/about/history/nestle-company-history 3. The post says Nestlé “acquired L'Oréal eye cream,” among other things. Nestlé is a major shareholder in L'Oréal—L'Oréal's 2024 annual report lists its holding as 20.14%—rather than having acquired L'Oréal. These notes have not individually verified the post's claims about “hundreds of companies” and “selling them when they reach the boundary.” Sources: https://www.nestle.com/ask-nestle/our-company/answers/nature-of-nestles-relationship-with-loreal https://www.loreal-finance.com/eng/2024-universal-registration-document/en/article/389/ ---- When Medium-Sized and Large Companies Hit a Boundary Wall—The Nestlé Case When a company “stalls and cannot get past an obstacle,” it has probably reached a boundary of its system. However fast a company develops or unstoppable it seems, it will eventually hit its own “boundary wall.” Founded in Switzerland in 1867, Nestlé initially sold a nutritious cereal porridge for infants. At the time, mortality among Swiss babies under one year old was as high as 20%, yet infants fed Nestlé's porridge were very healthy. Its product became an immediate hit. Nestlé then developed condensed milk and milk powder, which were also enormously successful. It seemed unstoppable. In 1921, however, the postwar decline in military demand for canned milk powder suddenly saturated the market. Nestlé's milk-powder prices fell and inventory piled up. It had encountered the hard constraint of the milk-powder market's size. Nestlé made a loss for the first—and only—time in its history. What should Nestlé do? Advertise that milk powder can fight cancer, then grit its teeth and keep trying to sell it? Nestlé did not force its way further into the milk-powder market, already subject to a hard constraint. Instead, it broke out by inventing “instant coffee,” bypassing that constraint and finding a new, enormous group of potential users, thereby escaping the boundary wall. Nestlé then became unstoppable. It developed or acquired hundreds of companies, including Maggi soups, Nestea, Alcon eye care, capsule coffee, Perrier, KitKat, Polo mints, L'Oréal eye cream, Hsu Fu Chi, Cat Chow, and Totole chicken seasoning. Whenever growth reached the boundary wall set by a hard constraint, Nestlé would sell the business. ------ What is a “boundary wall”? In system dynamics, it is a special kind of balancing loop. An ordinary balancing loop gradually limits growth, like an elastic band. Some, however, are like a steel wall directly ahead: hit one and you are badly hurt, with no room to maneuver. A boundary wall is the limit on a system's growth set by a hard constraint. Putting on our glasses of insight, we must see not just the system's growth drivers, but its hard constraints too. All growth has limits, and all systems have boundaries. It is extremely difficult to persuade an ambitious CEO to acknowledge growth limits. But only by admitting there are limits can the company break through its boundary wall. This is an important responsibility of the CEO. ----- Keep the following four hard constraints on your desk and watch constantly for signs that they are approaching. First, market size. In its earliest days, Nestlé encountered the hard constraint of market size. If you open a convenience store, that constraint is roughly the 3,000 households within a one-kilometer radius. If you make a film, it is the audience that can fit in front of the country's 60,000 cinema screens. This is called the “total addressable market” (TAM). Also remember that, even within film, the subject determines the market opportunity. Action blockbusters have a larger market than art-house films. There are other players in the market too. The strength of competitors determines how difficult it is to reach the maximum market. Once you approach your total addressable market, do not keep fighting on the same ground. Move to another field. Second, resource constraints. If you start a business based on “who I know,” you are a resource-based entrepreneur. That is your advantage and your hard constraint. Whatever the quantity of resources you control, you can quickly reach its limit. For founders relying on their personal abilities, time is the hard constraint. The more capable you are, the sooner you may reach the boundary wall. Raising prices does not eliminate the time constraint; it only delays it. If your venture depends on land, rare mineral resources, one person's unique craft, or similar nonrenewable resources, its boundary wall is also close at hand. What can you do? Try building your business model on rapidly renewable resources, such as knowledge, processes, and patented technology. Third, regulations and policy. Some small companies operate irregularly: they do not pay taxes or social insurance contributions, copy other people's patented inventions, and make false advertising claims. As soon as they grow a little, they turn around and run into a boundary wall. All those little tricks and clever shortcuts used when small become useless as the company grows. Operate compliantly early on, or the company will never grow large. Fourth, technological constraints. Every technology's development encounters a limit. However good Windows becomes, eventually it is good enough. However powerful the iPhone becomes, many people no longer want to replace it with every generation. Once a product is good enough, technology has reached its hard constraint. What can you do? It is time to move from milk powder to researching “instant coffee.” ----- Whenever you face a problem of “stalling and being unable to move beyond it,” you have probably encountered a hard constraint in the system's structure. Only if the CEO acknowledges there are limits can the company escape its boundary wall. This too is an important responsibility of the CEO. CEOs must identify where boundary walls are most likely to appear. Pay particular attention to four areas: Market size; Resource constraints; Regulations and policy; Technological constraints. Then find new growth opportunities without those hard constraints and break out, as Nestlé did in moving from milk powder to instant coffee. After a brief slowdown, you will accelerate again. “The future is bright; the road is winding.” #LiuRunThirtyLecturesOnBusinessInsight ---- Robin: “When medium-sized and large companies encounter limits to growth, they must break through boundary walls—for example, Nestlé developing new products or making acquisitions. “But when an early-stage startup faces a still-large market and has a tiny share, yet starts thinking in all directions and doing all sorts of things, that clearly means either it has no confidence in how to truly win a market, or it chose a market it cannot win from the outset. “In other words, do not rush to enter another market while your startup's share of the current one remains far below 1%, 3%, 5%, or 10%. Each new market requires fresh investment and a new learning curve, yet you end up insignificant in every market and mired in losses across them all.”