Does It Make Sense for Nestle to Focus Its Growth Efforts on Emerging Markets - Essay Example

?Business Synoptic Module Table of Contents Table of Contents 2 0 Does It Make Sense For Nestle To Focus Its Growth Efforts On Emerging Markets? Why? 3 2.0 What Is the Company’s Strategy With Regard To Business Development in Emerging Markets? Does This Strategy Make Sense? From An Organizational Perspective, What Is Required For This Strategy To Work Effectively? 4 3.0 Company Analysis over Last Five Years 8 4.0 Strategic Posture of Nestle At the Corporate Level 15 5.0 Does This Overall Strategic Posture Make Sense Given The Markets And Countries That Nestle Participates In? Why? 16 6.0 Is Nestle’s Management Structure and Philosophy Aligned with Its Overall Strategic Posture? 17 References 18 Bibliography 21 1.0 Does It Make Sense For Nestle To Focus Its Growth Efforts On Emerging Markets? Why? Nestle has made a huge contribution and has experienced growth in developed markets of Europe, New Zealand and USA and has a significant presence in most segments of these markets. For its future growth it needs to obtain either market share from its competitors or make entrance to a latest product segment. These growth methods are expensive and require maintaining sustained efforts from the management. The growth level of Nestle is rising in developing nations such as China, South East Asia and a few markets of Middle East, Africa and Latin America. Thus, it makes sense for Nestle to focus its growth in emerging markets (Biotee, n.d.). The company through mergers and acquisitions developed its growth and expanded the operations along with increase in market share in emerging markets. As the rising markets are providing ample of opportunities for Nestle to expand their business in certain growing economies, thus it can provide them opportunity for future sustained growth (One World Trust, 2007). Nestle, one of the world's largest food groups have set out to expand their business in the fast-growing emerging markets which will enable them to make future market growth with the help of new products as well as their existing products (The Economic Times, 2011). Nestle is much conscious of the emerging markets importance to its businesses. In 2009, the company had a 42 per cent fall down in its net profit. In 2010, Nestle had seen a growth of 0.3 per cent from its established markets whereas in Asian countries such as China there was around double- digit growth for the company. In provisions of retail sales the company is also ranked in third after Mars-Wrigley and Cadbury in the emerging markets. Thus, it is important for Nestle to expand its market in emerging nations for its future growth (Greenmail, 2010) 2.0 What Is the Company’s Strategy With Regard To Business Development in Emerging Markets? Does This Strategy Make Sense? From An Organizational Perspective, What Is Required For This Strategy To Work Effectively? Nestle continues to expand in emerging markets by extending to Central and Eastern Europe with the creation of a new service centre. They had developed strategies in order to generate growth in the local economy by enhancing employment opportunities and creating a talent pool of young skilled workers in the developing nations (Nestle, 2010). In emerging markets Nestle grow by controlling ingredients along with processing technology for local conditions and utilising the suitable brand for that market. In Asia, Nestle attain local companies in order to make a group of independent regional managers as they are much acquainted with the culture of local markets than others. They are generally focussed on developing local foods for local markets and they are not providing importance to their global brands in emerging markets. It also localises its distribution and marketing strategy to the requirements of the local market (Slide Share, 2011). In Nigeria, Nestle selected local singers in order to visit towns as well as villages for providing a mix of entertainment along with product demonstrations. In China, the company built its own distribution of network which is branded as ‘milk roads’ (Nestle, n.d.). Thus, the entire strategies adopted by Nestle to market in developing nation is making sense and it will bring positive results to their business growth in those nations. BCG Matrix Source: (Mind Tools, 2011). Nestle while marketing in emerging markets falls under the matrix “Question marks” of BCG matrix. The market share of business is low in such case and the opportunity of market growth is high. This means that they have scope and potential to grow and develop their business but huge investment is required to develop market share as there are already existing competitors at certain emerging markets. Certain strategies can be adopted by the company in emerging market such as building market share and divest. In the first strategy the company can expand market share and in the second strategy Nestle can divest from strategic business unit for using the resources in a different place (Tutor 2u, n.d.). Porter’s Value Chain Michael Porter has proposed five competitive forces that a corporate strategy ought to consider in their strategic perspective to meet the threats and opportunities of the external environment of the organisation. Sources: (Strategic Advantage, n.d.). Bargaining Power of Suppliers The bargaining power of suppliers in the emerging market is high because there are no alternative sources for the inputs and the cost of switching from one supplier to other is also high. But the bargaining power can be reduced to a lesser extent by adopting various strategies. Nestle can look to make partnership with the local suppliers of the emerging markets, dependency can be increased and knowledge of supplier costs as well as methods can be build (Recklies, 2001). Bargaining Power of Customers The bargaining power of customers will be high as customers possess low margin and are sensitive to prices, they are aware of the production cost, the product is not strategically important for the customer thus there is a chance of the customers to integrate backwards. The high customer bargaining power can be reduced by developing loyalty among customers, partnership with customers, intermediaries should be avoided to contact with the customers and moving ‘purchase decision away from price’ (Recklies, 2001). Threat of New Entrants The new entrants in the market will be competitive as there is already a presence of the local competitors. Thus, a new entry may change the ‘major determinants of the market environment’ such as market share, customer loyalty and prices. There may be scarcity of valuable resources such as qualified staffs; existing players at certain times manage the distribution channels and have good interrelation with the customer. The market as well as brand image need to be build properly. The suppliers along with distributors must be tied up through partnership to reduce the threats from new entrants in the market (Recklies, 2001). Threat of Substitutes As the emerging markets of certain countries are not yet completely developed there is a possibility of alternative products with lower prices in the market. The existing players may have good brand loyalty of customers and possess close relationship. The threat can be reduced by increasing the switching cost and survey can be conducted in order to understand the taste of the local customers (Recklies, 2001). Competitive Rivalry between Existing Players In the emerging markets there may be a chance of competition between the existing players when the products are of the similar nature. There is a price competition among the competitors’ products and thus this may result in lowering of the market growth. The price competition can be reduced and certain exclusive products can be manufactured which can attract customers (Recklies, 2001). Requirements for Strategies to Work Effectively High competency level has been developed by Nestle in order to respond rapidly to the changing environments. Nestle was capable of responding to alterations in local demand, cultural barriers and political fluctuation. For the success of the applied strategy it is vital that local units must be provided a great deal of autonomy that will mostly serve the interests of the local market. Extreme direction from head office will not only hamper the decisions of local managers but may deny them from considering options that might seem unusual or strange back at head office. Nestle uses that approach in order that the consumers can easily get used to their brand name. The Nestle strategy was to build cultural awareness by strategies such as employing local people in order to reduce cultural barriers. Nestle consider that the basis of their success is customisation to a certain extent than overstated globalisation (Nestle, n.d.). 3.0 Company Analysis over Last Five Years In 2010, Nestle attained organic growth of 6.2% in addition to real internal growth of 4.6%. The sale of foreign exchange was at the rate of 3.6% and divestitures, net of acquisitions reduced by 0.6% of sales. Group sales for the year 2010 were registered at CHF 109.7 billion. By continuing the operation the company organic growth rate was 6.0% including 4.4% of real internal growth. The foreign exchange was at a rate of 3.8% and acquisitions, net of divestitures increased by 1.8%. On the whole the sale of continuous operation was expanded by 4.0% (Nestle, 2011). Diagram Source: (Nestle, 2011). For the operation of food and beverages in America the organic growth was 5.7%, in Europe it was 3.7% and in Asia, Africa in addition to Oceania the growth was 10.2%. In emerging market and in advanced market the organic growth was achieved at 11.5%. As a result the market share was attained in both regions. Thus, there is a growing distribution of Popularly Positioned Products (PPPs) and the continuing roll-out of top products in both emerging along with developed nations. Diagram Source: (Nestle, 2011). The Group’s EBIT margin was raised by 20 basis points to 14.8% of sales. The continuing operations’ EBIT margin was increased by a margin of 30 basis points to a figure of 13.4% both in reported currencies as well as in constant currencies. The improvement of EBIT was due to sales growth and business mix, as well as by the attainment of operating efficiencies of above CHF 1.5 billion through ‘Nestle Continuous Excellence’, which benefited the cost of goods sold, distribution and administrative costs. The continuing operations’ cost of goods sold was decreased by 40 basis points. The continuing operations’ distribution costs were decreased by 20 basis points. The continuing operations’ administrative costs was lowered by 70 basis points but the control of fixed costs, enabling leverage from growth was present (Nestle, 2011). Diagram Source: (Nestle, 2011). In 2010, Zone Americas had sales of CHF 34.3 billion, 5.9% organic growth, 3.0% RIG and an EBIT margin of 16.5%, down by 30 basis points. Zone Europe had sales of CHF 21.6 billion, 2.5% organic growth, 1.7% RIG and an EBIT margin of 12.6%, up by 20 basis points. Zone Asia, Africa and Oceania had sales of about CHF 17.4 billion at a rate of organic growth of 8.7%, 7.0% RIG and an EBIT margin of 16.9%, up to 20 basis points. The emerging markets attained double-digit growth, with strong performances all over the Zone: from Africa, from Asia, including India and China, Indonesia and Thailand, and from the Middle East. The developed markets also attained growth which means that the business was raised in the developed markets of each of the three Zones. Nestle Waters had sales of CHF 9.1 billion at a rate of 4.4% organic growth, 4.8% RIG and an EBIT margin of 7.4%, up by 40 basis points. Nestle Nutrition had sales of CHF 10.3 billion, 6.7% organic growth, 5.5% RIG and EBIT margin of 18.1%, up 70 basis points. The three zones i.e. Asia, Oceania and Africa received growth as more than two times and market share also was raised on a global basis (Nestle, 2011). In 2006, the brand worth was of $4,932 million. The strength of Nestle is not based on its corporate brand rather its product brands. The Nescafe brand was categorised as 23rd by Business Week in that year (CICS, 2010). In 2010, Nestle Waters North America lessen water consumption in its factories by 2.2 percent while product volume raised by 27 percent (Nestle, 2010). Balanced Scorecard of Nestle From the overall analysis, from the financial statement and balanced scorecard of Nestle it has been observed that the performance level of the company is rising continuously in all the regions. The economic downturn had quite less impact on the performance of the company. They are developing various strategies in order to develop innovative products to attract the customers as well as to acquire market growth. Thus, it can be referred that the company will achieve success in future while operating its business in developing as well as developed markets. 4.0 Strategic Posture of Nestle At the Corporate Level From the case study it has been understand that Nestle is pursuing a global strategy though they follow multi-domestic strategy in certain cases. Nestle is a global food organisation thus it provides importance to global strategy in order to operate in worldwide basis. Their strategy is generally related to the foreign direct investment in dairy as well as food businesses. In developed market the company develop and achieve foreign direct investment by means of economies of scale. While in developing nations the growth is achieved by controlling ingredients or processing technology for local market and selecting the appropriate brand (Scribd, 2011). Nestle adopted multi-domestic strategy because the products for the emerging market will be more customised and strategy has been adopted as per the national demand (Schell, 2002). 5.0 Does This Overall Strategic Posture Make Sense Given The Markets And Countries That Nestle Participates In? Why? This global and multi-domestic strategic approach seems to make sense for Nestle. The existence of a huge number of global brands across the countries means that a part of multi domestic strategy would be most favourable. The global strategy facilitates the company to compete in all over the world. Appreciating that success demands a presence in almost every part of the world in order to compete effectively. The product remains similar in all places of each market and they follow centralised structure. They take advantage of the needs of customer and wants all over the international borders. The company through this strategy can gain the utmost competitive advantage. They incorporate and co-ordinate performance across borders. A global strategy is considered to be effective once the differences between countries are small and competition is conducted globally. The strategy has advantages in terms of economies of scale. By applying this strategy the price of the products become less and the growth takes place rapidly in development of the product (Tutor 2u, n.d.). The multi-domestic strategy possesses strategic along with operational decisions which is assigned for the business entity in each country. It allows customisation; however it interferes with economies of scale, learning along with information coordination (Wiley Knowledge for Generation, 2011) A multi-domestic strategy entails the products customised to individual countries. Innovation and design of the goods or products arrives from local R&D. There is decentralisation of decision making within the organisation and a result of decentralisation is local sourcing. The local people needs are responded quickly but there are disadvantages because it may bring high costs due to tailored products and replication all over the countries (Tutor 2u, n.d.). As Nestle is doing business in emerging markets as well as in international market thus these two strategies will be beneficial for Nestle to expand both in developed and developing nations. 6.0 Is Nestle’s Management Structure and Philosophy Aligned with Its Overall Strategic Posture? Nestle is a decentralised organisation within the “framework imposed by fundamental policy and strategic decisions requiring increasing flexibility. Operational efficiencies, as well as the group-wide need for alignment and people development, may also set limits to decentralisation” (Nestle, 2009). Responsibility related to ‘operating decisions’ is generally pushed down to the local units. These units typically enjoy a significant level of autonomy regarding decisions that involve pricing, marketing, distribution and human resources (Finntrack, n.d.). A global strategy absorbs a high degree of awareness of resources and centralization of authority for using potential scale and learning economies. Customisation is certainly quite less at the local level. In the multi- domestic strategies, resources are distributed and circulated all over the countries where Nestle operate their business. Decision-making authority is passed to the local level and each one of the business division is authorised to customise products depending on the specific needs of the customer (Reference for Business, 2011). Thus, it has been observed that Nestle’s management structure and philosophy are not well aligned with its overall strategic posture. References Biotee, No Date. Milchverabeitung World: Nestle, Danone and Lactalis front, Arla is in 7th place and to look toward Asia. 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