International Business Strategy: Nestle - Essay Example

Table of Contents International Business strategy: Nestle Nestle’s International Business strategy: The Current scenario Nestle’s Product and market Growth strategy: Market Penetration strategy: Market development strategy Product development strategy Diversification: Value chain analysis: Primary activities of Nestle Competitive advantage strategies built around the primary activities Secondary activities of Nestle: Competitive advantage strategies built around the secondary activities of Nestle BCG analysis of Nestle businesses: Nestle stars: Nestle cash cows: Nestle Question marks: Nestle Dogs Nestle’s strategic analysis based on Porter’s five forces model: Nestle food & nutrition market Major competitors and degree of rivalry among the competitors Bargaining power of buyers Bargaining power of Suppliers Threat of new entrants in the market Threat of substitutes Nestle Pharmaceutical market Intensity of Rivalry in the industry: Bargaining power of buyers Bargaining power of Suppliers Threat of new entrants in the market Threat of substitutes Nestlé’s International strategy: The future International Business strategy: Nestle Strategy defines the direction and scope of business. It tells the business about how to achieve an advantage over its competition. The strategy also outlines the nature and amount of resources required to compete. The strategy reviews the environment of the business and how it affects the business. It also presents the expectations and a value system of those who matter for the business(Tutor2u, 2009). Depending upon the business levels, a business strategy is classified into a corporate, business unit and an operational strategy. The management of strategies at the three levels is what constitutes strategic management. Nestle, being a multinational giant has strategic management as the most important component of its business management. Being an international conglomerate of businesses, the strategic thinking in nestle has International market dynamics at its core. Nestlé’s International Business strategy: The Current scenario Nestle’, is a Global food, nutrition, health and wellness company. Currently, the focus of Nestle’s International business strategy is strengthening of its Nutrition business. As per Nestle, gaining leadership in the nutrition market is the major element of their corporate strategy. The consumer’s buying motivation in this market comes from the credibility of the product claims based on its nutritional content. In order to gain and consolidate leadership in the nutrition market, nestle has created Nestle Nutrition, which is an autonomous Global business unit within the organization. This business unit is fully responsible for its operations as well as profitability. The markets it covers are infant, healthcare and performance nutrition segments. The food and beverage business of nestle was enriched with nutritional value addition through the creation of its corporate well ness unit. The unit is responsible for driving internal and external communications strengthening wellness awareness across all its food and beverage units. The unit is focused on efforts that address not just current but future consumer trends and needs. Nestlé’s competitive strategies are primarily focused on their international businesses. The businesses are based on foreign direct investment in food and nutrition businesses. Nestle aims to strike a balance between sales in low- risk low growth countries and high risk but high growth countries. The former, is mostly in the developed and the latter in the developing world. In choosing the markets for growth, nestle exercises caution and believes in not taking excessive or unjustified risks for growth. This resulting growth might be slow at times but steady nevertheless. In developed markets abroad, Nestle aims to achieve economies of scale. The Foreign direct investment in big companies enables Nestle to achieve the economies of scale. Forming strategic partnerships with large companies worldwide has spelt success for Nestle in the international arena. Its alliance with Coca cola in ready coffee and teas benefited Nestle immensely because of Coca cola’s bottling system and expertise in prepared beverages. Nestle sees the European and American food markets as saturated and very competitive and has set Nestle on a pathway to looking for new markets. Nestle has strived to form a group of regional managers with a great deal of autonomy in Asian markets. These managers know much more about the local markets and culture than Americans or Europeans and help localize Nestlé’s Global offerings. In Asia, Nestle follows a strategy which involves producing different products in different countries enabling each country to produce at least one product such that its enough for meeting the demand in the entire region for that product. Nestlés Product and market Growth strategy: In order to analyze Nestlé’s Competitive strategy, Ansoff’s matrix has been applied to Nestle. Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy based on whether it is offering existing or new products in existing or new markets. Nestle is currently offering both new and existing products in both new and existing markets. As a result, Nestlé’s growth strategies range from market development to product development to diversification. As part of its Market development strategy, Nestle tries to enter the markets early to gain a first or early mover advantage. It usually beats competitors such as Unilever in doing so. As a first step, Nestle sells basic products in the new market such as its infant formula in order to build credibility in respective segments. In this process, nestle further gains cost advantage by purchasing locally familiar brands rather than creating new brands which is almost always more expensive. This helps Nestle create local bonding and cultural ties. Customer resentment to foreign brands is thus easily won over. Once it gains a foothold in the basic product segments, it moves on to conquer higher end and upscale segments like chocolates and soft drinks. They do so as the demand for their basic products rises. Rising demand being an indicator of rising income levels in short term, it makes perfect sense to look at more profitable high end products. As part of its international market growth strategy Nestle believes in localization. A very interesting fact in this regard is that although Nestle owns more than 8000 brands less than 800 are registered in more than one country. More so, less than 80 are registered in more than 10 countries. This approach not only enables nestle gain early advantage but also helps it focus on process and technological improvement enabling it to gain competitive advantage. Market Penetration strategy: As per the Ansoff matrix, companies follow Marketing penetration strategy while offering Existing products in Existing markets (Tutor2u, 2009): As part of its international market penetration strategy, nestle aims at increasing its market share in existing markets for exits by adding functional benefits to existing products. For example, in Thailand’s packaged drinking water market, nestle aims to overtake ‘Singha’ as market leader within next three years, while simultaneously increasing its bottling capacity and opening up new plants. The branding approach under the current strategy would be to form favourable customer perceptions by being seen as ‘healthy.’ As an effort in the same direction, Nestle aims to raise the product penetration of nestle pure life from 30 percent to 50 percent. Furthering the product penetration strategy, Nestle is making efforts to emerge as a leader in PET (Polyethylene terephthalate) bottled water segment by launching its care delivery campaign. The campaign is a part its ‘emotional marketing’ approach that suits the local consumer mindsets. This involves launch of new packaging labels with caring messages to consumers (Nestle waters, 2009). Market development strategy As per Ansoff, the product & market growth strategy followed while offering existing products into new markets As part of its International market development strategy, Nestle looks for new and lucrative foreign markets and promotes its existing products with slight adaptations into the new markets. In fact, products based on traditional recipes of country are considered as potentially good as export products. With the right promotion and product adaptations, they are received well in niche segments of foreign countries. For example, Nestle, developed a whole new market for itself for the emerging frozen pizzas segment, when it bought into the German frozen pizza firm Wagner. Another example of Nestlé’s Market penetration strategy is Nestle India’s efforts to break into new markets with their Indian recipe based products into markets abroad. Product development strategy As per Ansoff’s theory, the product market strategy followed while offering new products into existing markets is the Product development strategy. This strategy involves development of new product offerings based on research so that they reflect the changing tastes of the existing markets or cater to existing tastes in a different way. As part of its product development strategy, Nestle is taking a family friendly approach to their confectionary advertising. They have announced that they would make an effort to improve the nutritional content of products across all its existing markets and if they fail to do so, they will stop advertising such products to children. Another example of nestle following a product development strategy is in the case of Chinese market where it aims to reach consumers across all age groups by expanding its product range. Nestle is already is in a commanding position in this market, however, the additional potential is driving Nestle to develop new products in its existing Chinese Ice cream market. In the process, Nestle will strive to improve its product quality and offer greater value to the customer. A low price strategy coupled with take home items is part of this approach the items being designed especially for the young. Interestingly, the average price of the product range has not been reduced rather, the range of products increased to suit the interests of a wider range of consumer tastes. Diversification: As per Ansoff’s matrix, the strategy adopted while offering new products in new markets is a Diversification strategy. This is a high risk but potentially high return strategy. For a business to adopt diversification, it must have a clear idea as to what it wants to achieve, besides sane check of the risks involved. Nestle has adopted a diversification strategy where required lately though. Nestle has adopted twin initiatives to embrace diversification. The first initiative is about the extensive Management training aimed at developing diversification competencies among its managerial staff at their Swiss training facility. The second initiative is about promoting the staff from within to ensure improved performance through staff diversification. The staff diversification in turn helps build a solid foundation for business or products and market diversification. An example of Nestlé’s diversification strategy can be observed in East Europe and Asia, where it followed this strategy to recover from the losses incurred in the Eurpean market in general due to price cutting drives by supermarkets. These emerging markets have become testing grounds for the success of the diversification strategy of Nestle. Its Alcon and Nespresso products have driven the growth in these in the non core product segment of Nestle. Value chain analysis: While analyzing and evaluating the strategy of any business, its important to analyze the nature of business activities and their relative importance in building up a value system for all its customers (Tutor2u, 2009). The collective value that is created as result of above activities is at the core of the strategy of a business. The process of analyzing this is termed as Value chain analysis. Nestle is a huge multinational company with thousands of brands. Moreover, Nestle has localization as a major component of its International business strategy, which is evident in its diverse product and brand portfolio which widely varies from country to country and region to region. Therefore it is difficult to analyze Nestlé’s value chain as a whole, since the components vary widely, from market to market and region to region. Thus, a country specific Value chain analysis and not a holistic analysis seem more feasible. However, a generic view of how Nestle perceives its value chain can be presented here. According to Nestle, its Value chain extends from farm to fork that is it creates value not just for the end customers of its food and nutrition business but the value creation starts right at the farms where procurement of raw materials for their business begins. Primary activities of Nestle Activities directly related to: 1. The procurement of Raw materials like farm produces, milk cocoa etc. for production of its food, nutrition and wellness business. 2. World wide manufacturing facilities for its nutrition and wellness products. 3. Distribution of its products both into domestic as well as international markets 4. Marketing communication activities like advertisement campaigns and promotional offers which communicate the value and price of the product. Competitive advantage strategies built around the primary activities 1. Creation of autonomous global Nutrition business unit to deliver superior value in this sector (Nestle, 2009). 2. Focus on quality (Nestle, 2009). 3. Nestle USA – Competitive advantage through supplier diversity This gives Nestle a vast pool of suppliers, better priced and varied goods and services, new capabilities and advantage in getting government contracts, diversity being a key requirement in such contract (Nestle USA, 2009). Nestle has strived to achieve competitive advantage by improving its Supply Chain Management (SCM). As per nestle, SCM is a two and fro management of Goods, services and information flow from suppliers to manufacturers, wholesalers, distributors etc. In the food and nutrition industry, Nestle is among the first to adopt an e-procurement approach. Nestle has outsourced many parts of its SCM since the process as a whole has become increasingly complex and being particularly crucial to food and nutrition business due to the high chances of spoilage, has helped gain nestle competitive advantage. (outsourcing.com, 2009) 4. As part of its localization strategy, Nestle has gained considerable advantage through strategic partnerships and acquisitions worldwide. (itweb, 2000). 5. Strong adherence to environmental standards in its manufacturing and packaging processes has helped nestle gain an advantage since environmentalism is affecting consumer mindsets, particularly in the developed world and nestle derives a quality image by doing so. Efforts in this direction include, those to reduce environmental impacts of its operations, reducing the use of water in its products and processes, Making the life cycle of its products sustainable by minimizing air emissions, fuel type and efficiency planning, waste management etc. 6. Nestle has outsourced many parts of its Supply chain management(SCM), since the process as a whole has become increasingly complex and being particularly crucial to food and nutrition business due to the high chances of spoilage, outsourcing as a strategy has helped nestle gain competitive advantage. Secondary activities of Nestle: 1. Local as well as Global procurement of materials for business use. 2. Recruiting, motivating, retaining and rewarding the huge worldwide workforce. 3. Developing and acquiring superior technology to help improve its primary activities. 4. Developing and maintaining support systems and functions required for supporting the core business activities eg. Finance, planning, quality control etc. Competitive advantage strategies built around the secondary activities of Nestle 1. Nestle has done well to recognize the importance of training and motivating human resources. It has made long term investments in training people. This gives Nestle a great competitive advantage in the form of a trained and self driven work force, directly improving quality and productivity. The competitive advantage thus gained is truly global in nature, since the training prepares its people to function in culturally diverse markets. 2. Nestle supports its employees through hard times such business changes such as closing down of its units, which though happens rarely, gives nestle a people friendly and employee friendly image further boosting its employees’ confidence in the company. Nestle adds value to its procurement process by supporting farmers and helping them follow and maintain sustainable agricultural practices. For example-training farmers on soil conservation, water, air and energy conservation and genetic diversity for better yield. BCG analysis of Nestle businesses: As mentioned earlier, Nestle owns businesses world over, with thousands of brands. Some of these brands have grown to be big enough to pose as an industry in themselves; some are smaller ones with a local presence, nevertheless giving Nestle a strategic business advantage in holistic sense. BCG matrix or BCG analysis is a tool to classify businesses based on market growth and market share of the individual businesses. Based on the classification, BCG analysis suggests strategic approaches for the said business to derive an overall advantage for the company. The matrix attempts to classify businesses or business groups into four categories as follows: Stars (High market share& high market growth), Cash cows (High market share and low market growth), Question marks (Low market share and high market growth) and Dogs (low market share and low market growth). Based on the classification, it advises the companies to follow the following business strategies for the respective industries depending on which category they fall into: 1. Build market share by investing more. 2. Hold onto its market share by retaining investment level. 3. Harvest the short term benefits and cash flows by reducing investment. 4. Divest the business by either phasing out or outright selling the business. Nestle stars: Nestle waters and Nestle Purina can be categorized as stars as per BCG matrix. Nestle waters is operating in a high present and potential growth market. Nestle, waters is currently number one in the world bottled water business and holds more than 17% of world’s market share. As per the latest reports on world pet foods market, the sector continues impressive growth. The market grew by about 43% from 2002 sales figures to 2008. The projections though indicating a slight slow down still project a 15% growth in next four years, which is good enough for the industry. Nestle dominates the world markets in this sector and continues to grow as well. Nestle would do well to build further market share in both the above business by investing more in capacity building as well as marketing and promotion. Nestle cash cows: As of now, Nestle milk products business will classify as a cash cow, since owing to the China baby milk scandal and world economic slowdown, the market growth prospects have as a whole suffered a setback. However, Nestle aims to retain its total market share by increasing business in other parts of this segment like the ice cream segment, where it continues to consolidate its position. Nestle should follow a strategy of holding on to the market share currently, by not investing more in the business as a whole, but investing in those areas of the business where it were losing out to competition. The unfavorable economic conditions are not likely to continue for many years and once the situation improves, nestle can again adopt the market buildup strategy in the above business. Nestle Question marks: As of now Nestlé’s frozen pizza business can be categorized as a Question mark business since the frozen pizza market is a high growth market. Nestle is acquiring leading business in the sector to create a foothold and an eventual leadership position in the market. Recently, Nestle, bought a 49% stake in the German Frozen pizza giant Wagner which held 33% market share in the segment. For the Frozen Pizza Business, Nestle must follow a strategy of investing heavily in capacity creation, marketing and technological advancement. This strategy could turn the frozen pizza business into a Nestle group star business. Nestle Dogs: Nestlé’s Agribusiness, which, a decade earlier could be classified as a Question mark for the Nestle group can now well be put into the ‘dog’ category as per Nestle as per the BCG matrix. Nestle followed a strategy of pulling out of its agribusinesses over 8-10 years, which were registering slow growth to invest more in its Nutrition businesses. Nestle, currently has a small share of world agribusinesses, which it eventually might give up. Nestle should hold on to its currently small market share in the agribusiness as a whole since although its registering slow growth for quite some years now and that was the reason why nestle kept divesting the business, however, agriculture being the backbone of the food and nutrition industry, agribusiness itself is likely to show a growth trend in the future. Nestle’s strategic analysis based on Porter’s five forces model: Porter’s five forces model is a mechanism to gauge the real nature of competition in a given industry or market or a market segment. To that extent, Nestle which is a giant company with international presence and stake in many industries, which have their own competitive scenarios totally different from the others, it does make sense to identify certain representative industries that would reflect the representative character and overall positioning thrust of Nestle. Since, Nestle identifies itself as a Primarily a food, nutrition, health and wellness business, its appropriate to choose the Nestle food & Nutrition business markets one hand in which Nestle is a world leader and Nestle Pharmaceutical business markets in which Nestle is not yet a leader, but is steadily growing: Nestle food & nutrition market Major competitors and degree of rivalry among the competitors Nestle’s major competitors in the said market are Conagra foods Inc, Group Danone and Kraft foods. Although, the demand is driven by population trends, age, ethnicity and availability of disposable incomes, however, the profitability of competitors is also determined by appropriate product mix and operational efficiency. Nestle is currently way ahead of all its competitors in this market. All three competitors share an intense market rivalry with nestle and are fiercely competing to capture Nestle’s market share. Although Nestle has an advantage over its competitors due to its strong Brand portfolio Bargaining power of buyers Low bargaining power of buyers due to the fact that 70% of the total Market share is held by top ten producers of Bottled water including Nestle. Besides mineral water brands have a loyal brand following of customers. Nestle is usually the leader in most of its product categories and thus has considerable bargaining power over distributors and suppliers, however, the recent growth in the organized retail sector has given buyers a greater leverage than earlier. This is due to the fact that instead of just selling the store items , the superstores sell value added services like a different experience, ambience etc. which dilutes the brand perception of the product brands which has already been diluted to an extent by the presence of a very large number of brands and items. Bargaining power of Suppliers Nestlé, the worlds largest food maker, said Wednesday that earnings had risen more than expected during the first half of 2006 after the company raised prices and used bargaining power to pay less to suppliers. Nestle is such a large buyer of food inputs that it exercises a considerable bargaining power over the food supply chain. Threat of new entrants in the market Threat of new entrants in this market is pretty low since Nestle and its major competitors hold majority of market share in this industry. This makes the industry unattractive for new entrants. Threat of substitutes There always remains a subtle threat of substitutes. Since companies offering substitutes usually rely on expertise in production of certain traditional or typically local recipe based products. However, Nestle, as part of its product marketing strategy has made localization the focus of its international business. Nestle has partnered with many local brands world wide to gain a foothold and ultimately manufacturer leverage in markets it would not have thought of entering earlier. Nestle Pharmaceutical market Intensity of Rivalry in the industry: Pharmaceutical industry is known to be fiercely competitive worldwide and price and Public Relations wars are commonplace in the Industry. Nestle is just starting to gain a foothold in the pharmaceutical industry, thus it does not directly compete with the big names in the pharmaceutical industry. Nestle pharma business contributes 7% of total revenue of the Nestle group which is the lowest among all other markets in which nestle operates. Competition at that level too is intense. However, since Pharmaceuticals is a high growth industry, Nestle will do well to continue its growth strategy in the industry. Bargaining power of buyers The Pharmaceutical industry’s competitive nature gives the buyers or distributors great bargaining power. This is due to the presence of a very large number of manufacturers making different brands of the same generic formula. Although the large number of distributors as well, offsets this power to an extent. Bargaining power of Suppliers The suppliers of Pharmaceutical industry in general do not hold much bargaining power except vis-à-vis small manufacturers. Since the pharmaceutical industry comprises of a large number of big manufacturers. This trend augurs well for not so big players as well. Threat of new entrants in the market The pharmaceutical industry is constantly being flooded with new entrants in the market who threaten to take market share away from existing players. Threat of substitutes The pharmaceutical market is probably the most affected of all industries with threat of substitutes. The substitutes might be from the modern medicine field or maybe from traditional medicine systems of the world. Besides, the wellness spas etc. are increasingly offering alternative cure and treatment therapies around the world, besides promoting different lifestyles, which poses a threat of substitution for the pharmaceutical markets. Nestle’s International strategy: The future The future strategy of nestle is to invest more and in future oriented business models, moving ahead with the technological advances, making more strategic alliances and partnerships particularly with the locally successful brands while focusing on Operational excellence. Nestle aims to retain its leadership position in most of the businesses and gain sufficient market leverage in businesses where it is not already a leader and keep growing (Nestle, 2008). References Bytes technology group (2000). Nestle case study, Web. Accessed on 29th March, 2009 Casterlar articles, Nestle’s Competitive strategy, Web. Accessed on 21 st March , 2009 Nestle USA, Community, Commitment to Supplier diversity, Web. Accessed on 23rd March, 2009 Nestle, Safety in practice, Web. Accessed on 22nd March, 2009 Nestle Waters, Environmental actions, Web. Accessed on March 25, 2009 Nestle, Full year results 2007 press conference - address by Peter Brabeck, Web. Accessed on March 23, 2009 Outsourcing center, Supply Chain Management: Nestle is quick to adopt Eprocurement, Web. Accessed on 24th March, 2009 Tutor2U, strategy, what is strategy, Web. Accessed on 21st March, 2009 Read More