Nestle in the International Environment - Term Paper Example

Strategic Directions The concept of health, nutrition and wellness is fairly new to the people and the industry is in its nascent stage. Nestle, theworld’s leading nutrition, health and wellness company, focus on the concept of shared value and believes in long-term strategies (Nestle, 2009). Nestle operates in many countries and cultures throughout the world. Being a consumer-driven company they tailor their products to suit the local tastes. As a part of their business development strategy, they listen to the consumers and interact with them for product development (NCBP, 2004). They carry out extensive consumer testing before launching any new product. They have been performing well above their targets. Organic growth Under the new leadership in 1997, the company focused on internal growth and they could succeed in achieving their targets for internal growth. They decided to eliminate the slow-growth components and increase the efficiency of manufacturing operations (Mudd, 2001). This is because they have a global strategy. They do not view centralization as an appropriate strategy in a food company. Nestlé saw organic growth in the Americas and Asia increase by 7.1% and 5.8% in the first quarter of 2009 while there was a decrease in the internal growth in Europe by 1.3 percent (DII, 2009). Globalization vs. localization The 20 largest food companies in the industry have just 8.3% of the $3.6 trillion of the food market (Mudd, 2001). This implies that the food industry has to be local. There are no global consumers; there are only local consumers. Whatever the consumer can see, feel, taste and experience has to be localized and all else can be globalized or centralized. They do not follow any company formula but make things that are suitable to the local environment. In the international market place brands have to compete not just with the local or the national brands but with competitive international brands (Palumbo & Herbig, 2000). Moreover, brands names are difficult to standardize on a global basis but Nestle has a brand name that carries instant recognition. Standardization implies a product-oriented approach and is not customer focused. Nestle had expected that its brand image could infiltrate into China but they were unable to introduce coffee culture in China (Hara & Nakanishi, 2004). This prompted them to change their strategy in China where they adopted a product diversification strategic. They started in China with products like milk, seasonings and water. They learned that there are no global consumers and accept that consumers are psychologically and cultural separated. Market entry They wait for the right time to make an entry into a new market as they did in the case of China. Once they enter, they have a long-term start to make it work; they do not pull out in crisis. When others fled from Russia during the period when the country was in crisis, Nestle stayed on and took advantage (Mudd, 2001). Within 18 months they invested and bought three additional confectionery factories. This strategy paid off as they received leadership in the Russian confectionery market. The company focuses on long-term growth in all markets. They spend 1% of their revenues on research and development and staying close to its customers. Strengthening the core business Their business strategy has evolved as they have grown and as the market conditions have changed. In the 1980s, they had a functional focus and the responsibility for generating profits was at the market level. Finance, technical and production were centralized decisions. However, as competition intensified, in the 1990s, they created strategic business units (SBUs) to have greater business focus. Nevertheless the zonal focus prevailed and these SBUs supported the zones. Currently, they have decentralized operations and they have a regional focus. The centre only takes care of meeting specific business requirements while at the regional level most decisions are taken. Nestle has been in the medical food business as a minor player in the global market but its take over of Novartis Medical Nutrition has been a strategic decision that will make it the number two player in the world. This will lead to strategic transformation of Nestle as it strengthens the core of its globally managed health and nutrition division, which is a major area of focus and investment. This deal brings with 2000 experts in the field that will boost Nestle’s R&D capabilities (McNally, 2007). This deal is further expected to transform the company’s approach to health and nutrition. Through this acquisition, which combines the strength of the two companies, Nestle aimed to be global leader in the nutrition, health and wellness industry. Obstacles influenced the choice of business development strategy Consumer spending in packaged food has fallen in the last quarter of 2008. Nestle SA was trying to push its products through discounts (Jargon, 2009). As market for the food industry matured with many competitors globally fighting for a sizeable market share, Nestle, having an orientation towards investment in research and development, could identify the market needs. There was a very marginal increase in the food industry between 1997 and 2005 (Nestle, 2009). Because of its orientation towards global markets, Nestle could sustain itself and look beyond the food industry. They had been investing in the acquisition and development of technical know-how in the form of ‘venture-capital’ (Datamonitor, 2008). In partnership with research institutes, they have been focusing on the relationship between the brain and the digestive system. They also started investing in the development of new functional foods for the overall health and well being of the consumers. Strategy and market analysis Nestle has pursued a strategy of acquisition and the success of their plan is evident from the double digit organic growth of their nutrition division (Datamonitor, 2007). Strategic analysis entails defining the organizational purpose, which is usually in the form of mission statement. Any strategy should be in alignment with its corporate mission. Nestlé has been trying to transition into a ‘nutrition and well-being company’ (Datamonitor, 2008). An evaluation of the external and internal business environment enables the firm to arrive at a strategic choice for growth and expansion. The core values of the company shape then behaviour of its people. Setting a strategy requires knowledge of the customers, competitors and competencies (Dobney, 2009). To determine these, external and internal analyses are conducted. FDI policies FDI inflow in any country can take place wither through exports, joint ventures, acquisitions or by setting up wholly owned subsidiaries. This would depend on the level of control and capital commitments required. Firms also like to take into account the political and economical risks involved in the process. Acquisition requires high investment and hence high returns, high risks but fetches high degree of control to the investing firm (Agarwal & Ramaswami, 1992). There are several theories that assist in making the right choice on the mode of entry. Nestle already has a global presence and in marketing its nutrition and health products, it had the distinctive advantage of extending its brand name. The acquisition of Novartis was a strategic business decision with a view to expand its market in the US where the packaged food industry had already registered a slump. A PEST analysis would evaluate the strategy of Nestle in acquiring Novartis Medical Nutrition/ PEST analysis Political The deal was subject to regulatory approval by the European Commission as there was competition issues involved. Before the takeover, Nestle had to divest in nutrition units in France and Spain to comply with the demands of the European Commission (Swissinfo, 2007). Economical The wellness industry is forecast to become a trillion dollar industry by 2012 (Nysewander, 2009). While five dimensions of wellness have been identified as spiritual, physical, intellectual, emotional and social, simple wellness strategies include educating the people on nutrition and health. Novartis Medical Nutrition is the number two global supplier of intestinal nutrition, oral nutrition and medical devices used to provide essential nutrients to patients with special medical conditions (Swissinfo, 2007). Social Consumers globally have become health conscious and have specific nutritional requirements. These days specific nutrition is required for specific diseases (McNally, 2007). Companies worldwide have been focusing on health and nutrition products to extend their reach into the healthcare segment. The life expectancy in the US has increased from 59 years in 1950 to 77 years in 2007 (Aquillian, 2008). As people get older they become less healthy and hence require more care and a wellness diet to maintain a quality life. The onset of chronic diseases is much earlier than it used to be and due to reduction of premature deaths and longer life span, the period of chronic illness has increased. The health care costs have gone up and this affects nations such as the US and the federal government has to bear the health costs. At the same time people have become health literate and consumerism is producing assertive buyers who know what they are looking for. Novartis products are required when illness, surgery or disability limit the patient from eating a balanced diet (Swissinfo, 2007). Technology Science has demonstrated the function of diet in reducing disease risk and consumers realize the benefits of a health diet. The company’s focus is on research and development and they have always been spending part of their revenues on research. Currently Nestle spends 1.7% of its revenues on R&D efforts that amounts to $1.7bn a year (Heller, 2007). In its efforts to be ahead of its competitors, Nestle is always on the look out for external innovation. Porter’s Diamond of Determinants To understand the dynamic forces that shape their strategy, firms apply theoretical models to remain competitive in any given industry. Porter’s Diamond of Determinants helps to further evaluate Nestlé’s take-over of Novartis Medical Nutrition. Source: Recklies (2001). Factor endowments These are not inherited characteristics but have to be created, according to Porter (Recklies, 2001). The basic factors include natural resources, demographics, climate and location while the advanced factors pertain to facilities such as communications infrastructure, sophisticated skills and research facilities. In the health, nutrition and wellness industry, the natural resources and climate are undergoing a change which enhances the importance of wellness. Demographics and location of most countries are conducive to this sector. Nestle has an abundance of the advanced factors such as skills and research facilities. Nestle has a strong brand portfolio, its products carry a strong brand identity and it has technological infra structure in place. Apart from strong corporate brand, Nestle also has a large collection of product brands. Because of a strong brand portfolio, each brand segment is able to maintain its brand equity and identity separately. Nestle has the resources necessary like qualified human resources, capital investment required for building up the company. They have developed the ability to customize global products according to customer preferences in the local market (Datamonitor, 2008). The emerging markets have registered growth in the nutrition division and this will be central to the future success of the company. Demand conditions In establishing and sustaining competitive advantages, new technologies and sophisticated skills play an important role. Firms have to remain conscious of and sensitive to the needs of the customers. Lifestyles have changed and the consumers have become demanding. When the customers are demanding, the firm remains under pressure to improve their competitiveness through innovation. As far as the health and wellness industry is concerned, Nestle could find growing consumer health concerns (Datamonitor, 2008) which prompted them to out their nutrition division at the centre of their growth plans. Consumers demand low calorie and low carbohydrate foods worldwide. Consumers are aware if the risks associated with obesity and diet irregularities. This is now an important trend in the consumer packaged goods industry. Nestle is well equipped to conduct on going research and developed in the sector and is able to support the market with education and training as well. Relating and supporting industries Nestle has been able to strengthen its core business through the acquisition of Novartis. If the supporting industry is well developed, it can offer advantages for new companies in that industry. Since the wellness industry is in the growth stage, and Nestle was already a small player, this acquisition helped it to become the second largest player in the sector, while strengthening its core business of nutrition and packaged food. This will also help Nestle to share marketing expenses as it already has a global network of dealers and establishments. It would help in exchange of ideas and information. To support its existing strategy Nestle has also acquired Gerber brand from Novartis, which gives Nestle the number one position in the US, which is the world’s largest single baby food market (Datamonitor, 2008). This acquisition will also enable Nestle to leverage its existing core business and supports its overall growth in the sector. Firm strategy, structure and rivalry There is no definite strategy or no-size-fit-all that can be adopted by firms to further their interests. Rivalry according to Porter is necessary to keep costs under control while it also enhances competitive advantage. In the health and wellness market there are a number of small and medium sized innovative companies that are in the early and growth stages of development. Several risks are involved in this which includes technology risk, financing risk, liquidity risk, management risk, and marketing risk, amongst others (Aquillian, 2008). The combination of consumer desires for health food, the advances in food technology and evidence of science linking health to diet creates an oppurtunity to address the issue of a health and wellness through the right nutrition (Aquillian, 2008). Hence this is the right time to enter this sector and entrepreneurs have been trying to capitalize on the situation. This sector also provides for a diversification strategy for investment funds in the health and wellness sector. Thus the decision to acquire Novartis Medical Nutrition demonstrates strategic leadership by Nestle’s executives. Strategic leadership The focus of Nestle has been on research and development as a means to improve health and nutrition. They invested huge amounts in venture capital funds with the objective of gaining better access to new technology and know-how in the field of life-sciences as well as commercial applications. They even set up a Wellness Health Fund with committed capital of €500 million to be invested over 5-7 years in mid- to late-stage companies (Aquillian, 2008). This was a strategic move by Nestle which accelerated its expansion into health, nutrition and wellness sector. This sector in fact was such a strategy move as it could integrate into its mainstream business. They have pursued the health nutrition through the acquisition strategy (Heller, 2007). They have thus connected their M&A strategy and their R&D strategy thereby gaining leadership in the wellness industry. Their acquisition of four-nutrition based businesses demonstrates their focus on nutrition as a part of their long-term growth strategy. In 2004 itself when they sensed the food market was saturated and they should pursue a strategy of product diversification, they created a new unit, Wellness in Action, which helped the company to strengthen its position in its core nutrition business. Very strategically, they then created W. Health, a fund, which they invested in companies that was active in health, well being and nutrition as an external component to its own internal research and development competencies (Datamonitor, 2008). They then acquired Uncle Tobys, a food company engaged in breakfast cereals in Australia followed by the acquisition of a weight management company which offered consumers a personalized weight management program. Finally they acquired the medical nutrition business Novartis which immediately brought them to string number two position in the world in the sector. This acquisition was a very strategic move because this is the right time to enter the market as consumers have become health conscious and are looking for nutritious and healthy food and food supplements. All their moves would help them capitalize on the health conscious trend globally. With the acquisition of the Gerber brand from Novartis, Nestle attained the number one position in the wellness industry. Functional strategies Nestle has a flat organizational structure with fewer levels of management and broad spans of control. Networking and communication are encouraged while the roles and responsibilities are clearly defined. There is strong focus on results and as the organizational structure is flat, bureaucracy is minimal (Principles Mandatory, 2009). Corporate culture Nestle tries to instill a ‘global culture’ in its international business environment by emphasizing on a ‘borderless mindset’. To achieve this objective, they develop internationally sophisticated managers and emphasize the firm’s global performance (Cavusgil, Knight and Riesenberger, 2008). Their corporate culture has evolved as the business environment has demanded, even though it is based on Swiss roots. They have a commitment to strong work ethic, honesty and integrity. Communication is open and frank while personal relations are based on trust and mutual respect (Principles Mandatory, 2009). The employees are encouraged to remain curious about technology changes and keep close contact with the consumers. This helps to understand their needs which in turn given rise to new ideas and oppurtunities. They also nurture a sense of quality and long-term achievement in their daily work. Conclusion Thus Nestle has been able to achieve its desired objectives as it has registered organic growth in its core business. The strategic decision to acquisition Novartis was well planned as they had already started investing in research and development in the nutrition sector. While they were a small player in the wellness industry, this acquisition makes them number two in the world. They have also found immense potential in the emerging markets for their nutrition products. Two factors have been responsible for their strategic success. One is the health consciousness of consumer globally for nutritional diet and the awareness of the risks of obesity. This has created the demand for special foods. The second factor is the stagnant condition prevailing in the packaged food industry. There has been no growth in some markets while in others there has been a marginal increase. There are too many players in the food industry but the health and wellness industry is just growing and competitive rivalry is not high. Some competition is necessary to keep fostering innovation and hence Nestle is well poised for growth and development in the future. Reference: Agarwal, S., & Ramaswami, S. N. (1992). Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Iowa State University, Retrieved online 22 February 2010 from: http://aib.msu.edu/awards/23_1_92_1.pdf Aquillian. (2008). CONVERGENCE OF HEALTH & WELLNESS PRESENTS COMPELLING VENTURE INVESTMENT OPPORTUNITY. Retrieved online 22 February 2010 from: http://www.aquillian.com/docs/aquillian-health-wellness.pdf Cavusgil, Knight and Riesenberger. (2008). International Business Strategy, Management & the New Realities . Global Strategy and Organization, Chapter 11. 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