Growth Efforts of Nestle - Case Study Example

Growth Efforts of Nestle Question 1- Does it make sense for Nestle to focus its growth efforts on emerging markets? Why? Nestle is a Swiss based global food company. It ranks among the leading food companies in the world. The company earns a majority of its revenues from outside its country of origin and has higher employee base in its international locations. Due to the small size of Switzerland the company was focused on the worldwide markets from the very beginning. The saturated Western markets prompted the company to enter the emerging economies. The growing challenges in the Western countries led to a shift from the large scale manufacturers to the national discount chains and supermarkets. As a consequence Nestle directed its attention towards the emerging markets in Latin America, Asia and Eastern Europe for exploring the growth potential of the regions. The reason for this divergence is fairly simple- rapid growth of the emerging countries. Despite these countries being poor the fast economic growth coupled with the rapidly growing population of the region and the market friendly policies of the government of these developing markets makes these regions lucrative attractive business destinations. Though these countries are relatively poor the growth rate of their economies is commendable. For instance if the most recent growth forecasts are taken into account it was anticipated that by 2010 the population in India and China would reach 700 million. The income level of this population was assumed to be in line with the income level of Spain. With the anticipated rise in the level of income the consumers are expected to substitute basic foodstuff with branded food items. This offers a host of opportunities for multinational food companies like Nestle. The main strategy of the company is to make a place in these markets before the entry of its rivals and establish its presence in the local markets by selling the items that are locally popular. The aim behind this strategy is to establish a commanding position in each of these markets. Once it is able to build itself then it can shift the focus on the upscale items like chocolates, mineral water, prepared food stuffs and cookies. The emerging markets are also popular on account of the pro-liberalisation policies of the national governments. This encourages the companies as it does not have to face any regulatory restrictions in setting up its operations. It is not likely to face any opposition. In some economies there are restrictions in businesses like retail however as Nestle is a consumer goods manufacturing company it does not have to face any such resistance thereby facilitating its smooth entry into the emerging economies. The emerging markets have been an attractive business destination for the multinational corporations. The main reason for this is that the emerging markets offer high skilled labour at low wages. Other than this the valuable untapped natural resources of the region adds to the potential of the region. Moreover, the rising middle income group of these countries indicates a substantial market for consumer goods (Cavusgil, et al., 2009, p.251). The attractiveness of the emerging markets is validated by Porter’s Five Forces model: 1. Threat of entry of new competitors: In general, Nestle identifies new markets at nascent stages and enters the markets much before its competitors do. This helps Nestle enjoy all the benefits of a first mover and creates substantial entry barriers for new entrants in the market. 2. Intensity of competitive rivalry: Nestle may face competition from 2 different kind of companies – companies native to the markets it is entering & other transnational competitors like Kraft foods. While native companies are generally way too small for Nestle to pose a significant competition, bigger and resourceful transnational competitors are a late entrant to these markets, thereby giving Nestle a relatively competition free market. 3. Bargaining power of customers: Nestle, in its initial years in an emerging economy market, faces little pressure on this front. It faces little or no competition from similar big brands and offer better quality as compared to local, home grown competitors. 4. Bargaining power of suppliers: As evident from the products manufactured by nestle, most of the suppliers of Nestle are retail vendors like farmers or small cattle ranches, and can exert little pressure individually or collectively. 5. Threat of substitute products: Among the 5 forces mentioned by Porter, this is the only parameter where emerging economy markets score a low marks. Given that Nestle enters market with basic, no frill products like baby food and condensed milk, there are a multitude of substitute products that a given customer can opt for. However, these substitute products cannot completely substitute the product offerings by Nestle, and hence pose minimal threat to Nestlé’s business prospects. Question 2- 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 has been innovative in its approach to business development in emerging countries. Nestle, generally, is the first mover in these emerging countries as compared to its peers. Unlike most of its competitors, Nestle enters an emerging economy market well before the market is matured enough to accept branded food products. Apart from educating the market, Nestle also spends considerable amount of resources in building up the infrastructure required to manufacture and distribute its products. As it enters new emerging markets, it gains strong brand recognition in the new market by launching one of many of its global brands in basic food items like noodles, baby food and powder milk. The SWOT analysis is one of most frequently used frameworks to analyze an organisation. The strategy of the company with respect to the emerging markets is based on a long term perspective. In some countries like China the company has also undertaken infrastructural development. Once the regional conflicts subside the long term strategies of the company will yield results as it will be able to achieve economies of scale. However, this strategy is costing heavily to the company and can be said to be one of the major weakness. Though the company has succeeded in countries like China and selected areas in Middle East there are places where its strategies did not work out. Like in the case of Japan the company failed to adapt its brand of coffee with the local conditions resulting in loss of market to another company. However it has not deterred the company from its customised business strategy for the developing markets. The growth forecasts of these economies look very promising and with the rise in the level of income the consumers in these markets would switch to branded products thereby creating a huge opportunity for Nestle. Question 3- Through your own research on NESTLE, identify appropriate performance indicators. Once you have gathered relevant data on these, undertake a performance analysis of the company over the last five years. What does the analysis tell you about the success or otherwise of the strategy adopted by the company? The strong market position of Nestle in the emerging markets is a strong support with the company achieving a sales growth of 11.5% in 2010 in the region. The biggest food maker in the world is confident that the strong market demand for its products in the emerging markets will enable it to offset the sharp rise in the cost of the inputs. The company has been able to create a brand image in these markets through its products like KitKat chocolates to overcome the rise in the costs of cocoa, milk, sugar, coffee and grain. In the view of an analyst the company is well placed to avoid any cost volatility which is serious concern for the food sector in 2011. This suggests that the company has benefited from its emerging market strategy (Koltrowitz, 2011). The net margin of the company has risen from 9.35% in 2005 to 16.41% in 2008. This margin declined to 9.69% in 2009 though this fall can be attributed to market conditions. On the whole the profitability position of the company has increased by more than 70% during the period 2005 to 2008 (Morningstar, Inc, 2011). This is a good sign as a rise in the profitability margin implies that the company management has been able to exercise a good control over the administrative and selling costs thereby, pushing up the business profits. A rising profitability margin is a good sign as it helps in times of falling sales. It makes sure that the company makes sufficient earnings even in times of falling revenue. With the rise in business profits the return on equity of the company has also almost doubled for the period under consideration. The ROE of the company was 19.13% in 2005 and this increased to 35% in 2008. It shows that the company has been able to generate a good return on the amount invested by the equity investors in the company. Though the return declined marginally to 18.24% in 2006 but it picked up from the next year and increased by nearly twice during the period 2006 to 2008. The five year average ROE of the industry is 23.07% and the average ROE of the company for the same period is 22.8%. This is fairly close to the industry average indicating the strong position of the company in the food business. This has been partly possible due to the growth achieved by the company in the emerging markets. As already stated the emerging market operations give the company a cost advantage over its peers thereby justifying its growth strategy pursued over the years. The asset turnover ratio of the company has remained steady at close to one for the last five years. It is a good sign as it indicates that the company has been able to utilize its asset base more efficiently and effectively. The inventory turnover ratio which is a measure of management efficiency increased, albeit marginally, from 5 in 2005 to 5.29 in 2009. This indicates that the company does not have to maintain high levels of inventory. It can be partly explained by the sales growth achieved by the company over the years. In fact the sales growth of the company beat the industry forecast of 5.5% as compared to the actual growth of 6% achieved by the company for 2010. This is a positive sign and it can be mainly attributed to the sales growth achieved by the company in the emerging markets. The return on asset of the company measures the return generated by the company on the available asset base. This too doubled from 8.94% in 2005 to 16.33% in 2008. It reflects the efficient asset utilization of the company management. Nestle is able to earn a fair return on the assets deployed in the business. The liquidity position of Nestle is also reasonable and it has improved over the years. The current ratio of the company was 0.83 in 2007 and this increased to 1.1 in 2009. It implies that the company has enough liquid resources to take care of any financial exigencies. The growth achieved by the company in revenue over the last five years indicates that the growth has been the highest over the last few years. The figure was 2.27% in 2005 and this increased to 4.4% in 2009. This corresponds with the impressive growth achieved by the emerging markets during the period. In fact some of the emerging countries like China and India recorded remarkable economic growth during this period. In the recent recession these economies remained resilient to the credit turmoil. This kept the revenue base of the company more or less stable during the crisis period. The average net income growth of Nestle over the five year period indicates that the average growth rate in this area has been highest in the last few years. The figure was 23.76% in 2008 which is the highest average five year net income growth for the last five years. This average dropped to 9.2% in 2009 even then the average growth is higher as compared to the earlier years. An analysis of the key performance indicators like net profit margin, turnover ratios, return etc present a positive picture about the company’s financial health (Reuters, 2011). Though the financial indicators cannot be segregated for the emerging markets an analysis of the news and analysts’ opinion together with the sales growth achieved by the company in the emerging markets justify the strategy adopted by the company. In fact it is due to its operations in the emerging markets that the company is enjoying a cost advantage over its competitors. All this shows that the strategy of the company has yielded positive results for the company. The financial perspective of the balance scorecard looks into growth in revenue, return generated, enhanced asset utilization, etc (Kaplan & Norton, 2002, p.47; Hirschbichler, 2011, p.6). Based on these parameters it can be said that average growth rate in revenue of the company has increased significantly over the last few years. Besides the efficiency of the company has also improved as evident from its asset turnover ratio that has reached close to one. Source: (Calhoun, 2004). Benchmarking helps in evaluating business performance in aspects relating to quality, finance, research, warehouse management etc (URENIO Research Unit, 2004). Nestle imposes identical safety and quality standards across all its locations. The company carried out internal benchmarking by setting up “quality control systems” which formed an integral part of its business strategy. It has been asserted by the company that its customers can safely rely on the stable quality of Nestle brand. This has been achieved by the engagement of the company in the process of extensive benchmarking which is very crucial considering the intense competition in the food industry (Sklair, 2001, p.120). Question 4- How would you describe Nestlé’s strategic posture at the corporate level; is it pursuing a global strategy, a multi-domestic strategy an international strategy or a transnational strategy? It is apparent from the case study that Nestle undertakes a multi-domestic strategy in which investments accrue from the local advantages (Dowling, 2004, p.9). This is particularly in the case of its operations in the developing markets. The successful implementation of the strategies in developing markets require greater flexibility as there can be unforeseen circumstances arising from the local conditions. At times, the company also requires emphasizing on building a sustainable business and setting aside short term profits. This is apparent from its strategy in Nigeria. The company had to redesign its distribution methods when it was confronted with dangers of local violence, inferior infrastructure which reflects through the crumbling roads and old trucks. Generally, in the case of other nations, the company’s distribution system operates through a central warehouse. But in case of Nigeria, it had to build a wide network of warehouses across the country. Moreover, it also had to ensure greater safety of products, for which the trucks which were used for carrying products of Nestle travelled only during daytime and also under the armed guards. China also provides an example reflecting the multi-domestic strategy of Nestle. In China, it was confronted with inadequate infrastructure and poor quality of rails and roads which inhibited the collection and delivery of products on time. Instead of making use of the local infrastructure, the company decided to set up its own distribution network which was called ‘milk roads’. The network was set across 27 villages. Nestle bought milk from the local farmers whom they paid promptly which consequently benefited the farmers. The strategy also reflects the company’s aims for uplifting the regional conditions through which it benefitted in the long run. Based on the above experience, the company could ensure building of two milk factories in the region which was to generate sales revenue of $700 million by 2000. Question 5- Does this overall strategic posture make sense given the markets and countries that Nestle participates in? Why? According to the Ansoff Matrix, market development seems to be the most effective strategy for Nestle. The company’s focus towards the emerging markets in Asia, Latin America and Eastern Europe. The strategy looks suitable given the new opportunities that the nations are showing. The emerging countries have been demonstrating rapid economic growth opening up new avenues for success for the multinational organisations. The Ansoff matrix shows the realistic option on which the company may spend its resources and time (Luck, 2008, p.347). This is shown in the following figure. Figure 1: Ansoff Matrix (Source: Bachmeier, 2009, p.3) The value chain analysis can be used in this context. It helps in evaluating the core competencies of the company. This includes each step that adds value to the products or services offered by the company (Needles, Powers & Crosson, 2007, 836). Among some of its primary activities include building and construction of infrastructure for the benefit and smooth running of its distribution network in Nigeria. Also the company’s opening of a plant in China to produce instant formula and powdered milk accounts for one of its major primary activities adding value to its product. The most prominent supporting activity undertaken by Nestle is extensive research and development. Research and development has been given primary focus for commercialising the innovative foodstuff of Nestle. The R&D team comprises of 18 groups operating in 11 different nations in the world. In fact the company allocates 1% of its entire sales revenue on research and development. Moreover, it employs about 3100 employees for the purpose. A major portion of the budget allocated for research and development is spent on the development initiatives. These are primarily meant for developing such processes and products which meets the market requirements. PESTLE analysis of the countries where the company wishes to enter shows that the rapid economic growth and opportunities demonstrated by the emerging markets has been the major driving force of the company. Some of the key drivers of change among the PESTEL’s factors are economic, technological and technological issues (Bender & Ward, 2008, p.54). The company could also enter into a series of acquisitions in the emerging markets which further triggered its growth. The competitive position gets reflected through the fact that several multinational companies have been trying to avail of the opportunities offered by the emerging markets while Nestle has successfully done the same. However, the turbulent environment and lack of proper infrastructure has been some of the retarding forces for the organisation (Carroll & Pirnes, 2009, p.56). Question 6- Is Nestle's management structure and philosophy aligned with its overall strategic posture? The operations of the company are decentralised with the local units enjoying high levels of autonomy in making crucial company decisions like marketing, pricing, distribution etc. Besides this the company has seven strategic business units (SBUs) across the globe, which is in charge of top level of business and strategic decisions. The company relies on local managers to manage its worldwide business operations. For instance one SBU focuses on beverages and coffee and the other concentrates on ice cream and confectionary. These units are engaged in the development of the overall business strategy which includes strategies relating to market entry and acquisitions. Along with this structure there is a parallel regional organisation that is divided in a way as to take care of six geographical locations. These regional organisations take part in the formulation of regional strategies. However both the SBU and the regional managers do not take part in the local operations or in their strategic decisions other than on some exceptional basis. Therefore the management of the company is aligned with its multi-domestic strategy where the company is involved in customization rather than globalisation. The company aligns its products as per the local demand. It makes use of the local inputs and focuses on the needs of the local people. Like its customised business approach for the emerging markets, the operating decisions of the company are carried out at the local levels. The managers of the company move around the globe to aid the management of the organisation. Reference Bachmeier, K. 2009. Analysis of Marketing Strategies Used by PepsiCo Based on Ansoff's Theory. GRIN Verlag. Bender, R. & Ward, K. 2008. Corporate Financial Strategy. Butterworth-Heinemann. Calhoun, D.B. 2004. Using the Balanced Scorecard to determine corporate information needs. Available at: http://www.designbydi.com/documents/BalScrCrd.pdf [Accessed on March 17, 2011]. Carroll, C. L. & Pirnes, A. 2009. From innovation to cash flows: value creation by structuring high technology alliances. John Wiley and Sons Cavusgil, S.T. Knight, G. Riesenberger, R.J. 2009. International Business. Pearson Education Inc. Dowling, M. 2004. Strategy Formulation in a Global Environment. [Pdf]. Available at: http://www.wiwi.uni-regensburg.de/dowling/files/int_sm/im04/ISM10-05-04.PDF. [Accessed on March 21, 2011]. Hirschbichler, P. 2011. Implementation of an IT Balanced Scorecard: Theory and Application. GRIN Verlag. Kaplan, S.R. Norton, P.D. 2002. The balanced scorecard. Harvard Business Press. Koltrowitz, S. 2011. Nestle emerging market growth to offset cost rises. Reuters. Available at: http://www.reuters.com/article/2011/02/17/us-nestle-idUSTRE71G1BZ20110217 [Accessed on March 17, 2011]. Luck, D. 2008. CIM Coursebook Assessing the Marketing Environment. Butterworth-Heinemann. Morningstar, Inc. 2011. Key Ratios. Nestle SA ADR. Available at: http://financials.morningstar.com/ratios/r.html?t=NSRGY®ion=USA&culture=en-us [Accessed on March 17, 2011]. Needles, B. E., Powers, M. & Crosson, S. V. 2007. Principles of Accounting. Cengage Learning. Reuters. 2011. Financials. Nestle Ltd. Available at: http://www.reuters.com/finance/stocks/financialHighlights?symbol=NSRGYN.MX [Accessed on March 17, 2011]. Sklair, L. 2001. The transnational capitalist class. Wiley-Blackwell. URENIO Research Unit. 2004. The technique of Benchmarking. Available at: http://www.e-benchmarking.org/benchmarking.html [Accessed on March 17, 2011]. Bibliography Caslione, A.J. Thomas, R.A. 2000. Growing your business in emerging markets: promise and perils. Greenwood Publishing Group. Cavusgil, T.S. Ghauri, N.P. Agarwal, R.M. 2002. Doing business in emerging markets: entry and negotiation strategies. SAGE. Cornelius, N. 2002. Building workplace equality: ethics, diversity and inclusion. Cengage Learning. Dransfield, R. 2005. GCE AS Level Business Single Award for OCR. Heinemann. Estrin, S, Meyer, K. 2004. Investment strategies in emerging markets. Edward Elgar Publishing. Leeman, A.J.A. 2010. Export Planning. BoD – Books on Demand. Niven, R.P. 2006. Balanced scorecard step-by-step: maximizing performance and maintaining results. John Wiley and Sons. Read, C. Scheuermann, D.H. mySAP Financial Team. 2003. The CFO as business integrator. John Wiley and Sons. Segal-Horn, S. Faulkner, D. 1999. The dynamics of international strategy. Cengage Learning. Welz, S. 2007. Balanced Scorecard and Sales Organisation - Chances and Risks. GRIN Verlag. Read More