Nestles Focus on Emerging Markets - Essay Example

?Business Synoptic Table of Contents Question One 3 Linkage between Topics Drawn From Two Pre-Requisite Modules 3 Nestle’s Focus on Emerging Markets 6 Question Three 7 Strategy for Business Development in the Emerging Markets 7 Requirement of the Strategy to Work Effectively 7 Question Four 8 Appropriate Performance Indicators 8 Question Five 12 Nestle’s Strategic Posture 12 Question Six 12 Relevance of Strategic Posture of Nestle 12 Question Seven 13 Nestle’s Management Structure and Philosophy Alignment with Strategic Posture 13 References 14 Bibliography 17 Question One Linkage between Topics Drawn From Two Pre-Requisite Modules This research paper intends to link the various strategic management concepts with the concepts of the management accounting. One concept that has been driven from the strategic management is the supply chain management while the concept driven from the management accounting is customer focused accounting. The linkage between the two concepts is evident in the form of increased sales, rise in the profit, enhanced productivity and customers, suppliers and employee satisfaction. This has been described in detail in the diagram elucidating a close linkage between the concepts. The diagram below helps to understand the linkage between the strategic management and the management accounting. Evidence Link between Strategic management and Management Accounting Accounting plays a vital role in the calculation of the product and to measure the profitability of the customers. In the figure above, it can be seen that the supply chain management of the company which is a strategic management concept can be linked to the customer focused accounting which on the other hand is a management accounting concept. The link between the two concepts is evident in the form of increased sales, profitability and productivity. The strategic decision making process incorporates a customer focus in order to guide value creation and delivery decisions. It is useless to supply the goods and services if the organisation is not able to create value in the minds of the customers. The management accounting techniques involve efficiency measures and control which help the organisation to analyse the performance of the suppliers and the abilities of the company. It is worth noticing that the supply chain management consists of each of the link in the whole supply chain, starting from the producer to the consumers. In case of horizontal organisation, the use of various management accounting techniques such as target costing, life cycle costing, consumer focused accounting, theory of constraints, balance scorecard and activity based cost management techniques are evident. The overall activity of the supply chain can be aligned with the wants and needs of the customers in order to satisfy both the organisations as well as the customers. If the company’s supply chain is customer focused then the company as a whole will be benefited. Based upon Nestle’s case study, a connection can be formed between the strategic management and the management accounting that elucidates the firm’s approach in its highly successful growth strategy. It has been argued by the researcher that the organisation that implements the strategic management approaches tend to be at a successful and profitable state. The business that uses the strategic management approaches shows progress in sales, profitability as well as productivity in comparison to the firms which lacked systematic planning activities (Virtual University of Pakistan, n.d.) There are various elements that are involved in Nestle’s competitive strategic management approach. They are ‘situation analysis, the strategy formulation, implementation and evaluation’. The competitive strategy of Nestle is associated with foreign direct investment in both the businesses namely the dairy and food businesses. It has been believed by the company that strengthening their leadership in this market is the most important element of their corporate strategy (Castelarhost, 2005). Nestle’s competitive strategy can be linked to management accounting in terms of investing for the future to make certain that there is financial and environmental sustainability of its actions and operations. Another element has been its presence in the emerging countries. It has been recognised that the growth drivers of Nestle have been premiumisation and its operations efficiency. The supply chain management of the company is also one of the key elements of the firm’s enviable growth. The company localises its distribution channels in the country it operates in order to increase the efficiency of operation. By doing this the company’s overall cost of operation reduces to minimum (Nestle, n.d.). The company makes great effort to supply its product to the ultimate consumers. It uses conventional marketing channels of distribution in order to supply the product. The product growth is encouraged via innovation and renovation in business strategy (Castelarhost, 2005). It’s new ordering system namely the Futures ordering program makes it distinct from the competitors and enables the company to deliver the goods at the right time in the right manner (Slideshare, 2009). In terms of strategic management accounting, the company has been able to achieve greater profits because of reform, acquisition, divestment and product innovation in order to penetrate into the market (Vijaya, 2005). The company’s presence in the budding markets has been highly developed with about CHF 35 billion of sales and it is also rich with abundant opportunities along with the growth in the market. The company also provides cost benefits to the customers with highest quality products. It targets its investment to capture growth in those countries where there are abundant opportunities. It was because of the effective implementation of the strategies that the company has been able to stimulate growth in all the sectors in the year 2009 (Nestle, 2009). Question Two Nestle’s Focus on Emerging Markets It has been evident that Nestle can enter into the emerging markets. The globalisation of the market is one of the factors that have been affecting the companies worldwide. There are various reasons for the companies to involve in the international markets. Certain firms gets involved in order to respond to the orders made from abroad, whereas a few firms have determined that it is to their advantage to pursue export business on an incremental basis and takes a proactive role (Jeannet & Hennessey, 2005). However, it is important for Nestle to understand the taste as well as preferences of the emerging market before entering into these markets. If viewed from the business perspective, the engines of growth are guaranteed in the emerging markets of the world such as countries outside the Western Europe, United States, Canada and Japan. The magnificent economic growth in the emerging markets can be sought as the beginning of the largest consumer boom in the history of the world. Large numbers of consumers who pursue more income provide manufacturer as well as the distributor an opportunity to make money. The emerging markets are being viewed as the place where the business leaders can stake their future prosperity. It has been evident that huge profits and growth have come from the emerging markets. The emerging markets are growing at a faster pace. The Gross Domestic Product for the year 1999 in several regions of the emerging markets had even surpassed and grew at a faster rate than that of the developed countries such as Britain, Japan, and the United States. Therefore, the opportunities for Nestle seemed to be immeasurable (Caslione & Thomas, 2000). By entering into the emerging markets Nestle will be able to fulfil its objectives which are to be recognised as a world leader in wellness, health and nutrition. It has been evident that the presence of Nestle in the emerging market has facilitated the company’s businesses to grow at a faster rate than its competitors and also helps the company to achieve good earning before interest and tax margins. There is huge potential among the emerging consumers and in the coming years it can be expected that about one billion consumers will opt for branded food products. In order to respond to this opportunity the company needs to shape its strategies accordingly (Nestle, 2009). Nestle already has a significant presence in most of the segment in the developed economy of the world. In order to have further growth, the company would require taking away market share from the competitor or it will become important for the company to make its presence in the new product segment and new markets. It is now worth saying that both the strategies are expensive undertakings and would require considerable effort from the management. However, in light of the competition that the company needs to face it would be prudent for Nestle to continually repeat both the undertaking for sustainable growth. In contrast, if Nestle gets well established in the emerging market, then it can be in a position to grow along with the market as the purchasing power of the consumer increases. Question Three Strategy for Business Development in the Emerging Markets The company has always focused upon developing new strategies in order to gain competitive advantage. In light of the fact that the emerging countries possess certain pitfalls such as lower economic stability, faster change and increased risk, underdeveloped infrastructure, underdeveloped rule of law, the company tried to establish itself in these markets as well (Samonis, 2003). It has been noted that in Asia, Nestle acquired the local companies in order to form a group of autonomous regional managers who is well acquainted with the culture of the local markets than choosing the Europeans and the Americans. It employs a wide area strategy in Asia in an attempt to produce distinct product in each of the country and supply the region with a provided product from one country. The company is embarking on to enter into the emerging markets ahead of its competitors and build a distinct image and position in the basic foodstuffs. When, the income level tends to raise, the company moves on to the upscale items from these niches. The company tries to focus its attention to produce local goods in the local market and plant less emphasis on its global brands in the emerging markets. It has been following the slogan “think global act local”. In order to gain advantage of the cost efficiency the company tries to localise the distribution and marketing strategies according to the needs of the local market. If the company finds good opportunity in those particular firms then it acquires the local firms (Leeman, 2010). The company purchases local companies if it finds it viable to do so. It pursued such a strategy in Poland by acquiring Goplana in the year 1994 which was the country’s second largest manufacturer of chocolate. It did so as the communism had collapsed and the Polish market had opened with the rise in the income level providing rise to the consumption of the chocolate. Local manufacturing becomes impossible when the production cost tends to be higher and the infrastructure is poor. In response to this when Nestle had established its powdered-milk and baby-cereal plant in China, it focused on the development of its own distribution network which they named as “milk-roads” that was between the distribution point and 27 villages. As a result of these, the farmers were provided with an incentive to produce more milk and even the herd of cows of the district eventually grew (Cavusgil & Et. Al., 2002). Since there is differences in the developing markets in terms of food preferences, cultures and languages, this customised approach as adopted by the company to act locally really makes sense. It is imperative for the companies to understand the local market and then act accordingly for sustainable growth. Requirement of the Strategy to Work Effectively The strategy as adopted by Nestle to think locally in the emerging countries and rest of the world is quite effective as it helps to reduce the cost of operation and then understand the local culture in a more better manner. However, for the strategy to work effectively, it would be recommended that there must be much liberty for the local managers to think and take decisions. If there is too much pressure from the headquarters then it will constrain the decision of the local manager and also encourage them to seek for option that might seem strange to the headquarters. The local supplier needs to be constantly encouraged and motivated via means of incentives and rewards in order to work in a cohesive manner and help in the development of the company as a whole. When entering into the emerging markets, it would be prudent for the company to sacrifice the short term profits for the sake of understanding these markets. It should also establish good government relation at the local, national and regional level because the support of the government plays a vital role while adopting such strategies (Samonis, 2003). Question Four Appropriate Performance Indicators Financial Indicators for Five Years The answer to this question needs the appropriate use of both the qualitative and quantitative data. The quantitative data will be gathered from the financial statement along with the annual reports of Nestle. Five years annual report from 2005-2009 will form the basis of the study. The qualitative data will be gathered from the industry information. The key performance indicator can be determined with the help of both the financial and the non-financial data that will help to illustrate the actual performance of the company. It is evident that there has been continuous increase in the group sales of the company. This has been presented in the table below. Sales (Group) in Billion of CHF 2005 2006 2007 2008 2009 91.1 98.5 107.6 109.9 107.6 Source: (Nestle, 2009). EBIT (Group) In billion of CHF 2005 2006 2007 2008 2009 11.9 13.3 15.0 15.7 15.7 Source: (Nestle, 2009). Earning Per Share In CHF Underlying Total 2005 2.15 2.08 2006 2.41 2.39 2007 2.80 2.78 2008 2.82 4.87 2009 3.09 2.92 Source: (Nestle, 2009). Dividend Per Share in CHF 2005 2006 2007 2008 2009 0.90 1.04 1.22 1.40 1.60 Source: (Nestle, 2009). It can be analysed from the above findings that there has been continuous increase in the sales volume since the year 2005. However, in the year 2009 there has been a decline in the sales volume by 2.3 billion. The Earning Before Interest and Taxes for the year 2005 has been 11.9 billion, for the year 2006 has been 13.3 billion. In the year 2007 the EBIT rate has been 15.0 billion. The year 2008 and 2009 experienced same rate of EBIT i.e. 15.7 billion. The earning per share of the company is denoted as an indicator of the company’s profitability. It can be noted from the above table that there has been increment in the companies earning per share till the year 2007. However, the year 2008 saw a rise in the earning per share by 4.87 billion due to increase in profit after tax. In the year 2009, there has been decline in the earning per share by 1.95 billion. It is evident from the above table that there has been an increment in the company’s dividend per share every year. The rising dividend per share signifies that the management’s growth can be sustained. The recent statistics state that the current market price and the stock are trading at P/Es of 28.9x and 23.5x to CY08E and CY09E earnings respectively (StockInvest, 2011). Source: (Corporate Information, 2011). Non Financial Indicators for Five Years After gathering the quantitative data and analysing it, it is important to analyse the qualitative data. For this it would be prudent to conduct the SWOT analysis of the company. The non financial indicators of the company have been revealed in the paragraphs below for five years. The main strength of the company is that it has strong brands such as Nescafe, Cerelac and Maggi. The brands mentioned here tend to be product generic. The company engaged has a dedicated R&D team who are involved in innovation of the product and satisfying the needs and wants of the consumers. It has a global network of centres in four continents in around 17 locations. There are around 3500 staffs internationally involved in search of the innovative products. The company has a high level of market share. The brand is trusted and recognised by people in the four corners of the world. The weakness of Nestle is evident in the form of its entry to the mature markets and thus providing a tough competition to the new entrants. The company has also witnessed few consumers in certain areas. Moreover, the supply chain management of the company is too complex. The opportunity for the company lies in its potential to expand its operation to smaller towns and other geographies. The threat for Nestle is that it faces immense competition from the organised and the unorganised sectors. The consumers are more prone towards spending in the consumer durables than consumer goods (Scribd, 2009). Through the analysis of strengths, weaknesses, opportunities and threats of the company, it can be argued that Nestle has been victorious in implementing most of its strategic plans and its performance has been above average in the last five years. However, it would be better if the company tries to overcome its weaknesses and improve its performance by exploring the opportunities that lies ahead in the coming years. The threat must also be taken as a challenge and strategies needs to be developed in order that the company can be the leader in the particular segment. Bench Market for Five Years Nestle Unilever Position in the world It is the world’s chief food manufacturer It is the supplier of the consumers goods with regard to the food, personal care and home markets Presence The company is present in 200 countries on a worldwide basis The company is present in around 160 countries worldwide Strategy It thrives to become a food, nutrition, health and wellness company Tries to adapt the products to the local markets It is a global brand that thrives to meet the local needs It makes greater use of the corporate brand Market share In Western Europe the market share of Nestle in the ready meals market accounts for 8.9%. While its market share in the diary market accounts for 7.9% In Western Europe the market share of Unilever in ready meals market accounts for 8.6% and in diary market accounts for 7.7% SWOT analysis The last five years have witnessed the main strength of the company being its cash generation and the size of operation. On the other hand the weaknesses of the company are the impact of Forex and commodity based. Opportunities for the company have been evident in the form of joint ventures in strategic areas and its penetration in the Asian markets. Private level competition is the main threat for the company as witnessed in the last five years In the last five years the main strength as noticed has been its strong corporate culture and supply chain. Similarly the weaknesses have been the branding and distance to the consumers. Unilever’s main opportunities are its brand equity and consumer safety. The threat for the company has been evident in the form of private level competition Good customer relation Nestle has maintained good customer relations The customer relation as maintained by Unilever is less in comparison to Nestle Covering health wellness issues Nestle covers good health wellness issues The health wellness issues covered by Unilever is less in comparison to the Nestle Quality Product It provides its customers with good quality products It also aims at providing good quality product to its customers (Bar & Et. Al., 2004). Question Five Nestle’s Strategic Posture After analysing the case study it has been observed that the strategy tends to be that of an international strategy. However, it has been viewed that Nestle has certain elements that possess the multi-domestic approach as well. It is important to know what the multi-domestic strategy focuses upon. The operational along with the strategic decisions are allocated to the business units in each of the country. It has been evident from the case study that Nestle encourages the concept of customisation demonstrating that it adopts the multi-domestic approach (Shenkar & Luo, n.d.). Nestle uses its local resources in order to meet its local needs. It focuses upon the revenue rather than the cost (Dowling, 2004). It is to note that Nestle is a kind of firm that responds quite well to the needs of the local markets and it also has lower level of coordination of the activities across the borders. Therefore, at certain point the company can be regarded as multi-domestic organisation. It becomes quite difficult for the companies to obtain an in-depth knowledge of each culture and market since the production and the product innovation generally takes place in various countries. Even though the local managers are more knowledgeable with regard to the understanding of the culture and the local market as well, it has been observed that the global managers retain the control of this operation. Large numbers of managers are sent overseas by Nestle. Therefore, the rigor of the training offered to the global managers that Nestle deploys generally ranges from moderate to high (Stroh & Black, 2005). The companies various subsidiaries enjoy the decentralised operational policy. In contrast to the decentralised operating procedure, the company uses a centralised operating and financing policy. The financing decision is handled at the corporate headquarters (Moyer & Et. Al., 2008). Nestle’s coordination across the various local markets and existence of the product focused upon SBU make it evident that Nestle has been focusing upon the International strategy. It can be concluded stating that Nestle’s strategic posture at the corporate level can be described as pursuing the multi-domestic and international strategy. While it makes it evident that the company is not pursuing the transnational and global strategy. Question Six Relevance of Strategic Posture of Nestle The strategic approach as adopted by Nestle seems to be relevant and tends to make sense. When opting for the global strategy there is requirement of greater degree of concentration of the resources along with the capabilities in the head office. It also demands the centralisation of the authority in order to exploit the potential learning economies. At this stage the need for customisation seems to be quite low. Transnational strategies need to focus upon leveraging its subsidiary skills. When the companies are trying to pursue the transnational strategies, it can be said that they are trying to build the business models that achieve low cost, fosters flow of skills among different subsidiaries in the companies global network of operation and also tries to differentiate its product from competitors across the geographic markets (Hill & Jones, 2009). It can be concluded that there are utmost requirements for the coordination of the region and leveraging the competencies. Since there are large numbers of the global brands thus the multi-domestic strategy is sub-optimal. Similarly, there are few cost pressures which call for the global and transnational strategies as well. Question Seven Nestle’s Management Structure and Philosophy Alignment with Strategic Posture It can be argued that the company’s management structure along with the corporate philosophy is well aligned with the strategic posture of Nestle. It has been evident that the company utilises the local managers in order to interweave its diverse worldwide operation. It is a decentralised organisation where the responsibility for the operating decisions is generally pushed on to the local units. There is high degree of autonomy as enjoyed by the company in matter of pricing, distribution, marketing, human resource and so on. Nestle believes that it is the core values of the company that allow it to grow as a successful, significant and humane organisation. It has been noticed that the company makes use of the certain means in order to propagate its core values, i.e. its international management cadre. The members who are in this cadre often visit country to country in order to ensure that Nestle’s core values are institutionalised at all the branches of Nestle. Even if the managers are from various ethnic origin and geographic location, they are part of Nestle’s culture and also share the similar core values of the company. It has been believed by the company that the managers need to have intercultural competencies and should interact with their customers in an effective manner (Jacob, 2003). The company’s philosophy is that the product must be made accessible to the consumers as and when required by them. The products are developed by focusing upon innovation and renovation and trying to maintain a balance in the geographic activities. It has adopted international and multi-domestic strategy as stated in the above paragraphs. It customises the product according to the requirement of the customers which proves that its management structure along with the philosophies is aligned with the strategic posture of the company. References Bar, D. & Et. Al., 2004. The Future in the Food Markets. Nestle Vs. Unilever. [Online] Available at: http://www.rodenberg.nl/publications/publications/CI-NestlevsUnilever%20v3.00.pdf [Accessed February 09, 2011]. Castelarhost, 2005. Nestle LC1. Nestle’s Competitive Strategy. [Online] Available at: http://articles.castelarhost.com/nestle_competitive_strategy.htm [Accessed February 09, 2011]. Castelarhost, 2005. Nestle LC1. Background. [Online] Available at: http://articles.castelarhost.com/nestle_background.htm [Accessed February 09, 2011]. Cavusgil, S. 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