Growth of Nestle on Emerging Markets - Essay Example

? Individual Case Study Assignment “NESTLE” Does it make sense for Nestle to focus its growth efforts on emerging markets? Why? Undoubtedly, it makessense for Nestle to focus its growth efforts on emerging markets. Nestle’s initiative to enter emerging markets can be explained by two basic factors: saturation of developed markets and tremendous opportunities for doing business in emerging markets. In order to obtain better understanding of the situation, it might be helpful to analyze both these factors in more details. One of the key reasons of the Nestle’s targeting of the Eastern European, African, Asian and Latin American markets was the mass saturation of its markets in developed countries. Having recognized emerging markets and popularly positioned products as one the key growth drivers, the company’s management has developed a well-grounded strategy, focusing on absolutely new customer segments (Van Dijk and Cantarell, 2010). Obviously, while developing the company’s growth strategy, Nestle’s management team relied heavily on the global market trends and development tendencies. Developed markets were already saturated with the Nestle’s products, and did not present such great growth opportunities as the emerging markets did. Additionally, the large Western European and North American markets became mature; population growth in some countries had stagnated and in some countries there had been a small decline in food consumption (Case study, n.d.). It was evident that the declines in consumer spending and retail sales did not fit to the Nestle’s growth objectives. In response to these challenges, Nestle has made “a move of the knight” by focusing on emerging markets. As it has been already mentioned, developing markets represented great opportunities for multinational companies, such as Nestle. In order to receive evidence that the Nestle’s growth strategy to expand globally to emerging markets was rationally planned, let us take a brief look at the recent global trends and forecasts. According to the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, the emerging markets comprise about 82% of global population (Van Dijk and Cantarell, 2010). Considering the forecasts of the Population Division, the amount of new emerging consumers will increase by 1 billion in the next 10 years (Van Dijk and Cantarell, 2010). Unlike most developed markets, GDP in emerging markets is expected to continue to grow, and populations in many emerging countries are younger, increasingly urban and showing a growing interest in modern retail formats (Food Industry of India, 2010). Urban growth rates are expected to be: moderate in Latin America, North America and Oceania; the most rapid in Southeast Asia and China; and the slowest in East Asia (Rajagopal, 2007, p.72). All these demographic changes will likely have more profound long-term implications for the food system of the country (Rajagopal, 2007, p.72). Thus, the Nestle’s growth strategy pursues long-term perspectives that promise unbelievable growth and sales. According to the World Bank forecasts, the economies in Indonesia, China, Malaysia, India and Thailand are expected to grow quickly in the next few years, the number of people with more than $3,000 in annual income is set to rise more than 40% between 2008 and 2018 (Mijuk, 2010). Consequently, higher incomes of emerging customers will allow them to buy the products, produced by the global food leader (here Nestle). For Nestle it means that the company will be able to sell its products to much larger amount of customers and to satisfy their modern needs and wants. Therefore, the Nestle’s focus on its growth efforts on emerging markets really does make sense. However, this strategy would make little sense, if Nestle failed to develop appropriate entry strategy to maximize the opportunities and to ignore the threats each emerging market represents. In spite of various legal, economic, environmental restrictions in certain emerging markets, the opportunities are much greater than the threats. In order to understand the key challenges and opportunities faced by Nestle while doing the business in emerging markets, below is presented a SWOT analysis. SWOT Analysis Strengths Weaknesses - well-grounded global development strategy - Unmatched product and brand portfolio (Van Dijk and Cantarell, 2010). - Unmatched research and development capability (Van Dijk and Cantarell, 2010). - Unmatched geographic presence (Van Dijk and Cantarell, 2010). - failure to adopt to Japanese market Opportunities Threats - Opportunities for business expansion due to both economic and population growth - Opportunities for mergers and acquisitions (Poland, etc.) - Opportunity to achieve scale of economies by selling through the Middle East region (Case study, n.d.) - Absence of basic product (Palepu and Khanna, 2010). - Foreign investment restrictions - Corruption (for ex. In post-soviet union countries) - Regional conflicts on the Middle East - Intense competition - Poor infrastructure (Nigeria, China…) - Low technological development - Restrictions on marketing advertisement (Nigeria) 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? Generally speaking, Nestle pursues the market dominance strategy. The company wants “to enter emerging markets early before competitors and to build a substantial position by selling basic food items that appeal to the local population base” (Case Study, n.d.). Afterwards the company will build a commanding market position in each of the main food niches, it plans to move progressively out from these niches, introducing more upscale items (Case Study, n.d.).The key to the company’s strategy in emerging markets lays in the customization rather than in globalization (Case Study, n.d.). Therefore, in order to implement its strategy, Nestle decided to optimize ingredients and processing technology to local conditions, and to use local rather than global brands (Case Study, n.d.). This strategy might be effective in case, if the company doesn’t target global customer segment. According to Van Dijk and Cantarell, Nestle is aimed at generating growth by serving the top of the pyramid consumers in emerging markets with premium branded solutions (Van Dijk and Cantarell, 2010). Consequently, in Nestle’s case, localization is critical to access and serve its customer segment (Palepu and Khanna, 2010). While each market requires certain amount of localization of the business model in order to succeed, too much localization might create operating complexity, and destroy the Nestle’s basic advantage of scale and global branding (Palepu and Khanna, 2010). That is why flexibility and adaptability are two important principles necessary for the Nestle’s success in emerging markets. Current decentralized organizational structure of Nestle seems to be quite reasonable and well-grounded. SBUs enable the global food leader to focus on the local needs and consumption preferences of specific geographic customer group. Considering the fact that not all emerging markets are the same and the nature of local businesses is different in different countries (Palepu and Khanna, 2010), Nestle’s decentralized structure enables the company to avoid two major problems, leading to the MNC’s failure in emerging markets. These problems include: not listening to local managers and lack of local knowledge (Palepu and Khanna, 2010). 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? Relying on the corporate information presented in the annual reports, presentations, and seminars, there have been identified key performance indicators of Nestle. These indicators have been developed with a purpose to provide a focus for measuring and reporting Creating Shared Value, compliance and sustainability (Nestle, 2010). The total amount of Nestle’s indicators is comprised of 7 categories, including: economic, nutrition, water, environmental sustainability, rural development, suppliers, and people (Nestle, 2010). However, despite the broad variety of performance indicators, economic indicators have been identified as the most appropriate pointers for analyzing the company’s performance in emerging markets. Therefore, the key economic indicators are: Group sales (billion), organic growth (%), real internal growth (%), EBIT margin and Net Profit. 5 –Year Results: Group Performance Performance indicator/Year 2010 2009 2008 2007 2006 Sales (billion) 109, 7 107, 6 109, 9 107, 6 98, 5 Organic growth (%) 6, 2 4,1 8, 3 7, 4 6,2 Real Internal growth (%) 4, 6 1, 9 2, 8 4, 4 4, 7 EBIT margin (%) 13, 4 14, 6 14, 3 14, 0 13, 5 Net Profit (billion) 34, 2 10,4 18, 0 10, 6 9, 2 By comparing the Nestle’s financial performance during the last five years, there can be drawn a conclusion that its strategy focused on emerging markets was quite successful. The company’s organic growth was constantly higher than expected (5-6%), except only the result of the 2009. Net profit of the organization has been also increased extraordinary. The sales of the company demonstrate stable growth through the all regions. However, Nestle’s sales in emerging markets are expected to grow more significantly in the near future. Below is presented a graph of the Nestle’s sales in emerging markets, based on historical and forecasted data. Graph 1. Emerging markets. % of Nestle sales (Van Dijk and Cantarell, 2010). From this graph, it is obvious that emerging markets comprise a tremendous part to the company’s sales and net profit consequently. Thus, for example, sales growth in Latin America was double-digit for the 2010 (Nestle, 2011). The same growth has been exceeded by Asia, Oceania and Africa region, where India, China, Indonesia, Indochina and the Middle East had strong performance (Nestle, 2011). Additional success of the Nestle’s strategy can be highlighted by the fact that now emerging markets represent 15% of all water sales (Nestle, 2011). All these contributed to the increase of EBIT by 20 basis points in 2010 (Nestle, 2011). Beside the group performance, Nestle’s press release informed that organic growth for Food and Beverages in emerging markets stood at 11, 5% in 2010 (Nestle, 2011). How would you describe Nestle's strategic posture at the corporate level; is it pursuing a global strategy, a multi-domestic strategy, an international strategy or a transnational strategy? Nestle’s strategic posture is focused on one of the key principles: demand generation (Nestle 2007). Current strategic posture of the organization at a corporate level can be characterized by “an agile fleet of businesses and a highly efficient support structure” (Nestle, 2007, p.44). Due to this strategic approach, the company is enabled to react timely on various challenges, including social, cultural, environmental, political, or economic challenges (examples: China, Nigeria) (Case study, n.d.). In order to ensure flawless, efficient and effective strategy execution, the company is required to structure its organization in appropriate way. As the most appropriate way, Nestle implements a multidomestic strategy. From the Case study (n.d.) it becomes known that Nestle is a decentralized organization, in which the responsibility for operating decisions is pushed down to local units. The company operates its business through the Strategic Business Units (SBUs) located in different geographic areas, such as Europe, Americas, Asia, Oceania and Africa zones and a regional organization that tries to help rationalize production and marketing among nearby coutnries (Nestle, 2008; Case Study, n.d.). Below is presented a geographic divisional-area structure of Nestle: Ireland, Hoskisson, and Hitt (2008) explain that such geographic-area divisional structure enables each division to focus on a geographic area, region, or country. It facilitates managers’ actions that tailor the product mix to meet the cultural or special tastes of local customers (Ireland et al. 2008, p.160). In order to coordinate divisions effectively, to save operating costs, and to be profitable in all geographical areas, Nestle requires a high degree of specialization and adaptation (Stroh et al., 2005). Therefore, Nestle has multiple foreign operations, but each affiliate is basically focused on local markets, competitors, suppliers, and so on (Stroh et al., 2005, p. 21). As it has been already stated in the case study (n.d.), the company focuses on developing local goods for local markets, and places relatively less emphasis on its global brands in emerging markets. It also localizes its distribution and marketing strategy to the requirements of the local market. Therefore, the use of international managers is limited up to a group of managers who rotate around the world on various assignments (Case study, n.d.). Stroh et al. (2005) explains that it is natural that the use of international managers is relatively low for multidomestic corporations because of the specific strategic approach. Furthermore, Stroh et al (2005, p.22) clarifies that in such multidomestic companies as Nestle, the international managers tend to be of two types: technical specialist and executives. The all above described characteristics of the Nestle’s strategic posture at a corporate level is very similar to the characteristics of the multidomestic strategy. Therefore, it can be concluded that the Neslte’s strategy refers to the multidomestic strategy. Does this overall strategic posture make sense given the markets and countries that Nestle participates in? Why? Undoubtedly, the Nestle’s overall strategic posture does make sense. The key arguments for this statement are relied on the theoretical analysis of the industry in which Nestle operates. Nestle is the consumer products firm in food and beverage, selling its products in various continents. So as food is a product which can have widely divergent consumer demands, there exist a strong necessity to customize the products to local tastes in order to satisfy the needs and tastes of all customers (Ahlstrom, Bruton, 2010, p.148). While by pursuing the global strategy Nestle could achieve the economies of scale and maintain its strong image, it would obviously fail to achieve (previously discussed) organic growth and sales throughout its geographic zones (Ahlstrom, Bruton, 2010). Through its multi-domestic strategic posture, Nestle is enabled to be highly competitive and fast growing corporation on the global scales. The company obtains a greater ability to hire local managers and employees in order to do key advertising and related activities and a greater ability to match the needs of each market (Ahlstrom, Bruton, 2010, p.148).Thus, Nestle can not only be locally responsive company with wide product differentiation but also it can minimize various risks, including political, economic and exchange rate risks and to adapt to environmental, socio-cultural, and even religious differences in the countries (QuickMBA, n.d.). Nestle organizes its business, relying on the sustainable approach and long term perspective. The effectiveness of this approach has been perfectly demonstrated by the successful cases in Nigeria, China, and some other countries (Case study, n.d.). Even though multi-domestic strategy is often criticized by the lack of economies of scale and cost disadvantages (Power, n.d.), the long-term approach of Nestle proves the contrary of a statement. Thus, for example, Nestle diversifies its business lines and achieves advantage through the scope of economies (Rajagopal, 2007). Additionally, the company’s strategy results in promoting innovation from the local research and development process (Rajagopal, 2007). For instance, Nestle instant noodle products were originally developed by the R&D group in response to the perceived needs of local operating companies through the Asian region (Case study, n.d.). While analyzing the Nestle’s reports and press releases, it can be concluded that the company transforms various threats and challenges into benefits and opportunities, even though in a long-term perspective. Is Nestle's management structure and philosophy aligned with its overall strategic posture? Nestle’s philosophy has been laconically expressed through the company’s mission aimed at “providing consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and eating occasions, from morning to night” (Nestle About us, n.d.). Peter Brabeck – Letmathe, Nestle CEO added that “We want to make sure that employees at all our regional companies maintain their original cultures, but follow the same Nestle principles” (Brabeck-Letmathe, cited by Reichlin, 2004, p.1). In order to achieve the previously set strategic goals and initiatives, the company needs to align its overall strategic posture and philosophy with its management structure. Being a decentralized organization, Nestle allows its subordinate organizations to enjoy relatively high-level of autonomy (Hebert, 2009). Meanwhile, Nestle provides strong leadership development programs specifically aimed at hiring managers with a high potential for positions that give a high probability of success (Hebert, 2009). This measure can be viewed as competitive advantage in the hands of the company, enabling it to operate more efficiently and to present new innovations and developments both emerging markets and emerging consumers. In order to make employees to align with the goals of the organization, to gain their insights, to collaborate and to show initiative, Nestle has developed the “Nestle on the Move” program to address the limitations of the hierarchical model (IMD, 2008). Briefly, Nestle on the Move program states that: employees’ actions should be in line with the company’s goals, not their supervisors’ expectations; they must convert their experience into meaningful insight and action; they must be cooperative, not competitive; they need to take the initiative (IMD, 2008). 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