Nestle: Strategic Management and Accounting for Decision Making - Essay Example

?Business Synoptic FA Answer to Question No With reference to the scenario of Nestle demonstrated in the case study, one such situation has been drawn up that will be essential to illustrate linkage between two topics: strategic management and accounting for decision making. A relationship between the concepts will be explained with regards to the company’s strategy of entering into emerging competitive markets in a worldwide basis before their competitors enter. Strategic management is that phenomenon which helps a company to take the most appropriate decision for successful functioning of an organisation. On the other hand, accounting for decision making is that aspect of a company in which a business firm takes strategic perspectives and decides on issues related to its successful operation. This following model is developed for determining a relationship between strategic management and accounting for decision making with the perspective of the case study of Nestle. The aspects based on the linkage between two modules are as follows: For understanding the model precisely, it is essential to review certain aspects of strategic management. In this paragraph the concepts of strategic management will be discussed. There are certain key activities in a process of strategic management that has been found to be relevant in the perspective of Nestle’s actions towards strategy formulation. The first activity deals with a situation analysis of organisational environment that includes operational activities of the company, inclusive of internal resources along with stakeholders. The second important activity deals with establishment of strategic direction. The strategic direction is reflected in vision and mission statements of the organisation. Based on the analysis of situation and review of the organisation’s vision and mission, certain specific strategies are formulated. The strategies are formulated with respect to ultimate objectives of the organisation. After the three most basic approaches towards strategic management, implementation of the strategy is undertaken. The implementation process includes designing of a structure of the organisation, processes of controlling the organisational activities, management of relationship with stakeholders and efficient management of resources for developing that competitive advantage in the emerging world markets (Media Wiley, 2007). Another module, accounting for decision making is also needs to be taken up for understanding the model. In this paragraph, the concept of accounting for decision making relevant to the development of the model will be discussed. The foremost activity that Nestle has taken prior to deciding on the entry strategy in emerging markets is related to clarification of decision problem. The decision problem is highly related to strategic alternatives selected for strategic management. The selection of alternatives is based on decision problem and is directly related to the perspectives of strategic management. Development of decision model is undertaken with the objective of selecting one best alternative. The decision model is crucial for collection of data and by analysing the collected data one best alternative is chosen (Accounting Education, 2011). The relationship between the two modules, strategic management and accounting for decision making will be presented through discussion in this paragraph. In developing the relationship between concepts of two modules with respect to decision making in Nestle case study, certain important aspects of the case have to be taken into account. Nestle has to build up a comprehensive decision model that would satisfy its objectives. In the above model, relationship between concepts of two modules has been presented, which is relevant for the successful functioning of the organisation. Steps followed in the strategic management are crucially related towards development of decision model. On the basis of the model developed, ultimate single alternative can be chosen. The relationship between the two modules arrived at from linkage between the modules’ concept with reference to Nestle’s case will be represented in the above paragraphs. In order to fulfil its aim in order to succeed in 21st century, undertaking of strategic alternative is essential. Nestle, therefore each time before entering a new market undertakes a comprehensive situational analysis prevailing in the market. The analysis made in this sense leads to development of strategic alternatives for Nestle. As the company aims to enter emerging markets of Asia, Eastern Europe and Latin America, complete review of available alternatives needs to be taken up. The major requirement of the company is to strongly build competitive advantage perspective. Thus, strategic formulation gaining competitive advantage is considered by Nestle. Nestle aims to enter the markets before their competitors take the step to enter and thus concentrate primarily on the foundation of stiff competition. The strategic alternatives should be developed that are most appropriate for Nestle to enter the emerging markets. For example, for operating in Nigeria successfully, Nestle took up situational analysis and decided to alter its traditional method of distribution and built network of small warehouses across Nigeria. This decision depicts linkage between strategic management and accounting for decision making as Nestle found the alternative both strategically and financially viable. Application of strategic management along with prospect of accounting for decision making helps in meeting challenges of developing strategies (University of Pennsylvania, 2011). Answer to Question No: 2 Nestle is an emerging business and targeting the emerging markets for growth perspective seems logical for the overall growth of the business. Emerging markets are those economies of the world that focuses on restructuring along lines of market-orientation and thus reflects a number of opportunities in transfer of technology, trade and foreign direct investment. The markets which Nestle has chosen for its efforts of growth have evolved from developing countries to emerging markets. The markets hold great prospects for Nestle to excel. Emerging markets are different and they stand out due to mainly four characteristics. Firstly, they are termed as ‘regional economic powerhouses’ due to huge population, large markets and large resource base. Secondly, the emerging markets are termed as ‘transitional societies’ that are indulged in economic, political and domestic growth. They adopt policies that help in sustaining growth. Thirdly, analysts estimated that by the year 2020, top five biggest emerging markets of the world will have share of 16.1 percent in the world market that will be double the share of 7.8 percent which was in the year 1992. Fourthly, they are ‘critical participants’ in the world’s major affairs of economic, political and social outlook (Li, 2010). Performance of the emerging markets with future prospects determines growth in those markets. According to the report of International Monetary Fund (IMF) Survey Magazine, China has evolved as the most important contributor to growth among all other economies of the world. The growth is considered in terms of both exchange rates of purchasing power parity and market. China (Asian country) is among the selected economies by Nestle for growth efforts. In this section of the research paper, performance of the economies in Asia, Eastern Europe and Latin America would provide evidence that it really makes sense for Nestle to focus on the emerging markets for growth. Source: (Callen, 2007). The above figure depicts the contribution of the emerging markets toward growth of real GDP. Nestle has a real growth prospect in the above emerging markets of the world. The factor of growth of the emerging markets is instigated by the fact that they are reaping the benefits of wary macroeconomic management during the last ten years and are benefiting from the prevailing external conditions inclusive of high prices of the commodities. Despite certain risks and uncertainties associated directly with the global outlook, expectations of International Monetary Fund (IMF) visualise the emerging markets to sustain growth and remain strong (Callen, 2007). The drivers of growth in emerging markets have been identified in this part. Segran (2010) reported that innovation plays a primary role to drive growth in the emerging markets. Innovations in the emerging markets are leading to the materialisation of a new world initiated by innovation. The growth driven emerging markets would provide three major opportunities for Nestle: talent hubs, new growth markets and innovation hubs. As Nestle is headed towards entering markets before their competitors, innovation has to be applied as an important factor in the growth efforts of the company. Thus, the strategy of Nestle of targeting the emerging markets is reasonable enough in the present scenario of the company. Nestle values unexplored markets and with innovation, the emerging markets can be developed as a strong scope for future growth (Segran, 2011). Answer to Question No: 3 Nestle is a developed multinational unit that has acted strong in the execution of its strategies globally. For performing successfully in the emerging markets, Nestle has taken up two most important strategies namely local adaptation and long term focus. The strategy of local adaptation stresses on the necessity of localisation and for sustaining growth, long run perspectives of the company is essential. In this section of the case study analysis, validation of these two strategies of Nestle will be presented. Local adaptation is important for Nestle to take up. For most multinational firms, the important factor is not the choice between localisation and globalisation but a mingled approach of the two. Though it is important for any companies to develop a global brand for ensuring its organisational characters in the world, it is never sufficient for a firm to develop that global brand. Localisation does not imply that each and every aspect of Nestle has to be localised. It implies more flexibility in management approach that can adapt local environment in foreign country. The degree of local adaptation depends on the capabilities of the organisation itself which intends to adapt. It can be observed that Nestle has successfully implemented strategies in Nigeria and China. Thus, the capability of the company to undertake strategies is strong. As the company is heading towards meeting the needs of countries which are both traditionally and culturally different, the need for local adaptation is enormous (Lin, 2005). Along with local adaptation, the company also needs to focus on long-term outlook. Organisations such as Nestle that hopes to make market in the emerging economies of the world must focus on long-term development of their businesses in those markets. This is also important for business for positioning their brand in the emerging markets. For the long-term sustaining growth, Nestle focuses on satisfying local people through demographic change, urbanisation and environmental protection. For a company that wants to grow and prosper in the emerging markets, needs to concentrate on the long-term benefits even if certain proportion of the short run benefits is sacrificed for that. Moreover, the global economy carries uncertainty along with high growth prospects. For sustaining the level of growth during meltdowns and keeping itself apart form all economic disparities, long term focus of strategy is the most important factor for Nestle (Zhihong, 2010). Analysis of the case facts states that Nestle requires successful global strategies for successful operation of its business in the emerging markets. Nestle needs to focus more on the market participation for the strategies to work effectively. Three requirements have been identified for successful performance of the strategies. The first one is the development of core strategies. Nestle should focus on the core strategies in which they are efficient enough. Core strategies form the basis for competitive advantage that is sustainable in nature. In the second phase of requirements is the internationalisation of the core strategies. This can be done through global expansion of operations along with desire of adaptation on the part of every individual of the company. Lastly, inducement of the feelings of accepting traditional values in the emerging markets among all company’s individuals is essential. Nestle needs to focus on these three attributes if they want to evolve as a successful business in the emerging markets (Yip, 2011). Answer to Question No: 4 Nestle is the world’s leading nutrition, health and wellness company. The performance of the company for the last five years will be analysed in this section of the research paper. The performance indicators that have been chosen for discussion are sales, earnings before interest, tax and operational efficiency. The company has evolved as the ‘world’s leading food and beverages company’ by working on ten basic principles namely consumers, human rights and labour practices; people, product safety and quality assurance; consumer communication; human rights in business activities; personal and leadership responsibility; health and safety at work; customer and supplier relationship; environmental sustainability; water and agriculture and rural development. Nestle operates on the basis of these principles and creates share value for the organisation as well as the nation. In this section of the research paper, performance will be discussed and comparative analysis will be undertaken of Nestle and its most important rivals (Principles Mandatory, 2010). Figure 1: Sales of Nestle for Last Five Years Source: (Nestle, 2010). During last five years that started from the year 2006, Nestle has experienced years of profitability. There had been continuous growth till the year 2009 when global economy was adversely affected by economic meltdown. By adhering to its principles and values, Nestle has brought about its huge success. Due to the increase in unemployment and decrease in 2009’s economic growth, there prevailed uncertainty for the performance of the year 2010. However Nestle had been successful in coping up with these adverse situations and thus had entered the financial year 2010 with strong momentum. Given the level of performance during the past years before recession and also the performance during the year 2010, future prospect can be expected to be high (Nestle, 2010). Figure 2: EBIT of Nestle for Last Five Years Source: (Nestle, 2010). The above figure depicts the movement of EBIT of Nestle for the past five years. Along with the increased level of sales, EBIT has also increased for the company during the past five years. The continuous improvement of the company’s performance has been driven by the increased brand investment. The improved margin of EBIT was successfully initiated by marketing mix and growth in sales level as well as enhancement of operational efficiency through continuous excellence. The overall cost benefited the administrative and distribution cost and cost of goods sold. These achievements reflect the continuous drive for operational excellence. The achievements have continued throughout 2010 and have laid the foundation for further development as well (Nestle, 2010). The table below shows the performance of Nestle with regards to every dynamic category in its range of product offerings. The objective of providing evidence in this respect is to explain the financial position of the company. As a result of this performance, net financial debt of the company has decreased from CHF 18.1 billion in the year 2009 to CHF 3.9 billion in the year 2010. The company had made its biggest acquisition of Pizza in the USA which was settled up for CHF 3.9 billion. During the year 2010, strong position of the company has provided scope for buying back its own share of CHF 10.1 billion. Nestle expects to continue its buying back of shares in the year 2011 and at the same time also expects that the net debt will increase (Nestle, 2010). Source: (Nestle, 2010). In this section of the paper, benchmarking for Nestle has been presented. The performance of Nestle with respect to its sales and profitability can be compared with that of Unilever and Danone’s and ultimately benchmark can be set in the European food market. Unilever experienced a rise in the level of annual profits of 26 percent by its performance of the year 2010. This performance has been influenced by lower cost of restructuring, business disposal proceeds, acceleration of sales figures during last three months of the year 2010. However, the shares of Unilever fell on the day the results were announced. The company was perceived to be unable to deal with the increased raw material in the coming years. The shares of Danone’s also rose as the company announced increase in the earnings of it by 38 percent during the year 2010. This was initiated by lowered financial cost and operating profit also increased by 12 percent along with increase in the sales by 14 percent. It was reported that growth in the emerging markets has driven the profits and high performance for the company. Nestle had posted an increment in its profit during the year 2010 which has been initiated by the sale proceeds of its eye care business Alcon’s shares. Although the sales and EBIT rose in the year 2010, the net profit from continuous operations fell. The analysts of Nestle has insisted that the performance of Nestle has ‘outperformed’ the market as its share rose and this made the analysts positive about the performance of Swiss company (Best, 2011). Thus, the data collected on the comparative performance of the three giants in the food segment at Europe, it can be mentioned that the performance of Nestle has outperformed the performance of the other two companies and thus can be set as the benchmark for the next year, 2011. Answer to Question No: 5 The strategic posture of Nestle at the corporate level implies that the company is following a global strategy. At the micro level, global strategies are concerned with allocation of resources of a company in such a manner that helps in gaining competitive advantage by grasping the opportunities prevailing outside the domestic market. In this section of the case study analysis, a statement will be supported with respect to the citation of relationship between theoretical perspective of global strategy and practical evidence from the case. Companies which follow global strategy include certain aspects that form the characteristics of the strategy. The first aspect is that global strategies are aimed at competing in all the corners of the world where the company intends to operate. In the case of Nestle, the company has intentions to enter markets faster than their competitors and pose serious threats in the competition perspective. The second aspect of global strategies is that it appreciates the fact that success is initiated by the company’s presence in almost all parts of the world (Tutor2u, 2011). Organisational implication of a global strategy states that organisations are imparted with two forms of benefits from the implementation of a global strategy: competitive advantage and location-specific advantage. The global competitive advantage is achieved through international economies of scale, learning of organisation markets and scope in international market. The location specific advantages are achieved by the organisation through exploitation of capital differences, factor differences, product markets and policies of the government among the countries. Considering the global outlook of Nestle, it can be assessed that the company requires the benefits to be perceived for remaining competitive in the international market. This is the reason that the company has taken up the global strategy to be applied in the international market (Roth & Morrison, 1992). The strategy followed by Nestle is a global strategy since it resembles global strategy’s mission. Nestle should have the ability of intermingling with global customers so that their products can be accepted in the global market. The undertaking of global strategy provides with the understanding of objectives to the global audience. This is done through various publications and promotions through events and enhancing issues that affect international security and peace of the local community. As evident from the case, Nestle followed this approach during conducting their business operations in Nigeria for the purpose of getting hold over the local people there (Global Strategy Project, n. d.). Answer to Question No: 6 The overall strategy posture of the company stands at the benefits that a global strategy formulation can provide. Nestle is aiming to do business at the emerging markets of the world and it is essential for the company to design a well-equipped global strategy. The global strategy would benefit Nestle to gain competitive advantage. The discussions on the advantages are the following. The advantages are efficiency, strategic advantage and diversification of risks. The strategy undertaken by Nestle is helpful in its achievement of economies of scale for the company through access to more markets and customers. The exploitation of resources of other countries such as raw materials and labour is possible through the execution of global strategy. Another important advantage that the global strategy would provide is related to the extension of product life cycle. Products that have become obsolete or old in a developed country can be sold in less developed countries. Due to the execution of global strategy, operational flexibility is ensured for the company as it can shift its production with the changes in exchange rates and costs over a period of time (Strategic Management Society, 2011). Through the execution of global strategy, Nestle can acquire the strategic advantage provided by ‘first mover advantage’. As Nestle targets to be the first one to enter the emerging markets before their competitors, global strategy would be of great help. Global strategy provides countries’ cross subsidisation. At the same time, global strategy also benefits the company from the effectiveness of transfer pricing (Goldman Sachs, 2002). The risks of the macroeconomic context are diversified due to the application of global strategy. This is because business cycles of various countries are not perfectly correlated. In a particular country, there can be period of recession while in another country, the period can already reach the phase of recovery. The global strategy is also helpful in diversifying the operational risk related to earthquakes, labour problems and wars (Khanna & Palepu, 2010). Answer to Question No: 7 Organisations that perform in the international market are faced with challenges in terms of allocating resources, balancing authority between the business units in other countries and the central office and the degree to which the customisation of products and services are done based on the demands and level of preferences of the local markets. For adhering to the requirements of local markets where Nestle wants to operate with the help of global strategies, centralisation of management structure is essential. There is requirement of high concentration of capabilities and resources in view of the global strategies along with centralisation of authority for exploiting potential learning economies and scales. Thus, there is lower requirement of customisation in local markets. Although the strategic requirements are that of global strategy, Nestle follows a management structure that resembles a multi-domestic strategy. Nestle pushes down the authority of decision making to the local levels and at the same time controls the human skills with the help of expatriate employees. Thus, the control over employees is centralised while the resource based decisions are decentralised (References for Businesses, 2011). Nestle, by perceiving multi-domestic approach of management structure and philosophy, are keeping itself isolated from competitive forces globally. This is because the global strategy framework helps in operating in a protected market environment where the differences of the local traditions are dealt with in a homogenous fashion. However, in the case of a decentralised management structure in the global strategy, local authorities perform in heterogeneous manner that ultimately hampers the common goal of the organisation. Thus, the structure and philosophy of Nestle seem to be not in line with implementation requirements of a global strategy (Jstor, 2011). Integration of a company’s position across the markets of the world provides effective results in the success of global strategy. This requirement for enhancing the integration initiates various resource managements throughout the network of the company. Excessive decentralisation restrains the company in fulfilling this requirement. Thus, it can be stated that integrative approach in the success of a global strategy cannot be fulfilled by Nestle. It should bring changes in the structure and philosophy if it wants to accomplish the goals of 21st century (Roth & Et. Al., 1992). References Accounting Education, 2010. Cost Accounting as A Tool of Decision Making in Today Business. Decision Making. [Online] Available at: http://www.svtuition.org/2010/05/cost-accounting-as-tool-of-decision.html [Accessed March 12, 2011]. Best, D., 2011. In the Spotlight: Comparing Nestle, Danone and Unilever. Just Food. 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