Strategic Management Accounting and the Realistic Practices of Nestle - Essay Example

?Business Synoptic Table of Contents 0.Linkage between Strategic Management Accounting and the Realistic Practices of Nestle 3 2.0. The Appropriateness and Reason for Nestle’s Focus on Emerging Markets in Its Growth Efforts 5 3.0.Nestle’s Strategy to Develop Its Business in the Emerging Markets 7 3.1.The Appropriateness of these Strategies 7 3.2. Requirements to Execute These Strategies from an Organisational Perspective 9 4.0. Identification of the Performance Indicators of Nestle 9 4.1. The Performance Indicators 9 4.2. Performance Analysis 11 4.3. Efficacy of Strategies and Success of Nestle 12 5.0. Strategic Posture of Nestle at Corporate Level 13 6.0. Efficacy of Nestle’s Strategic Posture 13 7.0. Alignment of Nestle’s Strategic Posture with its Management Structure and Philosophy 15 References 17 Bibliography 20 21 1.0. Linkage between Strategic Management Accounting and the Realistic Practices of Nestle According to the definition of Strategic Management Accounting (SMA), it efficiently links with the business strategy of a firm and helps to maintain and/or increase its competitiveness. Few basic attributes of the SMA process, relates with the collection of competitors’ information regarding price, products, market share and others; identifying opportunities in global market and recognising the efficacy of company’s strategic position with providing emphasis on the accounting aspects (Collier & Agyei-Ampomah, 2006). With a thorough analysis of Nestle’s case study, it can be stated that the company has achieved a sustainable and at the same time quite impressive growth with a long-term benefit to the company. Two most significant causes to stimulate growth of the company can be identified as strategic management approach and managerial accounting behaviour of the company to take a certain decision. These two theories can be evidently linked with the company’s adopted strategies, with reference to case study and fundamentals of the theory SMA. Nestle’s strategic decisions over the years have been focussed on its expansion in the global platform covering almost every economic market of the world. Thus, one of the company’s most significant strategic decisions can be identified as its aggressive expansion strategies. For instance, the company started expanding its operations worldwide since 1868 and by late 1990s, the company had already acquired the markets of 76 countries and 193 nations to manufacture and market its products respectively. Another strategic decision taken by the company was to diversify its product lining from simple infant formulas to condensed milk, chocolates, coffee drink, soups and mineral water as well. With this strategic alliance the company was able to achieve a huge amount of profit in western economies, especially in European and the US markets. However, to imply these strategies in an effective and efficient manner the company focussed on few other factors, such as market competency, internal and external environment and others. In this regards, the company can be observed to apply a few analytical measures. For instance, as mentioned in case study, the company observed that markets of Europe and North America were particularly growing rapidly in terms of competition along with stagnant population growth. This in turn acted as a barrier to Nestle’s growth. To be specific, as the population growth was stagnant and number of market players was also increasing rapidly, there was a little scope for Nestle’s growth in the economies. Moreover, the trends of markets were becoming much favourable for local firms manufacturing the products similar to that of Nestle’s. Realising these facts, the company initiated to expand its market in emerging markets where the population is at rise, demand for branded food items are also increasing and local competitors are also minimum. Hence, the company instigated its operations in eastern emerging countries such as China, India and others. Accordingly, the company also narrowed its market focus to basic food stuffs and a handful of brands targeting local customers in the emerging markets. By executing this strategy, the prime intention of the company was to fortify its market position, reduce the influences of risk factors and simplify managerial approach. This certain strategy also assisted the company to fully utilise its marketing resources in a cost effective manner and thus rewarded benefits of cost leadership to the company. It is worth mentioning that in both examples of the company’s strategic decisions, the concept of SMA can be related evidently. The theory of SMA relates two broad concepts of strategic management and accounting which significantly assist the company to achieve higher competitive advantage and stimulate its growth earning in long-term benefits. According to the theory, it can be highly beneficial for a company to link its strategic decisions with accounting figures as it not only reveals the appropriateness and the efficacy of the strategic alliance but also assists the firm in its ultimate execution (Drury, 2007). This can be comprehensively observed with a graphical representation which is as follows: 2.0. The Appropriateness and Reason for Nestle’s Focus on Emerging Markets in Its Growth Efforts The operations of Nestle, since its introduction in the European market in 1866, have been mostly focused on the western developed markets such as America, Spain and others. Notably, strategic decisions of the company in 20th century was mostly emphasised on the company’s expansions and diversification of its product lining. To be illustrated, it expanded its marketing operations in other sectors of food markets rather than mere production of infant formulas ranging from condensed milk to ice-creams and pet foods as well. By 1990, the company had already been recognised as an international player with hundreds of brands marketed to various countries. Thus, it has successfully achieved a competitive advantage with the virtue of its diversification and expansion strategies. The company also instigated to market its most popular brand, Nescafe which was the first soluble coffee drink and assisted the company to differentiate its product lining from that of its competitors. Hence, it is quite apparent that the company had achieved a remarkable strategic position in the then market. However, with the growing effect of globalisation and the changing scenario of the business environment in the then period, the company recognised few challenges in the western markets. For instance, the population of the markets were becoming increasingly stable along with a growing number of local players. Moreover, the preferences of the customers were also becoming more inclined towards the local brands over international brands which started effecting the company’s growth (Price, 2010). On the contrary, in emerging markets the scenario seemed to be quite promising for the company in a long-term perspective. The population in the emerging markets was at a rise and there were comparatively fewer local players in the markets with the similar product lining as that of Nestle’s. Furthermore, the markets were recorded to grow rapidly which depicted that the population will have an increasing affordability within few years to prefer world renowned brands such as Nestle, as substitutes to their basic food items. Therefore, the company instigated its operations in the emerging markets such as Asian, Eastern European and Latin American markets. This can be well depicted with the help of the image represented below. Figure 1: The Growth Prospect of the Emerging Markets Source: (The Treasury, 2007) Subsequently, during early 21st century the emerging markets were also highly fluctuating with comparatively low demand for branded food items. It was due to the fact that affordability for such kind of products was quite moderate in these markets. This depicts that instigation of the business operations in the emerging markets were inappropriate from a short-term perspective (The World Bank, 2007). However, the company entered the emerging markets with few relevant marketing strategies. Despite focussing on multiple brands in its product line, the company mainly focussed on products which can be sold as substitute to the basic foods items such as condensed milk, infant formulas and others. These products were marketed according to customers’ preferences and their affordability with the intention to strengthen its strategic position in the markets. It also conducted few reformative measures which not only increased the profitability of the company but also confirmed its sustainable growth. For example, the company in China formed its logistic network to market its products all over the country, realising the fact that roadways and railways were inefficient in the country to a large extent. Although these strategic decisions to enter the emerging markets were remarked to be highly efficient in a long-term perspective, these strategies can be identified to provide rise to the operational costs to the company in a short-term point of view. In other words, in the short-term perspective these strategies were highly expensive and also risky to be executed. However, in the long-term phenomenon, these strategies assisted the company to increase its competitive edge to a large extent. The company entered the emerging markets in a period when the competition level in those markets was low and the future prospects were quite secured to yield long-term benefits (Nestle, 1999). Figure 2: Three years sales of Nestle according to the geographic coverage Source: (Nestle, 2001) Conclusively, it can be stated that the strategic decision to shift its focus from the developed markets to the emerging markets seemed to be costly and ineffective from a short-term perspective. Nevertheless, the decision was quite advantageous for the company to yield long-term benefits in terms of competency, sustainability and profitability in its realistic practices. 3.0. Nestle’s Strategy to Develop Its Business in the Emerging Markets The company formed few strategic plans, as mentioned above, to stimulate its operations in the global market. However, the strategic alliances were tailored according to the trend of the business environment of the emerging markets. For instance, during 21st century Nestle’s focus shifted from the developed markets such as the USA, Canada, Italy, Spain and others, to the developing economies such as India, Brazil, China and others. The aim of the company to instigate its business operations in these emerging markets was to stimulate its growth and attain a competitive edge in the global platform. The reason for which the company selected these emerging markets was entirely related to opportunities which these economies were able to provide in the long-term perspective. For instance, the economies were recorded to grow rapidly despite few problems such as rising inflation, unemployment and others. On the contrary, markets also provided a few significant opportunities for companies such as Nestle, in terms of rising demand, increasing rate of income per capita and modest competition (The World Bank, 2007). In order to utilise these opportunities, the company adopted few strategic measures which principally focussed on differentiation, cost leadership, sustainability and long-term profit maximisation. In this regards, the company narrowed its focus to few of its most potential brands and marketed them as substitutes for basic food items. The list contained infant formulas, condensed milk and few other food items which were scarce in the markets and/or can be offered at a cheaper rate. Thus, the company focussed both on its product differentiation and cost-leadership while entering the market. It also focussed on its expansions acquiring various local companies in the targeted markets. For instance, it acquired Shanghai Totole Flavouring Food Co. Ltd. and Xi'an Totole Flavouring Food Co. Ltd. in China in the year 1999. This helped the company to widen its market scope and strategic position in the Chinese market along with local acceptance (Nestle, 1999). To be specific, the company’s strategies were aligned with prime emphasis on the aspect of customisation rather than globalisation. The company also required to focus on its distribution strategies, as every economy was vastly different from the others in terms of culture, infrastructure and other attributes of a business environment. With an overall perspective, these strategies assisted the company to strengthen its strategic position in the emerging markets. 3.1. The Appropriateness of these Strategies According to the strategic alliances adopted by Nestle, the company required to serve the emerging markets with its products at a competitive price which in turn affected its production system. The company’s production system was also affected by inefficient infrastructure of those economies. For instance, the company realised the necessity of a complementary infrastructure to support its distribution channel in various markets including China and Middle East. Due to this fact, the company initiated to build up logistic infrastructure in those markets which was indeed an expensive strategy. Due to all these facts, the company’s performance was recorded to fall during 1999. However, in the next few years the company’s turnover again took pace thus providing increased profitability for a long-term period (Nestle, 2001). However, with the significant assistance of the strategic alliances adopted by the company, it was able to gain a significant position in the targeted markets. Having captured a large proportion of the emerging markets it also enjoyed a large amount of competitive advantage in these economies. Subsequently, it gained its recognition as a market leader in the global platform. 3.2. Requirements to Execute These Strategies from an Organisational Perspective From an organisational perspective, a company requires various significant attributes to execute the adopted strategic alliances. Firstly, to offer products in comparatively low price and in narrow range requires high level of financial stability and strength. Financial strength was also required to develop the logistic infrastructure of an emerging market such as China and Middle East. Furthermore, there was a great possibility to incur losses in the early years of its instigation in the emerging markets due to fluctuations in terms of inflation rates and currency exchange rates. Due to this reason, the company required to have a strong financial and market position in the emerging markets and in the developed markets as well. This certain attribute can be stated as significant because it supported the company to bear losses in the short-run execution of the strategies. To be precise, the company required a concrete ground to enter the emerging markets in 1990s in terms of financial strength and market position as well. 4.0. Identification of the Performance Indicators of Nestle The performance of Nestle shall be analysed with due consideration to the aspects of its financial data and other industrial attributes such as threats and opportunities. Notably, the study will concentrate on the last five years of performance of Nestle. In this regards, the study shall focus on qualitative and quantitative study as well. The data collected from the research shall be further evaluated with the assistance of a GAP analysis and a SWOT analysis of the company’s present status. 4.1. The Performance Indicators The sales of the company can be identified to grow substantially over the past five years from 2006 to 2010. Consequently, net profit earned by the company also increased with remarkable differences which can be evidently depicted by the graph below. Figure 3: The Increase in sales of Nestle over the past five years Source: (Nestle, 2010) The graphical representation of the growth of the company in terms of sales depicts that Nestle was able to gain a considerable increase in its profit for the past five years. For instance, the company earned a net profit of 9197 million CHF in the year 2006 which increased to 10649 million CHF in the next year. In the fiscal year 2008, the company earned a profit with vast difference than its last year revenue, i.e. 18039 million CHF. However, in the year 2009 the performance of the company can be identified to fall back, reducing the net profit amount to 10428 million CHF, which was lesser than the net profit earned in 2007. Notably, the reduction in the net sales can be stated as the consequence of global recession. Yet the performance of the company again increased successfully in the year 2010 earning a net profit of 34233 million CHF which can be recognised as the highest among the five years (Nestle, 2010). The company can also be identified to continue its acquisition and diversification strategies. For instance, in 2010, the company acquired Waggin’ Train, which was recorded to be a market leader in the US and served its customers with pet foods (Nestle, 2010). It also acquired Kraft Foods' in the same year, i.e. 2010, the company is related to the frozen pizza business and was also categorised as a market leader (Nestle, 2010). In 2009, the company established its ‘largest bouillon factory’ in Shanghai which can be stated as an example of its continuous expansion (Nestle, 2009). Therefore, it can be observed that the company was growing at a rapid pace not only in terms of sales and net profit but also in terms of market coverage and competency. 4.2. Performance Analysis Nestle’s - Gap Analysis End State Current State Gaps/Action Control of global retail markets Controls most of the markets, especially in the US, Europe, Japan and China Aggressive acquisition strategies to acquire competitive local firms Continuous expansion in terms of product lining and organisational operations Growth in the European and global markets Considerable growth in the US and European markets but comparatively lesser growth in eastern markets Slower growth in international platform Rapid growth in the US and Europe Formation of corporate respect and brand image Favourable brand image resulting in a sustainable growth The company is engaged with various CSR activities Continuously evaluates its labour relations Diversification to fresh segments Considerable significance is provided to the diversification of product lining and company operations The company is diversified in electronics (designing and manufacturing complementary products) Immense significance is provided to R&D operations Highly depended on the food market segment Strengths Decentralised operations Diversified product lining Huge market coverage Competitive market player Continuous and sustainable growth Financially strong Weaknesses Largely depended on food market Complex organisational structure due to huge coverage Slower growth in eastern countries Opportunities Stability in the growth of emerging economies Immense scope for organic foods Less competitive market players with similar product lining Threats Increasing competition in emerging markets Cultural differences Regulatory interventions 4.3. Efficacy of Strategies and Success of Nestle With reference to the above discussion it is quite apparent that the company has achieved its goal to become a market leader in the international platform. It has achieved growth in terms of sales, profit maximisation, expansion, differentiation and also diversification of its market operations and product lining. Subsequently, the company has gained a considerable amount of financial strength and sustainability in its operations. This depicts that the adaptation of the strategies, i.e. to expand its business to the emerging markets were quite efficient to provide it a competitive strategic position which the company is enjoying at the present. 5.0. Strategic Posture of Nestle at Corporate Level According to the fundamentals, an organisation which is concentrated on the implication of global strategies will have multiple operations in numerous countries all around the world. The operations of the company will again be structured in a specialised form, i.e. R&D in Japan, production in Europe and others (Hill, 2007). However, in the realistic practices Nestle operates its functions in a decentralised manner. For instance, it has its R&D operations based in multiple countries all around the world, e.g. China, France, Australia, India and others (Nestle, n.d.). Similarly, it also has its marketing and production operations scattered globally. However, global strategies can be identified on the case of Nestle in its aggressive expansion and competitive advantage. Thus, the company does apply the global strategies but not at a large extent. On the other hand, with the implementation of multidomestic strategies, a firm executes its operations with due consideration to the environmental factors. For instance, a firm will only set up a production factory in Brazil when the environmental factors will be cost effective and highly stable (Ireland & Et. Al., 2008). At corporate level, the company can be observed to implement various multinational strategies in terms of its marketing functions and organisational operations. For instance, not all brands of Nestle are sold in every market captured by the company. There are specialised brands for particular regions, e.g. Buitoni and others (Nestle, n.d.). Therefore, it can be easily identified that at the corporate level, Nestle is implementing both the global strategies and multidomestic strategies in its realistic practices. This depicts that the company emphasises on transnational strategies to achieve its goal, implementing both global strategies and multinational strategies according to the requirement. 6.0. Efficacy of Nestle’s Strategic Posture Presently, Nestle is recognised as one of the most competitive market leaders in international platform. Presently, its global network comprises of more than 130 countries and manufactures more than 10,000 different varieties of products (Nestle, 2006). Thus, the company operates in a vast area which not only makes the organisational structure complex but also makes it quite challenging to manage all its operations with equal significance all around the world. With this concern, the implementation of transnational strategies can be stated to be highly beneficial for the company. Notably, there are various shortcomings of transnational strategies such as complex execution, requirement of thorough research and others. The implementation of transnational strategies has also been observed as a cost expensive procedure in several cases. It is also time consuming and thereby lacks efficiency. Moreover, as a fresh concept it lacks a definite explanation with rational characteristics (Stonehouse & Campbell, 2004). However, with efficient use of resources and appropriate implementation of global and/or multidomestic strategies a company can be able to obtain various advantages with assistance to the transnational strategies. To be mentioned, the implementation of transnational strategies rewards an opportunity to exchange the core competencies within the organisational network. Furthermore, to a large extent the company applying transnational strategies also become locally responsive, which strengthens the market position and its competency in turn (Stonehouse & Campbell, 2004). Nestle can be observed to gain most of these advantages by implementing transnational strategies. For instance, with an increasing market demand the company initiated to strengthen its production of Nescafe coffee in the Shanghai region which rewarded the company a hike in its sales by almost 20% (China.or.cn., 2009). This reveals the fact that with its investment strategies, which can also be resembled as its multidomestic strategy, Nestle has been able to gain a certain level of competency and local response. Similar kind of strategies can be identified in Nestle’s operations in the past. Hence, the company’s performance can be stated as quite successful which in turn signifies the efficacy of its strategic posture. 7.0. Alignment of Nestle’s Strategic Posture with its Management Structure and Philosophy The management structure of Nestle in based on its ten basic principles which also signifies its philosophy. To be mentioned, it has its management principles concentrated on the best interests of its stakeholders and investors. In this regards, the company concentrates on its sustainability with considerable significance. This can be well-observed with reference to the operations of the company by providing great emphasis on its R&D sector. Moreover, the company also provides an extensive consideration to the employee’s performance and relations in order to maintain the stability of the internal environment. However, to be precise, the philosophy of Nestle is to attain a sustainable growth every year in order to satisfy the needs of its customers, investors, employees and community on the whole (Nestle, 2010). This can be well-depicted with the diagram represented below. Figure 4: Management Structure and Philosophy of Nestle Source: (Nestle, 2010) On the similar context, the strategic posture of the company depicts its organisational goal that is to be emphasised on the attainment of growth in almost every aspect of business, i.e. from sales to sustainability and competency. In this regards, it becomes quite essential for an organisation to maintain a certain level of stability in its internal environment. It also requires maintaining its competency in the global market. 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