Nestle's Strategies in Emerging Markets - Research Paper Example

An example illustrating a link between two topics or concepts different concepts from two distinct modules Nestle’s approach in entering new markets is based on two different concepts – the corporate planning process and the method of inquiry. The corporate planning process involves several steps and helps the firm arrive at the right strategy. A strategy provides a direction to business and helps determine which business to be in. the long-term goals and the corporate objectives have to be established. It also helps define the optimal use of the resources in the changing business environment to meet the set objectives. A strategy defines the roles and responsibilities of the organization. According to the Harvard Policy Mode, strategy is a pattern of purposes and policies defining the company and its business (Carter, 1999). The strategy implementation involves several steps as follows: Source: Schraeder (2002). Globalization is a concept that speaks of one world with similar tastes and preferences. However, Nestle does not believe in globalization of consumer behavior and tastes. They follow the philosophy that consumers are individuals. They do not follow a set pattern and hence cannot be classified as global consumers. Thus, in clarification of their objectives, they evaluated the globalization trend and concluded that they wanted to have a customization approach rather than a globalization approach. However, the globalization principle did help in focusing on the emerging markets as they conducted an external and internal analysis. They could identify the gap in the services in the emerging markets and found tremendous potential. They could foresee the removal of trade barriers and the rising consumerism in these economies. This is the reason they adopted the early-mover principle in these markets. They could also analyse and find that they could achieve competitive advantage by fulfilling consumer needs in these markets. Link between the two concepts Strategy implementation involves several steps. Strategy implementation required them to evaluate the strengths and weaknesses of globalization. It also brought to light that removal of trade barriers had opened up the opportunities in the emerging markets. They thus first developed their corporate level strategy to approach the emerging markets. Strategy is drawn up at three levels – the corporate, business and the functional levels. This helps them decide on the choice of products, the choice of markets and the choice of competitors. To fulfill individual consumer needs or the local needs requires a strategy that differs from the globalization approach. They hence standardize wherever possible but adapted wherever necessary. This provided them with the competitive advantage and gain foothold in the emerging economies. To achieve success, they had to change their strategy of having global managers. Just as there can be no global consumers as per Nestle philosophy, they also believed that the workers should maintain their own cultures but follow the Nestle principles. Maintaining their own cultures enables them to understand the market needs better and make adaptation as necessary. Thus, as a part of their functional strategy, they provided complete autonomy to the local managers to function but in alignment with their overall philosophy, they maintained control having their own expatriate managers to oversee the operations in these nations. After careful evaluation they adopted the transnational approach to internationalization as it allows them control over the operations. They could understand that consumers are not global in their tastes and behavior and that local culture is important. The two concepts are interlined because strategy cannot be developed in isolation. Since the trend was towards globalization, Nestle evaluated the strategic options and concluded that it could gain competitive advantage by attending to individual consumer needs in local markets. This perhaps is the reason that even though they have about 8500 brands not more than 750 brands are registered in each of the emerging markets. Does it make sense for Nestle to focus its growth efforts on emerging markets? Why? In the 20th century Nestle had been expanding through a series of acquisition and was pursuing a global strategy. It had several food items on offer in all countries and approximately 38% of its food sales were made in Europe and 32% came from the Americas. Africa and Asia’s contribution was a mere 20 percent but in the 1990s Nestle realized that the Western markets were maturing and the company needed to revisit its strategy. The developed countries had matured and growth had stagnated. The retail environment had become challenging as retailers were into intense competition against each other. Consumption habits changed and consumers became price conscious. In Europe the situation was even more challenging as retailers had introduced own labels. Price competition had become intense thereby reducing the profit margins in the developed countries (Carter, 1999). At this time the emerging economies were opening up for foreign companies. Africa, Asia and Latin America were high on population and the governments had liberalized their policies for foreign investors. Many companies that find their own markets saturated seek growth through entering the emerging economies. Companies such as General Motors and Motorola also entered emerging economies such as China (Hara & Nakanishi, 2004). Only the mode of entry may differ but the basic strategy is to seek growth through emerging economies. These nations at that time were relatively poor but their economies were growing. Much growth was expected due to liberalization. As income levels would rise people would start looking for branded food and other related products. By investing in emerging economies, MNCs such as Nestle can take advantage of their specific know-how such as technology, managerial expertise and marketing know-how (Athukorala, 2009). Nestle had been firmly established in the developed countries and had the risk mitigating abilities by entering the developing economies that were just opening up. Thus, Nestle’s approach to focus on emerging markets makes sense because the developed markets that had so far been contributing the maximum had now matured and growth had slowed down. Focusing on emerging markets would enable Nestle to sustain profitability and growth. Through strategy evaluation they could foresee the tremendous potential that these economies offered. What is the company’s strategy with regard to business development in emerging markets? Does this strategy make sense? In the emerging economies, Nestle adopted the early-mover strategy and entered before the competitors. Moreover, knowing that economies are poor and people have low income, they started in these economies with basic food items such as infant formula. Their strategy was to focus on a handful of strategic brands and simply life for the people in these economies. This strategy also helped them to utilize their resources on the promotion of restricted number of brands. They did not register all of their 8500 brands in all the countries they had a presence in. They were discriminative and registered only the brands they thought was necessary for the local market to suit the local conditions. They wanted to have a commanding position in each of these markets and they did manage to have 85% of the instant coffee market in Mexico, 66% of the market for powdered milk in Philippines and about 70% of the market for soups in Chile. When entering a new market and especially an emerging economy, it is very essential for a firm to evaluate which markets to enter, the scale and timing of entry in addition to the products to be introduced in the initial stages (Hill, p488). Nestle’s strategy was to focus on emerging economies as it helped them take advantage of the liberalization of economies without focusing on globalization trends. They evaluated the scale on which they would enter the new markets and the timing too was evaluated. Nestle’s approach followed this principle due to which they could attain commanding position in each of these markets. When they entered Nigeria the infra structure was extremely poor and they had to revisit their traditional distribution strategy. Thus, when entering an emerging economy the scale of operations have to be carefully evaluated. This strategy does make sense in the developing markets. From an organizational perspective, what is required for this strategy to work effectively? To make this strategy work local adaptation is essential. They used customization strategy in the local markets to suit the local taste and local culture. This too is absolutely essential to attain success and growth in emerging markets. Cultures are deep seated and consumers cannot change their tastes overnight. They have common set of beliefs which lie deeply embedded into their system. Moreover, different cultures require different programming because the culture governs the activities, motivation and behavior (Hope & Mühlemann, 2001). Nestle adopted a different strategy in each of the emerging economy which is justified as Gilbert and Tsao (2001) emphasize that a strategy that is successful in one country may not be successful in another. For instance, the Chinese consumers create an emotional bond with the brand and hence adapting to the local culture is necessary in low-income economies. Their strategy differed in the developing countries from what they implemented in the developed countries. In the developed countries they used “global brands” but in the developing economies they optimize the processing technology and available resources to local conditions. They also use a brand name that favors well with the local people and that which blends with their culture. Nestle adopted the strategy of flexibility which enabled them to adapt to unforeseen situations in the developing countries. They had a long-term focus to build a sustainable business rather than aim on short-term profitability. The autonomy to be flexible was granted to the functional units at the country level as they could best decide the matters that needed to be adapted. Local adaptation and knowledge of local culture is essential to make the strategy work and which Nestle followed. Moreover, in emerging economies Nestle maintained local managers instead of appointing expatriate managers. This strategy was necessary as they could foresee that powerful forces of culture can differ even within the same region. The attitude to work, authority and equality may differ from one location to another (Johnson, Scholes, and Whittington 2005: 197). Had Nestle appointed expatriate managers they would not have been able to cope with the human resource management challenges. Moreover, understanding the local nuances would be difficult for the expat managers. They could thus ensure that local culture is adhered to. At the same time, organizational culture is also important. The management has to ensure that the workforce adopts the organizational culture. To meet this objective they send the local managers for training to the headquarters where the corporate vision and culture is transmitted to the managers. Thus, when adopting the strategy for entering the emerging economies, Nestle also ensured that cultural differences should not become barriers to growth. Through your own research on Nestle identify appropriate performance indicators. Once you have gathered relevance data on these, undertake a performance analysis of the company over the last five years (financial). What does the analysis tell you about the success or otherwise of the strategy adopted by the company? (non-financial). The best performance indicators are the company’s balance sheet and the assets/liabilities statements, and the financial ratios available from the financial statements. These help evaluate the weaknesses and then derive the relevant strategy. Nestle’s five years financial data: Balance sheet and Cash flow statement in millions of CHF. 2009 2008(a) 2007(c) 2006 2005 Current assets 39870 33 048 35 770 35305 41765 of which liquid assets 5 319 7 131 9 496 11475 17393 Non-current assets 71046 73 167 79591(c) 66500 60953 Total assets 110916 106215 115361(c) 101805 102718 Current liabilities 36 083 33 223 43 326 32 479 35 854 Non-current liabilities 21 202 18 076 17 259(c) 16 478 17 796 Equity attributable to shareholders of the parent 48 915 50 774 52 627(c) 50 991 47 498 Non-controlling interests 4 716 4 142 2 149 1 857 1 570 Operating cash flow 17 934 10 763 13 439 11 676 10 205 Free cash flow(d) 12 369 5 033 8 231 7 018 6 557 Capital expenditure 4 641 4 869 4 971 4 200 3 375 as % of sales 4.3 4.4 4.6 4.3 3.7 Source: Nestle.com The above data demonstrate that the current assets of the company have been steadily declining. It has come down to CHF 39870 in 2009 from 41765 in 2005. Moreover the reduction in liquid assets from CHF 17393 in 2005 to just CHF 5319 in 2009 suggests that the company is not healthy. The non-current assets have risen which means blocked funds, which again is not a positive indication for an organization. Reduced current asset indicates reduced working capital. This means that while the company has been making fixed investments, the working capital has been affected which can impact operations. In 2008 the current assets showed a sharp decline which could possibly be due to the global financial crisis. However, the five year-sales figures as per chart below, do not indicate decline in sales. The sales and net profit has declined only in 2009 which could be because of opening up in newer developing regions. The return from developing economies is not immediate as Nestle pursues a long-term strategy. For instance, they have made massive investments in the Middle East where they expect the trends to change and intraregional trade to grow. Results (in million CHF) 2009 2008 2007 2006 2005(a) Sales 107618 109908 107552 98458 91115 EBIT (Earnings Before Interest, Taxes, restructuring and impairments) 15 699 15 676 15 024 13302 11 876 as % of sales 14.6 14.3 14.0 13.5 13.0 Taxes 3 362 3 787 3 416 3 293 2 647 Net profit (Profit for the period attributable to shareholders of the parent) 10 428 18 039 10 649 9 197 8 081 as % of sales 9.7 16.4 9.9 9.3 8.9 Total amount of dividend 5 608(b) 5 127 4 691 4 004 3 471 Depreciation of property, plant and equipment 2 713 2 625 2 620 2 581 2 382 as % of sales 2.5 2.4 2.4 2.6 2.6 Further, the chart below indicates that stakeholders’ interests have been protected as the earnings per share have gone up and so has the dividend amount. This implies that focus is on protecting shareholders’ interest which may not be the right strategy in the long run. Data per share (e). 2009 2008 2007 2006 2005 Weighted average number of shares outstanding (in millions) 3 572.0 3 704.6 3 828.8 3 848.0 3 888.1 Basic earnings per share 2.92 4.87(f) 2.78 2.37 2.08 Equity attributable to shareholders of the parent 13.69 13.71 13.75(c) 13.25 12.22 Dividend 1.60(b) 1.40 1.22 1.04 0.90 Pay-out ratio (based on Total basic earnings per share) 54.8%(b) 28.7% 43.9% 43.5% 43.3% Stock exchange prices (high/low) 51.25/35.04 52.95/38.02 55.35/42.65 44.83/35.50 40.43/29.83 Yield (g) 3.1/4.6%(b) 2.6/3.7% 2.2/2.9% 2.3/2.9% 2.2/3.0% Market capitalisation 174 294 150 409 195 661 166 152 152 576 Number of personnel (in thousands) 278 283 276 265 250 The sale figure by continent is depicted below which also illustrates the difference in sales between 2009 and 2010. The table indicates that Europe has registered negative growth and most of the additional sales in 2010 have come from the developing regions from Asia, Latin America and Africa. Asia’s contribution towards growth has been phenomenal and Nestle should focus more on these regions to gain back its position. Source: Nestle AR (2010). The table shows the reduction in the number of factories in 2010, again Europe showing a decline. Source: Nestle AR (2010). Overall, the financial figures indicate that the company has protected the stakeholders’ interest as it is essential to get their support. Second, the current assets have been declining which is possibly because of investments in new developing economies where returns take time. It could also be because of the long-term investments in the Middle East where the market has yet to develop. Overall sales increased in 2008 and investments in fixed assets have increased which is evident from the higher depreciation over the five year period. These figures suggest that Nestle’s strategy has been effective and they are on the right track. They invest in emerging economies which blocks their funds as they have been investing in infrastructure in several countries. In the past too they have invested in infrastructure in Nigeria and China. Over time they would be able to reap the benefits of their investments. How would you describe Nestle’s strategic posture at the corporate level? It is pursuing a strategy global strategy, a multidomestic strategy, an international strategy or transnational strategy? Strategic posture is the alignment of the organization’s design components with its strategies and with each other. The strategy should reflect the operating realities and support the prevailing strategies (Petronius, n.d.). If all of these are properly aligned, the organization is said to have a strategic fit. This is the basic principle but the operational realities are affected by the external and the internal environment. To be a globally competitive enterprise the form must have three strategic objectives – flexibility, learning and efficiency (Slide Share, 2011). Nestle has demonstrated all of these in its operations. It is flexible in each of the country it operates and after learning about the region, it adapts itself to the requirements of the regions. It thus gains efficiency in each of the regions. Nestle has allowed its subsidiaries in each country complete autonomy to respond and act as the business environment demands. They are thus able to respond to the local requirements very quickly. Their advertisements, product mix and the pricing – all depend upon the local markets in which they operate. This can be said to be the multi-domestic strategy where county managers can pursue local responsiveness. Managers thus have the responsibility to recognize the difference between national markets and which also enables them to change their management practices across countries. While this approach is good for emerging markets, there are chances that the headquarters lose control over the country operations because the country manager may not be willing to share information, knowledge and experience with the others at the headquarters or even with those in other countries. This reduces the chances of developing knowledge-based competitive advantage and since knowledge is not shared across subsidiaries, it could also result in reduced economies of scale. Moreover, since the managers do not share the same corporate vision, competition may be intense among the subsidiaries. To overcome these disadvantages and higher costs of the mutli-domestic strategy, Nestle uses about 700 of expatriate managers to knit its diverse worldwide operations together. Through the bulk of their careers they are on foreign assignments and each of them has covered at six nations through their careers with Nestle. Thus they purse the transnational strategy, which is a coordinated approach to internationalization. This allows the firm to adapt to local conditions while retaining central control over operations. This approach allows Nestle to be flexible when necessary. They have a centralized training cell and the managers from different regions are sent to Switzerland for training at different stages in their careers. To maintain their strategic posture and to ensure that manager across regions share the same corporate vision, these training programs give the managers a better understanding of the company’s culture and strategy. This also motivates the employees to align their individual career goals with those of the organization, and hence they feel committed and motivated. This is in line with their philosophy that the regional managers maintain their own cultures but follow the Nestle principles (Reichlin, 2004). Moreover, the training aligns with their principle that people are the most important asset (Reichlin, 2004). The high potential managers are sent to the headquarters at Switzerland for training. Nestle can hence said to be having a good and flexible strategic posture as their strategic objectives, their strategy and the operational realities are in alignment with each other. Does this overall strategic posture make sense given the markets and countries that Nestle participates in? WHY? Nestle has shown growth in the past decade mainly in the Asian continent, Africa and Latin America. In these markets strategic posture is essential. Even in 2008 when the world was reeling under global recession, sales at nestle have increased. This has been because of the support they provide to their operations in the emerging economies through their SBUs, their regional organizations and their functional units. Moreover, they have demonstrated and changed their strategy as they learned from each new market. Adaption has been the key to success. Even though the company owns 8500 brands it registers in the developing economies only those that would relevant and accepted. They standardize where possible and adapt where appropriate. Adaptability and flexibility in emerging markets is essential to enhance local responsiveness. For instance, in Nigeria the state of infrastructure forced the company to rethink its tradition distribution system. Instead of a central warehouse as is the practice in most nations, in Nigeria they built several small warehouses round the country. Since they cannot use western-style advertising, they use local singers to go to villages and advertise for their products. In China too they faced infrastructure problems with distribution and found their own solution. In the Middle East they are pursuing a long-term strategy. The region has little scope as of now for packaged foods but they continue to remain in the region as they expect the trends to change. They have a network of five factories in the region and they expect that intraregional trade will expand as trade barriers are removed between these countries. This strategy does not seem to fit with their flexible approach as also their strategy in Japan. They lost the market in Japan to Coca-Cola because of their rigidity not to adapt the coffee brand to local conditions. They dismissed it as a coffee flavored drink which allowed Coca-Cola to capture the giant share with Nestle having just 4 percent of the market share. Japan however is a developed economy and Nestle refused to adapt to local environment. Hence, its strategic posture finds a fit only with the developing economy and not in the developed and mature markets. Is Nestle’s management structure and philosophy aligned with its overall strategic posture? Strategy is usually at three different levels – the corporate level, the business unit level and at the functional level. A strategic fit between the three gives Nestle the right strategic posture. The management structure at Nestle has clear demarcation of responsibilities and accountability. It is a decentralized organization. At the functional level, they have provided complete autonomy to the regional heads and the local managers. However, to maintain control and to achieve optimum economies of scale, they do have central monitoring. This way they are not only able to keep the local managers motivated and involved, they are also able to retain control and allow knowledge transfer. At the business level, they have seven different strategic business units (SBUs) that are responsible for high-level strategic decisions and business development. Different SBUs focus on different products and formulate the strategy including whether to enter a new market through acquisition or some other mode. They also have a regional organization which demarcates the world into five major geographical zones. These regional organizations develop the regional strategies such as Nestle’s strategy in the Middle East. The philosophy of Nestle is that there is no global consumer but only a local consumer. This implies that they have to cater to each individual consumer. It suggests that Nestle would make product offerings to suit the local culture and requirements. Nestle has been able implement its strategy in alignment with its philosophy and with the management structure. One of the reasons for success in expansion into new markets is its ability to be flexible and its management structure of providing complete autonomy to its local managers. Since they are able to respond quickly to the local environment they are able to achieve their philosophy of “customization rather than globalization”. This approach creates a synergy between its corporate philosophy, the organizational structure and the overall strategy. This strategy has helped them cope with local issues such as changing the distribution pattern whenever necessary. They have amply demonstrated that the business environment is constantly subject to change because of changes in the macroeconomic environment. Unless local autonomy is provided, it would be difficult to achieve success in developing markets. Moreover, they maintain central control by appointing 700 expatriate managers who move from one country to another to oversee the operations and gather information and knowledge about the different regions. Thus, even though decentralized, Nestle maintains control and monitors progress. Even their research and development program speaks of their overall philosophy. Their innovative food products are developed through intensive research of the markets as they strive to fulfill the market needs which are identified by the SBUs that have been specially created for this purpose. Thus, their management structure and their philosophy can be said to be in alignment with their strategic posture. References: Athukorala, P 2009, 'Trends and Patterns of Foreign Direct Investments in Asia: A Comparative Perspective', The Journal of Applied Economic Research, vol. 3, no. 4, pp. 365-408 Carter, H 1999, 'Strategic planning reborn'. Work Study, vol. 48. no. 2, pp. 46-48 Gilbert, D & Tsao, J 2000, 'Exploring Chinese cultural influences and hospitality marketing relationships'. International Journal of Contemporary Hospitality Management, vol. 12, no. 1, pp. 45-53 Hill, CWL 2009, 'International Business: Competing in the Global Market Place', International Edition, 7th edition, (London: McGraw-Hill) Hope, CA & Mühlemann, AO 2001, 'The impact of culture on best practice production/operations management'. International Journal of management Reviews, vol. 3, no. 3, pp. 199-217 Johnson, G Scholes, K Whittington, R 2005, 'Exploring Corporate Strategy' Seventh Edition, Prentice Hall, Financial Times. Nestle.com http://www.nestle.com/Investors/FinancialOverview/GroupFigures/Pages/GroupFigures.aspx Nestle AR, 2010, Nestle Annual Report 2010, retrieved 16 March 2011 from http://www.nestle.com/Common/NestleDocuments/Documents/Library/Documents/Annual_Reports/2010-Annual-Report-EN.pdf Petronius, G n.d., 'Strategy and Strategic Posture', retrieved 16 March 2011 from http://coles.kennesaw.edu/drbob/dr.bob/OACC6.pdf Reichlin, I 2004, 'Getting the global view: Nestle, led by Peter Brabeck-Letmathe, climbs to the #1 spot in this year's Best Companies for Leaders', The Chief Executive, October 2004, retrieved 16 March 2011 from http://findarticles.com/p/articles/mi_m4070/is_202/ai_n8576050/?tag=content;col1 Schraeder, M 2002, 'A simplified approach to strategic planning', Business Process Management Journal, vol. 8. no. 1, pp. 8-18 Slide Share, 2011, Global Strategy & Organization, Chapter 11, retrieved 16 March 2011 from http://www.slideshare.net/Ugur_Eminli/ch-11-global-strategy-presentation Read More