The Nestle Corporate Strategy - Essay Example

Nestle Corporate Strategy Ans The Nestle case study is an example of a diversified market strategy, as set out in Ansoff’s product/market grid.This model lists four distinct kinds of growth strategies based upon two dimensions: products and markets, namely: market penetration, market development, product development and diversification. The last growth strategy focuses upon entering new markets with new products and is therefore, the most risky kind of strategy. Ansoff has further distinguished four separate categories for diversification, based upon the premise that the most appropriate growth strategy to pursue will be determined by arriving at decisions about whether to sell old or new products in old or new markets. (Ansoff, 1957). Nestle’s growth strategy falls under the category of concentric diversification, wherein a Company produces new products that are closely related to its current products, but introduces them into a new market (Ansoff, 1957). This has been Nestle’s strategy in countries such as infant formula, tofu and noodles which are basic food stuffs but are tailored to meet the needs of the new market, for example in India, the Company also sells pickles to appeal to the housewife market. Nestle’s financial strength and ability to weather the recession may be closely linked to its diversification strategy. Since it has such a broad based approach, any potential issues that it is likely to face are marginal. The efficacy of this strategy is also borne out through the application of the Shareholder Value Analysis, developed by Rapoport (1986). Rapoport identified three specific value drivers, namely Finance, Investment and Business, all three of which if improved, could lead to a direct increase in shareholder value. In general, shareholders in a Company are rewarded in two different ways: (a) dividends paid and (b) capital appreciation, which depends upon the kinds of investments that the Company undertakes. The total shareholder return for a specific year can be calculated using the formula: TSR = Dividends + Capital Appreciation (Pike and Neals, 2006). From an examination of Nestle’s balance sheets for financial records in the European region, it may be noted that the net dividend yield percentages have increased as follows: 2006 – 2.4%, 2007- 2.8% and 2008 – 3.1% (NestleSA, 2008). The last share price in 2006 was 42.85, in 2007 it was 48.05 and in 2008, it was 45.56.(www.nestle.com). The total shareholder value for each year may therefore be calculated as follows: 2006 = 0.024+42.85 = 42.874 2007 = 0.028+ 48.05 =48.078 2008 = 0.031 +45.56 = 45.591 This result from the valuation shows that Nestle has provided its investors with a strong value for their stock and this may be the result of the constant diversification of its brands, for example in the range of Purina pet food products, Wagner, Proteika and the creation of a strategic business division specifically to deal with fresh milk products (Lactalis Nestle Produits Frais), as well as mergers with companies such as L’Oreal and Ralston for the Purina pet foods range.(www.nestle.com/resource). There is a decline in shareholder value in 2008, but this represents a decline of only 2.487 and could well have been caused by the recessionary trends in Europe, but the earlier rise in shareholder value between 2006 and 2007 before the recession is 5.204, which is a much higher range. It is also significant to note that despite the decline in share value, the dividends paid have actually increased from 2007 to 2008, from 2.8 to 3.1%, i.e, an increase of 0.3%. Comparing this to the increase in dividend value between 2006 and 2007, the value has jumped from 2.4 to 2.8% , i.e, an increase of 0.4%. This shows a dividend return rate which is almost constant and has not varied significantly despite the recent turmoil in the financial share markets. This provides a clear indication that the Company’s high levels of diversification could well explain the marginal impact the recession has had in impacting upon returns to investors, especially in the form of dividends which have not posted a decline, but rather an increase. Nestle is also moving into new markets in eastern Europe, which further shows that the policy of diversifying by varying its products and reaching out into new markets may be serving the Company well. Ans 2: Nestle’s strategy to focus on the emerging markets may be a very good one, especially in recessionary times. According to the IMF, economic growth is expected to drop worldwide, from 5% in 2007 to 3% in 2009, but whereas economic growth in developed countries will dip by half a percent, in developing countries, it will rise by an average growth rate of 6.1% (Hemerling, 2009). During the recession, customers in developed countries are also purchasing lower priced goods, therefore in comparison, Nestle is likely to find greater sales volumes for lower priced products in the emerging markets rather than markets in developed countries. Since Nestle is a decentralized organization where operating decisions are pushed down to local units, it is very likely that in a recessionary business environment, the economies of scale achieved for production of Nestle’s lower priced products in these emerging markets will produce higher levels of profit for the Company as compared to the developing countries. Production and labour costs are up to 20 to 30% lower in these countries, and new opportunities are also opening up through infrastructure development (Hemerling, 2009), which Nestle can capitalize on and benefit from. Lastly, this strategy also allows the Company to enjoy the benefits of the being the first mover into the market, as it was in the case of China for example. Being the first mover into a market gives a company the competitive advantage in that market, because it is the first one to get its product to the consumers and establish itself before competitors move in (Rahman and Bhattacharya, 2003). By analysing the pace at which the technology for the products and the market are evolving, companies can improve their odds of succeeding in that market – for example, Hoover in the vacuum cleaner industry created a dominant position that was long lasting, while Sony with its Walkman achieved a first mover advantage in a situation where its product remained unchanging in a changing market but its extensive resources allowed it to gain a long term rather than a short term benefit.(Suarez and Lanzolla, 2005). This would also apply in Nestle’s case, because its products, once localized to suit the emerging market, as for example marketing noodles in Syria, will remain unchanging but the market may change due to recessionary trends in other parts of the world. But Nestle with its extensive resources, may be able to weather the changing market and gain a long term benefit out of being the first entrant into the emerging market, before other competitors in the developed countries realize the potential benefits of these markets and move in. Ans 3: In the emerging markets, Nestle’s strategy thus far has been characterized by the following aspects: (a) Nestle tries to enter the market before any of its competitors do (b) The Company first establishes itself through the production of basic foodstuffs before moving up into more expensive products (c) Its first products are localized to meet local consumer tastes and using products available in abundance in the local areas (d) Operating decisions are decentralized, with judgment and decisions on local preferences and strategies for the local market being determined by Nestle’s local employees, subject to an overall global strategy outlined by the core marketing team Nestle’s current strategy in emerging markets makes eminent sense, because it amounts to “glocalization”, or the modification of an organization’s products and services to suit the local markets. This practice first originated in Japan, but the efficacy of this strategy has been corroborated by other researchers as well (Shamsuddoha, 2008). Glocalization suggests that there is an interaction between global and local elements, but that the global product is modified or adapted in such a manner that it suits local tastes and thereby appeals to local customers. Hence Nestle’s global strategic goals form the basis for modification of strategic goals and target and niche marketing to suit the local markets. Moreover, as Svenson (2001) points out, the glocalization of business activities enables economies of scale, by making use of raw materials and labour that is available locally in manufacturing the products. This is what Nestle has done in Syria for example, where tire tomatoes are a major local product and also a major ingredient in Ketchup. Syria also grows wheat which is a major ingredient in noodles. As a result, Nestle is able to realize gains in production value by utilizing local raw materials to manufacture its products to suit local tastes, thus enabling a higher profit margin. In Malaysia for example, Nestle ensures that all its products are branded as HALAL, in order to cater to the local market. By focusing on a product niche, for example Ketchup and noodles in Syria, Nestle is also able to consolidate its position in the new market before expanding into other products. Localized niche marketing thus helps Nestle to gain a hold in the market. From an organizational perspective, Nestle must improve its sourcing strategy and pay attention to local practices in manufacture of its products. For instance, Nestle was taken to court over claims of child trafficking and slave labour in cocoa plantations in West Africa(www.tradeaid.org). This impacts adversely on the Company’s corporate social profile and must be addressed to make its glocalization strategy more effective, perhaps by ensuring that there is a higher level of control of local operations by requiring them to fall within the parameters of global strategy. Ans 4: Financial ratios provide an effective means of assessing the financial health and profitability of a business. Since businesses exist primarily for the purpose of creating wealth for their owners, an analysis of profitability ratios over a period of time provide insight into whether there has been an improvement or deterioration in performance.(Atrill and McLaney, 169-170). Ratios used to evaluate the profitability of a business are (a) return on ordinary shareholders funds (b) return on capital employed (c) net profit margin and (d) gross profit margin. The formula for calculating ROSF is given as Gross profit margin is calculated using the formula: Gross profit/sales revenue X 100, while net profit margin is calculated using the formula: Net profit before sales and taxation/Sales revenue X 100. (Atrilla nd McLaney, 2006:177-178) In the case of Nestle, the gross profit margin for 2008 is: 22978/ 109908 X 100 = 20.90%, while the net profit margin is: 19,051/109908 X 100 = 17.33% In the year 2007, the gross profit margin was: 14434/107552 X 100 = 13.42%, while the net profit margin was: 10.58% In the year 2006, the gross profit margin was: 12786/98458 X 100 = 12.98% while the net profit margin was: 9.93% In the year 2005, the gross profit margin was:10800/91075 X 100 = 11.8% while the net profit margin was: 9.35% In the year 2004, the gross profit margin was: 8672/86769 X 100 =9.99% while the net profit margin was: 6.39%. As may be noted from the above figures, both the gross profit margin and the net profit margin have shown a steady increase from the years 2004 to 2008. In particular in the last year from 2007 to 2008, the gross and net profit margins have jumped by almost 7%, as compared to previous year increases of 1 to 2%. The steady rise in profits indicates that from a performance point of view, nestle has been doing well. According to Bender and Ward (2002), economic profit or residual value is a profit based measure of shareholder value and is primarily used for performance measurement. There is a relationship between shareholder value and economic profit, because it can be shown that the discounted value of the projected economic profits for a business for a particular time period will equate to the Shareholder value. But while SVA shows the value of a business over its lifetime, economic profit shows whether a business has been able to create value in a single given period.(Bender and Ward, 2002:17). While a short term profit may be explained away due to factors in the environment, Nestle shows a sustained profit trend, which indicates that the strategy it has used thus far has been successful. Ans 5: Nestle’s strategy at the corporate level may perhaps best be described as a combination of a multi-domestic and a transnational strategy. In earlier years, Nestle’s marketing strategy was different in different countries, because the determination of marketing strategy was left to the subsidiaries. As a result, there was a low level of control by the corporate headquarters over strategy. According to Peter Brasbeck, when he took over as CEO in 2005, he was frustrated by the peripheral role that used to be accorded to marketing and the lack of accountability arising in a matrix like, decentralized structure of the Company. The reason was because it often resulted in an overlap between managerial responsibilities and local market management.(Benady, 2005). Nestle’s earlier strategy may therefore best be described as multi-domestic, because it adopted a decentralized, localized strategy that was relevant in the context of a particular marketing region. This was the case because the Company’s competitive position in one country did not impact significantly upon its competitive position in other countries, as opposed to a multinational strategy.(Hout, Porter and Rudden, 1982) After Brabeck took over as CEO however, the Company’s seven strategic units – dairy, confectionary, beverages, ice cream, food, pet care and food services were all brought under one common umbrella. The marketing team has the responsibility of devising global strategy that also includes research and development as well as systems control.(Benady, 2005). It is now the global business strategy that forms the basis upon which local marketing strategies are formulated. This new, revised global strategy therefore conforms more to the definition offered by Bartlett and Ghosal (1991) of a transnational strategy where business strategy is driven by the simultaneous demands for global efficiency and national efficiency concurrently. Ans 6: Nestle’s transition from a multi-domestic to a transnational strategy is a relevant one in the context of globalization. A transnational strategy is essentially integration of the strategy formulation process, and it offers benefits to a business in enhancing the potential of each local market to contribute to broader globalisation benefits (Lovelock, 1999). The Company’s transnational strategy would not necessarily impede the Company’s established marketing strategies within each local region, which are tailored to meet the requirements of that particular local market. Rather it would provide focus and direction to that local strategy. Since a steadily increasing trend towards globalization has even penetrated into the Middle East countries for example, a failure to pursue a global strategy could restrict Nestle’s market outreach and fail to resonate with its customers. For example, as pointed out by Gibbs(2006), Nestle’s strategy for the 21st century is to position Nestle not as merely a trusted food company that produces delicious and tasty foods, but also as the premier Company of the world in nutrition, health and wellness. This is also exemplified in the logo of the Company, which states: “Good Food. Good Life”. Since this is a part of the Company’s integrated global strategy from which regional strategy is to be formulated, this means that marketing at the local level would also be able to direct its focus in promoting the image of the Company as a producer of products that enhance the quality of life. Maintaining a global strategy also helps to promote the image of the Company as a socially responsible entity. By ensuring that certain standards are maintained by all its subsidiaries, Nestle can ensure that it is not made the subject of controversy as in the case of allegations of slave labour in the West African countries but rather, it can promote itself as an organization with corporate social responsibility worldwide. This is especially important in the context of recent corporate scandals such as Enron, where the public perception that a corporation does not pursue socially and environmentally sustainable goals could be disastrous for its public image. Ans 7: Nestle’s overall strategy is one of growth through diversification, i.e, expanding into new products with new products that are derived from its existing product base. As a part of this strategy, it has (a) entered into strategic alliances with companies such as L’Oreal, etc (b) created subsidiaries in different nations with localized control over operations and marketing and (c) is focusing upon entering emerging markets such as East Europe, Africa and the Middle East. Hence, it appears that its management structure is also closely aligned with its strategic policies. Local management and the direction of marketing strategy in a particular region is left to the discretion of the local managers, so that the Company has a decentralized form of management. Despite the balance of control being in the hands of local managers, the Company has also established Strategic Business Units (SBUs) for different geographical zones, and these management groups are responsible for providing an overall global strategy which can then be tailored to suit the local environment. By following such a transnational policy, the Company has been able to realize tangible benefits in terms of its productivity. The SBUs have been set up after the new CEO took over in 2005 and as demonstrated earlier, the profitability of the Company has jumped in recent years. This suggests that the new transnational, global policy may be improving the performance of the Company, because it allows local marketing strategy for Nestle’s products in every region to be refined and modified in accordance with the global policies and strategic initiatives of the Company. Since there is a greater level of communications between regional and local levels, this ensures that a unified strategy is in place. The management structure is set up such that the SBU’s communicate the company global strategic goals to the local units, who are then able to implement it as a part of their general policy, while it also allows these local managers the latitude and flexibility to tailor marketing strategy to suit a particular region and glocalize the products. It may be noted that the setting up of the SBUs may have shifted the orientation of the Company slightly from a largely decentralized, localized form of management to one where there is a global focus and vision that is being provided by the SBUs. The hierarchical structure of the firm remains informal, where there is no rigid transmission of policy down a chain of command that originates at Nestle’s head office in Switzerland. Rather, there is a high level of networking among management in different countries through the SBUs. This improvement in communications also helps to ensure that the Company’s global strategic goals are implemented effectively throughout all its offices across the world. This aids in the promotion of its goals of corporate sustainability and accountability and helps promote the image of Nestle as an ethical and reputable company. Bibliography Ansoff, I. H, 1957. “Strategies for diversification”, Harvard Business Review, 35(2): 113-124. Atrill, Peter and McLaney, Eddie, 2006. “Accounting and Finance for non specialists”, Bartlett, Christopher A. and Sumantra Ghoshal, 1991. “Managing Across Borders: The Transnational Solution”, Boston: Harvard Business School Press. Benady, Alex, 2005. “Nestle’s market wars: The food giant is drawing on local expertise to put marketing at the heart of its global growth strategy”, The Chief Executive, (April 2005), http://findarticles.com/p/articles/mi_m4070/is_207/ai_n13787808 ; Gibbs, Paul, 2006. “Marketing Strategy Analysis: Nestle,” www.insightory.com/view/945/marketing_strategy_analysis:_nestle; Hemerling, James W, 2009. “In recession, focus on emerging markets”, Insight, January 14, 2009, http://www.businessweek.com/globalbiz/content/jan2009/gb20090114_675226.htm?campaign_id=rss_as; Hout, T, Porter, M.E and Rudden, E, 1982. “How global companies win out”, Harvard Business Review, (Sept-Oct 1982): 98-108 Lovelock, Christopher H, 1999. “Developing marketing strategies for transnational service operations”, Journal of Services Marketing, 13 (4/5):278-295 Nestle Court action under way. http://www.tradeaid.org.nz/Food%20For%20Thought/Chocolate/Child%20labour%20and%20Chocolate/Nestle%20Court%20Action%20Underway; Nestle stock quote. http://www.nestle.com/InvestorRelations/SharesADRsBonds/ShareAndADRprice/Graphs.htm; Nestle Group 2007: Company profile. http://www.nestle.com/Resource.axd?Id=740BFA60-9525-4A01-A891-00AFA768E482; Nestle SA, 2008. “Preview H 108 results (7 Aug): Company Focus”, Citi, 24 July 2008 Nestle 2007 financial statements: http://www.nestle.com/Resource.axd?Id=55EBCBD1-E037-47AE-B436-9E4689F16D3A; Pike, R and Neale, B, 2006. “Corporate Finance and Investment”, (5th edn), Prentice Hall. Rahman, Zillur and Bhattacharya, S.K., 2003. “The sources of first mover advantages in emerging markets – an Indian perspective”, European Business Review, 15(6):359-369 Shamsuddoha, Mohammad, 2008. “Globalization to glocalization: A conceptual analysis”, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1321662; Suarez, Fernando F and Lanzolla, Gianvito, 2005. “The half truth of First Mover Advantage”, Harvard Business Review, April 1, 2005. Svensson, Goran,2001. “Glocalization of business activities: a glocal strategy approach”, Management Decision, 39(1): 6-18 Read More