Nestle's Growth Strategy and Business Development

Essay add: 30-09-2015, 13:43   /   Views: 644
Nestle's Growth Strategy and Business Development

1.) Does it make sense for Nestle to focus its growth on emerging markets?

As it can be derived from the text, Nestle generates operates worldwide with a focus on European markets, which make up 70 percent of its sales. These markets are in the mature state of life cycle of that industry and additionally demographic changes such as the stagnation of population growth rates make it very hard companies like Nestle to generate higher profits through higher sales. As a matter of fact the western economies are actually facing a downturn in output and growth, thus influencing the consumption patterns of customers, especially in the retail business. Consumer are becoming more price aware and tend to spend less while demanding at the same time for customisation, product differentiation and specialization. Another trend is the shift away from branded food and beverages towards cheap non-branded foods and beverages. Nevertheless, the introduction of non-brand own labelled products such as Food Lion offers only makes sense in a large scale in order to achieve economies of scale. As a result of increasing non-brand cheap products offered by rivals, Nestle find itself in an even more embattled market and needs to develop a new strategy either away from branding or towards a higher degree of international market penetration. Since Nestle stands for high quality and has distinctive competencies in producing higher quality food, it would not make sense to change the strategic group, because it would most likely get stuck in the middle. The right strategy is to expand into new markets such as Asia, Eastern Europe and South America. Logically, in these markets the consumer behaviour, macroeconomic environment and cultural habits are different in contrast to western economies. Most of these markets are yet in a growth cycle and this clearly generates an opportunity because they are emerging markets and “untouched”. As mentioned in the text book China for instances will inhabit 700 million people by 2010 who will have nearly the same income levels as Spain has today. While income levels in these emerging markets will increase, people will gain a higher purchasing power with unsatisfied demands. Serving this demands is the right opportunity for Nestle to penetrate new markets, build up market share while at the same time using its profits to defend its old markets in the western economies through low prices. Concluding, I am strongly convinced that expanding into new markets is necessary for Nestle if it wants to stay a global player in the 21st century.

2.) What is the company’s strategy with regard to business development in emerging markets? Does it make sense?

Nestle follows the first mover advantage strategy which means that the company enters in an early stage the emerging markets, in order to establish a network there before competitors such as Unilever do so. The first step they make is to establish a substantial position by selling basic products such as infant formula and condensed milk to the customer with the goal to build up commending positions in each niche. In order to save the costly process of establishing a brand name, Nestle simply purchases local brand names which the consumer is accustomed to. This helps the company to overcome cultural barriers and customer resentments to foreign brands. After these niches of basic food supply are filled Nestle moves on into the more upscale segments such as chocolate, soft drinks and the like. Their strategy is to establish a basis and then expand into more niches as demand rises. Connected to the rising demand is the rising income level as the population can afford to spend more money on food products. As mentioned in the book, Nestle provides about 8500 brand names, but only 750 of them are registered in more than one country and only 80 are registered in more than ten countries. This is due to the fact that Nestle’s strategy is based on a broad range of local brand names which are not entitled as “Nestle”. The company uses that approach in order to the convenient fact that the consumer is easier to reached because he is accustomed to this brand name and they think they know what they are buying. Consequently, marketing is easier and les costly because a reputation, a distribution channel and customer loyalty already exits for that product with that brand name. As a result Nestle can focus its distinctive competencies on product improvement and technological aspects such as process innovation.

Concluding, the key to their success is customisation rather than exaggerated globalisation. This strategy makes sense as the business success of the company proofs. An example is Nestle’s success in the Chinese milk powder market. There was hardly any infrastructure nor transportations systems in 1987 when the company entered the market. Nevertheless, Nestle increased the output of powdered milk from 300 tons in 1990 to 10,000 tons in 1994. This refers to an increase in output of 790% per year. These figures show the success of their strategy, as well as their flexibility, the steady learning processes and the monitoring of the environment. In combination all these factors make up a successful and sense full strategy.

3.) From an organizational perspective, what is required for this strategy to work effectively?

As a matter of fact a good strategy is not the only necessary prerequisite for operating successfully in foreign markets. In markets of transitory nations or even less developed nations there could be a risk in terms of political instability harming the political economy such as the security of property rights, macroeconomic and cultural uncertainties are as well an issue. To a certain extent environmental changes occur with the notion of endangering the basic strategy. In order to avoid these influences and to counter react on these a company needs the ability of gaining steady learning process which needs ultimately to be implemented with a cross-functional attitude among all functional levels. Flexibility is another distinctive competencies a company must be able to achieve to react as quickly as possible to changing environments. As a consequence, the company must implement mechanisms allowing it to respond to changes in local demand, cultural barriers and political fluctuation. Ethnocentric behaviour must be avoided in any circumstances in order to approach the market in the appropriated way. A company must as well learn to consider decisions under the long-run perspective, because markets can be conquered within in short period, but the successful implementation of a strategy needs more time than that. Entering a new market requires some pre-math. The company must estimate the perspectives it has in that new market with regards to threats and opportunities formulating the profile of that country. Basing on this profile the company is able to figure out the strategical approach. One important part of the strategy must be the cultural awareness, which means a company should employ locals in order lower cultural barriers and resentments established by the foreigner. Hence, this results in a better insight and handling of local demand conditions and knowledge about the customer. In order to guarantee flexibility the functional level units must have their own responsibility and must have freedom in decision making, which allows a quick response towards market fluctuations. To relate these statements to this case Nestle’s business process in Nigeria gives a good example. An entirely new marketing approach, distribution channel and network had to be set up due to changing demands, lacking infrastructure and a lack of security. Nestle managed these threats successfully by understanding the culture and the being aware of the lack of essentials.

4.) How would you describe Nestlé’s strategic posture at the corporate level?

The ability to react and act on environmental changes is a crucial part of Nestle’s strategy. Consequently, all subsidiaries have their freedom in decision making regarding strategy issues. This allows them act independently from the headquarter. Hence, it responds quicker to the local environment, conditions and demands with the result of a more efficient approach to local distribution, employees, advertising, products and marketing. To support this approach Nestle’s established its “expatriate army” which is a group of about 700 managers who have a lot of experience in doing management activities in foreign countries. These managers are highly educated and trained in order to enable them a worldwide field of operations. Employee training is not the only distinctive competency Nestle was able to establish. As mentioned earlier, Nestle has a sophisticated R&D department. A steady stream of new inventions and product improvements allows Nestle to keep up its competitive edge. Supporting this globally aware approach the company is organized into seven worldwide strategic business units which are called “SBUs”. These units formulate the high level strategic decisions on a worldwide basis, while each of these SBUs focuses on a specific segment: chocolate, infant food, cereals, coffee etc. . Engaging in the overall strategy development such as acquisition and market entry strategy these SBUs form an important part of the company’s decision making and operating process. Acquisition contributes about 2/3 to Nestle’s growth rate, hence this emphasizes the importance of this functional part of the company. Additionally Nestle established a structure of regional organization which divides the world into 5 major geographical zones: North America, South America, Asia, Europe and Asia. These organizations are assisting the SBUs and have the responsibility for developing strategies within their region.

5.) Does this overall strategic posture make sense given the markets and countries that Nestle participates in? Why?

This overall strategic posture makes sense which is proved by Nestle’s successful worldwide expansion, the steady growth rate and the continuously generated profits. Nestle’s approach of expanding into emerging markets clearly is highly functional throughout the organizational structure (support of R&D, SBU, regional zones) and the corporate level strategy. One of the main reasons for this successful expanding into new markets is due to flexible responds to environmental changes and the ability to obtaining a steady learning process. These two factors make up a large contribution to Nestle’s operating performance, which is as well manifested in the credo of having “customisation rather than globalisation”. Through this attitude the company was able to create a functional and operational synergy among the corporate level strategy, the organizational structure and the general strategy set up. Despite of recessional tendencies and high market fluctuations in the western economies, Nestle was able to grow continuously into new market segment through skilful market penetration. Clearly, this extraordinary performance was only enabled through its strategy of avoiding an ethnocentric approach, building up customer ties through local employees and managing the distribution channel by an entirely unique approach. The company will continue to generate profits and increase market share when it keeps up its strategy but has to be aware that macroeconomic, social or cultural aspects have to be taken into account while pursuing the strategy. Especially in the new emerging markets this strategy awareness makes a lot of sense, because western economies are pretty much standardized in regards to cultural or social economic aspects while Asian or South American markets are characterized by different means. Nestle was already able to emerge into markets such as Africa and the Middle East where long lasting formal and informal trade barriers were established by local government. Lesser developed countries tend to raise trade barriers justifying it with the infant industry protection argument. Nevertheless, food is needed all over the world and with the product range and the distinctive competencies the company possesses a decent platform is given to keep up that strategy. Finally, the approach makes sense from that point of view, that these transitory and less developed economies have a high growth potential over the next two decades. China, Southeast Asia, South America and Mexico will be the future markets on this planet with a growing population and growing income level. If Nestle would not take the opportunity of moving into these markets with these incredible potentials, the company will lose its competitive edge and will lose its position as a global player. Hence, I strongly recommend to pursue this strategy because it makes sense of the highest degree.

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