International Business Strategy. BSMU – 4154 This essay aims to connect business models like SWOT analysis, George Yip’s ‘D rivers of Globalisation’ framework, VRIO framework, Ansoff’s Product-market expansion grid, Porter’s generic competitive strategies, Porter’s International strategies, value chain, PESTEL and CAGE framework to a leading transnational Agro food firm. To incorporate these frameworks and models, 5 years strategy of Nestlé has been studied. Betz (2001: p.132) states, “A strategic firm model provides a perspective for optimizing both short term resources and long-term capital appreciation by rationalizing sales and profit utilization.” According to Waal (2007) though, Nestlé usually takes strategic planning as their parenting style, but they have taken number of means to enter in a country to fulfil their objectives.
Figure 1: The Choice of Entry Mode: A Hierarchical Model
CHOICE OF ENTRY MODE
Non-equity modes
Exports
Conceptual agreement
Direct export
Licensing/ Franchising
Indi Indire rect ct ex ex ort ort
Equity (FDI) modes
Joint ventures (JV)
Wholly owned subsidiaries
Minority JVs
Green-fields
50/50 JVs
Ac uisit isitio ion n
Majority JVs
Others
Turnkey projects Other R&D contracts
Comarketing
Strategic alliances
Source: Peng (2006: p. 231)
As their strategic planning, Nestlé has acquired, contracted and merged with number of companies. So it is evident that, Nestlé usually undertake equity modes to enter in a country (Peng 2006). Nestlé’s strategies to match its external opportunity and threats with internal strength and weakness can be judged through TOWS Matrix (Wheelen & Hunger 2004), which is based upon SWOT analysis.
Figure 2: TOWS Matrix
Strength (S)
Weakness (W)
List 5-10 internal strengths here
List 5-10 internal weaknesses here
Opportunities (O)
SO Strategies
WO Strategies
List 5-10 External opportunities here
Generate strategies here that use strengths to take advantages of opportunities
Generate strategies here that take advantages of opportunities by overcoming weaknesses
ST Strategies
WT Strategies
Generate strategies here that use strengths to avoid threats
Generate strategies here that minimize weaknesses and avoid threat.
Internal factors (IF AS)
External factors (EFAS)
Threats (T) List 5-10 External threats here
Source: Wheelen & Hunger (2004: p.115)
In 2005, Nestlé Waters, leader of bottled water market of middle/east Africa region, has formed a joint venture with 51% share with Boissons Gazeuses des Frères Zahaf Group of Algeria (Perroud 2005a, www.Nestlé.com) and expanded their market share (Kotler 2004). This might give Nestlé the advantage of their distribution channel, ability to eliminate the second player of the market, opportunity to market their other brands and acquire the strongest position in the middle of Maghreb countries with 34 million inhabitants. According to Johnson et al. (2008) this SO and ST strategies (Wheelen & Hunger 2004) have enabled Nestlé to overcome geographical distance in terms of CAGE framework. This year, Nestlé has sold its milk powder plants of Australia to Fonterra Company and Gorinchem unit of Netherlands to Mr. Jaap Vreugdenhill. Nestlé has decided only to produce liquid milk products and outsource powder milk products from these two firms (Perroud 2005b, www.Nestlé.com). Since these products are not Nestlé ’s key distinctive competenc ies (Wheelen & Hunger 2004), this linkage can minimize maintenance cost and add value by closer coordination with specialized supplier of raw materials (Mintzberg et al. 2003). Later in 2005, Nestlé has entered in EU by engaging into minority Joint venture for 40% share with Lactalis, leader of yoghurt and chilled dessert markets (Perroud 2005c, www.Nestlé.com). This merger has given Nestlé the advantage to market their brands, L actalis’ strong brand name and their strong customer relationship. This strategic move might gave Nestlé the opportunity to close the geographical distance of CAGE framework among the EU nations (Johnson et al. 2008) and to learn about their marketing and commercial skills, efficient manufacturing and supply chain expertise (Mintzberg et al. 2003). This year Nestlé has also acquired Delta Ice Cream and expanded position in growing ice cream market in Greece and the Balkans (Kotler 2004). Thus, Nestlé eliminated the market leader of icecream market from Greece, Bulgaria, Macedonia, Romania, Serbia and Montenegro. The macro-
environment of Greece posed a constraint in terms of legal field of PESTEL framework, because Delta Ice Cream was listed on the Athens Stock exchange (Unknown 2005, www.Nestlé.com). Regulatory approval was needed for this acquisition, which falls under the Government drivers of George Yip’s ‘Drivers of Globalisation’ framework. According to Johnson et al. (2008) restriction on company
acquisition is a legal constraint of PESTEL analysis and ownership regulation is a form of government driver George Yip’s ‘Drivers of Globalisation’ framework. Figure 3: George Yip’s ‘D rivers of Globalisation’ Framework
Market drivers
Similar customer needs Global customers Transferable marketing
Government drivers
Cost drivers International strategies
Trade policies Technical standards Host government policies
Scale Economies Country specific differences Favourable logistics
Competitive drivers
Interdependence between countries Competitors’ global strategies
Source: Johnson et al. (2008: p.297) [e-book] In 2006, with the acquisition of Dreyer’s ice -cream, Nestlé has gained its proprietary technologies,
those are used to produce ‘Dreyer's Slow Churned Light’ , which tastes like classical ice cream but has half the fat and one third less calories; ‘Dreyer's Dibs’ , bite-sized pieces of ice cream and ‘ HäagenDazs Light’ (Tickle 2006a, www.Nestlé.com). According to VRIO framework, which stands for
value(V), rarity(R), inimitability(I) and organisational(O) of resource based view (Peng 2006), this hard to imitate rare value may protect Nestlé from potential entrants, which is a force of Porter’s five force model (Bowman 1998). The learning objective (Mintzberg et al. 2003) was fulfilled by gaining
Dreyer’s
proprietary
technologies
and
Nestlé is planning to create intangible
interrelationship by leveraging these technologies (Campbell & Luches 1998) by introducing locallyadapted new products to other markets (Dicken 2008). According to Ansoff’s Product -market expansion grid (Kotler 2004), new technologies give the firm opportunity to develop new products.
Figure 4: Ansoff’s Product-Market Expansion Grid Current products
Current markets
New markets
New products
Market
Product
penetration
development
strategy
strategy
Market
Diversification strategy
development strategy
Source: Kotler, P. (2004: p. 100)
The acquisition of Uncle Tobys in Australia strengthens Nestlé's Nutrition, Health and Wellness positioning along with its 40% market share of breakfast cereal (Tickle 2006b, www.Nestlé.com). This step might provide a opportunity for synergies, both in terms of cost and moving Uncle Tobys brands in the channels where Nestlé has particular strength (Campbell & Luches 1998). Nestlé has reached to an agreement in 2006 to sell its canned liquid milk businesses to Fraser & Neave Holdings Berhad, which will manufacture and distribute under licence of Nestlé canned liquid milk products in Thailand, Malaysia, Singapore, Brunei and some other countries in the region (Perroud 2006a, www.Nestlé.com). This may allow Nestlé to rationalize its portfolio and concentrate on higher value-added brands (Dicken 2008). During the same year, Nestlé has agreed to market its Nestea and green tea base drink Enviga through its 50/50 joint venture with The Coca Cola Company- Beverage Partners Worldwide (BPW) throughout world except, US and Japan market (Perroud 2006b, www.Nestlé.com). As Datamonitor report (2010) has presented, they had licensed these two brands to TCCC to compete in US. Though there is a threat that TCCC could gain the formula of these two brands, the opportunity to take advantage of their distribution channel mi ght offset the threat. Nestlé Waters has formed an alliance with Grupo Modelo, because Mexico is the world's second largest bottled water market with a yearly turnover of 15 billion litres and average growth of 8% per year. In addition to the opportunity to be in a lucrative market, Nestlé would gain privileged access to traditional Mexican distribution channels (Perroud 2006c, www.Nestlé.com), allowing it to increase its market share over the coming years (Kotler 2004). This SO strategy (Wheelen & Hunger 2004) may enabled Nestlé to remove two threats of Porter ’s 5 force model - the threat of substitution and threat of rivalry (Bowman 1998) and add value to its value chain in terms of outbound logistics (Porter 1986).
Figure 5: The Value Chain
Source: Porter, M. (1986: p. 21)
In 2007, Nestlé has acquired the entire business of Novartis Medical Nutrition, which strengthens their position as a nutrition company (Perroud 2007c, www.Nestlé.com). During the acquisition they have included the leading baby food brand of US, Gerber, in their portfolio (Perroud 2007b, www.Nestlé.com). This leaping in the new area of business has enabled Nestlé to learn Novertis special know-how and expertise and leverage it to 40 other countries to satisfy the demand of the customers (Mintzberg et al. 2003). This indicates their intention to undertake ‘Market Development Strategy’ of Ansoff’s four market growth strategies (Kotler 2004). In terms of PESTEL (Johnson et al. 2008), Nestlé had also dealt with minor regulatory process with European Commission in France and Spain. This year, Nestlé opened a milk processing plant in Pakistan and entered into a public-private partnership with the United Nations Development Programme (UNDP), which aims to train 5,000 women involved in farming in Pakistan (Tickle 2007, www.Nestlé.com). Thus they have overcome the administrative and political distance of CAGE framework and political constraint of PESTEL framework (Johnson et al. 2008). Similarly, opening of the milk factory in the remote location of China enabled them to have access in lucrative location for farming (Perroud 2007d, www.Nestlé.com). With broadening strategic co-operation with Barry Callebaut in Europe in 2007 (Perroud et al. 2007, www.Nestlé.com), Nestlé has decided to outsource (Wheelen & Hunger 2004) specialized high quality chocolate ingredients to its European chocolate factories, especially Russia, and add value to their value chain (Porter 1986). According to VRIO framework, Nestlé has gained access to a value adding, rare, and hard to imitate opportunity, which is synergetic with organisation (Peng 2006). Backed by the strength of supply and distribution network Nestlé Russiya has acquired Ruzskaya Confectionery Factory (RKF), the leading premium chocolate producer of Russia and added RFK’s premium brands like Сomilfo and Ruzanna brands in their portfolio (Perroud 2007e, www.Nestlé.com), which denotes the strategy of ‘adding global brands with local jewels ’ (Dicken 2008). Regulatory approvals of the Russian Federation authorities were needed to complete the
transaction. Though it might be taken as a legal constraint according to the PESTEL analysis in macroenvironment, but cost driver of George Yip’s ‘Drivers of Globalisation’ framework offset that in terms of favourable logistics (Johnson et al. 2008). Nestlé’s commitment to the pr emium chocolate market is also evident by their joint venture decision with Belgian luxury chocolate maker Pierre Marcolini. The partnership will allow Nestlé to benefit from the know-how of the world's leading luxury chocolate makers (Mintzberg et al. 2003), while Pierre Marcolini will gain access to Nestlé's global experience (Perroud & Goemaere 2007, www.Nestlé.com). This strategic move has added and changed capability of both companies (Johnson et al 2008). In 2008, Nestlé Nutrition facility was started in Konolfingen (Switzerland), which will produce newgeneration probiotic infant formula under the NAN brand and enable Nestlé Nutrition to undertake the market of over 90 countries (Perroud 2008b, www.Nestlé.com). According to Johnson et al. (2008) cost driver of Yip’s ‘D rivers of Globalization’ is effective here in terms of economies of scale and country specific differentiation along with national characteristics enable firms to create differentiated products. Thus, Nestlé has gained the opportunity to strengthen its position by sharing Konolfingen's position as a global manufacturing site for highly-specialised infant formula and healthcare nutrition. The new Nestlé Nutrition industrial site will benefit from synergies with Nestlé's Product Technology Centre, also based in Konolfingen, and create a tangible interrelationship (Campbell & Luches 1998). In 2008 Nestlé has decided to acquire Santa Bárbara Mineral Springs to gain 57% market share of Brazil (Unknown 2008, www.Nestlé.com). 2008 is mostly compact with Nestlé’s investment in different
R&D
projects
like,
coffee
factory
of
Timashevsk
of
Russia
(Zibareva
2008,
www.Nestlé.com), new R&D Center in Beijing (Tickle 2008a, www.Nestlé.com), R&D facility in Switzerland to develop premium and luxury chocolate (Perroud 2008a, www.Nestlé.com), R&D facilities for its out-of-home business in Ohio (Tickle 2008c, www.Nestlé.com) and research program on specific nutritional need of athletes (Tickle 2008d, www.Nestlé.com). This may help to secure their face-value during melamine crisis (Tickle 2008b, www.Nestlé.com). In 2009, Nestlé continues to invest on R&D centre in West-Africa to improve local agricultural crops (Tickle 2009a, www.Nestlé.com), research units in Japan (Unknown 2009, www.Nestlé.com), research on breakfast cereal solution in Orbe (Green 2009, www.Nestlé.com) and Indonesian coffee and cocoa research institute (T. Hardjosubroto 2009, www.Nestlé.com). Since, food industry is always under scrutiny of government; Nestlé’s commitment to research may give them a favourable position to Government (Dicken 2008). Additionally, innovative product and technology will reduce threat of substitute and potential entrants of P orter’s five force framework (Bowman 1998). In a hypercompetitive industry like food and beverage, organizational knowledge is embodied in the firm’s core competences and value-adding activities (Stonehouse et al. 2004) and enable Nestlé to un dertake ‘Product Development Strategies’ of Ansoff’s Matrix (Kotler 2004) . In 2009, Nestlé has started Nespresso site in Avenches to support the growing market of its premium coffee brand ‘Nespresso’, which grew 30% over last 5 years, along with other premium and luxury products like Mövenpick of Switzerland ice-cream, S.Pellegrino and Perrier waters, Cailler, Perugina, Baci and Nestlé Noir chocolate (Tickle 2009b, www.Nestlé.com). This strategic step is bolstered by
country specific differentiation opportunity and Cost driver of Yip’s ‘D rivers of Globalization’ in terms of economies of scale (Johnson et al. 2008). Nestlé strategic steps like, acquisition of Delta and Dreyer’s ice -cream, RKF; merger with Lactalis; agreement with Barry Callebaut, Pierre Marcolini; starting plants in Switzerland to support premium brands helps them to differentiate their products. Nestlé’s strategies for differentiation can be evaluated in terms of Porter’s G eneric Competitive Strategies (Wheelen & Hunger 2004). Figure 6: Porter’s Generic Competitive S trategies
Competitive Advantage Lower cost
Cost
Broad target
Competitive Scope
Differentiation
Differentiation
leadership Cost focus
Narrow target
Differentiation focus
Source: Wheelen & Hunger (2004: p. 118)
As (Stonehouse et al. 2004) has stated, coordination and configuration of business activities generates core competency of the firm by adding distinctive value to their value chain. In the light of earlier discussion it is apparent that Nestlé has taken basic global and complex global strategy of Porter’s (1986) International Strategy. Figure 7: Porter’s International Strategies High
Complex global
Basic global
High foreign investment with extensive coordination among subsidiaries
Simple global strategy
Multi-domestic
Export based
Country-cantered strategy by multinationals or domestic firms operating in only one country
Export based strategy with decentralised marketing
Geographically dispersed
Geographically concentrated
Coordination of activities
Low
Configuration of activities Source: Porter, M. (1986: p. 28)
Figure 8: Sales of Nestlé during last 5 years
Source: Corporate author: Annual Report (2009)
Besides the performance over last five years as shown in the above chart , Nestlé’s strategies has made Nestlé world leader in ice-cream with 17.5% of market share, number two player globally in healthcare with the acquisition of Novertis, and global leader in baby food market worldwide by the acquisition of Gerber, Nestlé Waters, the world leader in bottled water with 19.2% market share, the number two player in breakfast cereal market with the acquisition of Uncle Tobys. It is evident that, Nestlé undertakes the strategies on the basis of their strength like- the ability to leverage strong brand names customise products to local market conditions, R&D capability and coordinate global operation by recognising the weakness that, increasing brands can hamper overall brand equity where opportunities like- supporting their brand image, emerging and developing countries and growing market are available. Nestlé is also aware about the threats of Government penalties, macro-economic factors and unethical business activities (Datamonitor report, 2010).
Word count : 2191
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