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This report will analyze the international strategy of Nestlé and one of its major competitors, Cadbury plc in the United States. Nestlé is one of the oldest multinational businesses and focus in nutrition, health and wellness. It was founded by Henri Nestlé, a pharmacist, who established food for babies who were unable to breastfeed in Switzerland in 1866. The company merged with the Anglo Swiss Condensed Milk in 1905. Nestlé expand their business through a series of acquisitions after World War II that included Maggi (1947), Cross & Blackwell (1960), Findus (1962), Libby’s (1970), Stouffer’s (1973), Carnation (1985), Rowntree (1988) and Perrier (1992), (Nestle Mangement Report, 2008). By the 1990s, Nestlé had more than 500 factories in 76 countries and sold its products in 193 nations almost every country in the world. Roughly 28.2 percent of its sales were made in Europe, 33.1 percent in the Americas and 17.1 percent in Asia, Oceania and Africa (Nestlé Management Report, 2008).
Nestlé USA is a subsidiary of Nestlé S.A in Vevey, Switzerland. Nestle has been present in the USA over than 110 years and now headquartered in Glendale, California. By the 2000s, Nestlé become a larger company through several acquisitions that included Ralston Purina (2001), Chef America (2002), Power Bar (2006) and Gerber (2007). Nestlé major products and services include milk based products, pet care, confectionery, beverages, cooking aids and prepared dishes, ice cream and pharmaceutical products. In US, Nestlé markets confectionary and sweets products under Wonka, Perugina and After Eight brands. It also makes biscuits, toppings and mints. This consumer goods company practising a widen product marketing and offer many brands and product in most markets. Nestlé recorded US$10 billion with America is the biggest geographic market, recorded for 30.2 percent of total revenues in 2008 and offer more than 50 brands (Nestlé Management Report, 2008).
The issue of global integration with local responsiveness can be analyzed in a two dimensional matrix. Figure 1 provides an example. There are four type of classification of multinational companies, Global combining high integration with low responsiveness, Transnational combining high integration with high responsiveness, Multi-domestic combining low integration and high responsiveness and International combining low integration and low responsiveness. The International companies was not included in Bartlett’s classification because it is does not fit in this scheme. However, (Sundaram and Black, 1992) equate it with the Transnational company while (Ghoshal and Nohria, 1993; Welge, 1996) place it as a low integration with low responsiveness in the lower left corner.
Figure 1: Global integration vs. national responsiveness (Bartlett and Goshal, 1998)
The vertical axis in the figure shows the need for global integration and movement up the axis indicates in a large degree of economic integration. Global integration brings economies of scale and capitalizes on lowering unit costs as a company moves into global market for selling its products. The economies of scale are obtained because of the centralization of activities in the value-added chain. They also happen by reaping benefits of higher coordination and control of geographically dispersed activities. The horizontal axis indicates the need for MNCs to respond to differentiation or local responsiveness. This implies that MNCs must consider government regulations, local tastes and preferences. Maximizing value in such situations requires MNCs appointing strategic responsibilities and key operating rights to national subsidiaries. Each subsidiary has its own autonomous manufacturing facilities and marketing function. The products offered will vary between nations based on the tastes and preferences of different consumer and competitive strategy. This indicates that in a multi-domestic strategy, a low degree of control is required for the subsidiary company. Organization that engages in multi-domestic strategy will favour low-control entry modes.
In Global strategy, the need for awareness of differentiation is low while the need for integration is high. This situation causes to Global strategies based on price competition for perspective of economies of scale. According to Bartlett and Goshal (1989, 1992), the main strategic thrust of Multi-domestic company is to respond to national differences. In Global strategy, competition takes place at a global level while multi-domestic companies are geared towards domestic competition because national product market do not have the same criteria to make competition at a global level. In global companies, direction and pace would be expected to flow mostly from a headquarters to their subsidiaries while Multi-domestic companies would be characterized by a lower overall flow of products, people and information (Perlmutter, 1969). To be locally responsive, local production and local research and development (R&D) are not essential for a company with local presence since direction and pace comes from a centre. Global companies are unlikely to locate these parts of the value chain close to the customer, since they will feel less need to access this type of market information. In International and Transnational strategy, it reflects more complex environmental situations. International strategies are characterized by increased international standardization of product and services. It can lead to lower needs for centralized quality control and strategic decision making while eliminating requirements to adapt activities to individual regions. In transnational strategy, there is a higher need for regional differentiation in marketing and a strong requirement in production. Transnational is the most challenging strategy where MNCs seek to operate (Jeannet, 2001). However, the problem for many MNCs is the cultural challenges integrated with localizing a global focus.
Business Analysis of Nestlé
Nestlé is characterized as a multi-domestic company by its pronounced local responsiveness and relatively weak global integration. Including its operating companies, such as Carnation, Rowntree and Buitoni among others, it has traditionally practiced a decentralized approach to management. Local operating managers thought to be much more in tune with local markets are given the freedom to develop marketing strategies that match local needs. Like many other companies pursuing a multi-domestic strategy Nestlé has begun a move toward a more centralized management structure, which has resulted in a re-organization around major business lines. In order to reap the benefits of global leverage, companies realize that the multi-domestic business model leaves too many initiatives to local levels thus resulting in missed opportunities (Doole, 2004).
In terms of entry mode and internalization, Johanson & Widersheim-Paul/Vahlne (1975) claim that internationalization is the product of a series of incremental decisions or ‘stages’ based on different foreign market entry modes. They introduce the Uppsala Internationalization model. In this model the firm’s engagement in the specific country market develops according to an establishment chain that has four stages. There is no regular export activities are performed in the market, export only takes place via independent representatives, sales subsidiary and manufacturing in the foreign market. The sequence of stages indicates an increasing commitment of resources to the market. In addition, business activities are differed with regard to the market experience gained. Nestlé use direct exporting for entry mode, which is subsidiary and uses its own organization in the overseas market.
Nestlé focuses on internal growth and try to achieve greater volumes by innovating new products and renovating existing products. This strategy has given Nestlé the ability to grow many products in the various fields of prepared foods, breakfast cereals, dairy products, baby foods, beverages, ice-cream, bottle water, chocolate confectionary and pet care. In addition, Nestlé is a low cost operator. This allows them not only to edge ahead with low operating costs but also beat the competitors by producing low cost products. Nestlé has ability to customize global products based on consumer choices in the local market. This is one of Nestlé’s key strengths where its subsidiaries develop products that match consumer preference in the local market. Due to the nature of the markets psychological and cultural spread, Nestlé believes that there are no global consumers in the market. Its ability to customize products to the local markets brings association in the mind of the customer and brand loyalty by using local names. For example, its confectionery range sold in the US is called Rolo but in Russia, it is called Rossyia. In the US, brands like Kit-Kat chocolate and Maggi noodles have been priced at US$0.2 and some other chocolate and candy brand are priced at US$0.05 per unit. These price help Nestlé reach more customers not only in urban markets but also in rural markets. In the US, Nestlé has two top products capable of becoming at least regional which are pet food and ice-cream, but both lag well behind the market leaders of Mars in pet food and Unilever in ice-cream. With the exception of a few products such as its famous tomato sauce, eaten everywhere with burgers and hot dogs, Heinz (US) applies effectively a multi-domestic strategy, making a small effort to force a global or even pan-regional strategy. For instance in 2001 it took over Honig (Holland) which makes very local traditional delicacies, such as chocolate sprinkles topping.
Nestlé has strong capabilities in research and development (R&D). The group invest more than US$1390 million in R&D annually and the Nestle Research Center in Switzerland is its major think-tank. It has more than 100 different professional areas including raw materials, nutritional science, ingredients, the life science and production processes. By doing R&D, it allows Nestlé renovate existing products and innovate new products continuously. It also allows Nestlé to review its product at regular intervals while generating revenue growth. For instance, Nestlé possess a product LC1, which is innovated and provides health benefits for the consumers and it was fairly new in the US. The LC1 product, probiotic cultures found that it had an innovation that offers a new avenue of profits for Nestlé by introducing it into the US market. The LC1 powder was introduced into US market in 2000. This product focuses on customers who are concerned about their eating habits and health and it was made to be mixed into beverages and foods. Unfortunately, the product went largely unnoticed by the US customers and yielded only minimal results although Nestlé used a smaller campaign targeted at health practitioners, print ads and internet advertising to introduce the product.
In terms of confectionery segment, while taste of chocolate differs by country, the process in making products is the same. Nestlé has a new Worldwide Chocolate Centre of Excellence in Broc, Switzerland and brings more than 130 years of expertise international chocolate making and professionals. Packaging designers who works on R&D focus on developing the luxury products and the finest chocolate premiums. Nestlé achieved overall chocolate growth 7.6 per cent per annum. With sales of CHF9.8 billion they are the fastest growing in number 1 dark chocolate manufacturer. Figure 2 illustrates that confectionery achieve 13.1 percent of sales during FY2008.
Figure 2: Product group sales (Nestlé Management Report, 2008)
Nestlé which was established in the nineteenth century, operates a policy of decentralisation and dispersion of activities. Nestlé’s corporate management is responsible for giving strategic direction to the organisation. R&D is also strongly centralised. Despite this centralized roles, the company’s organisational structure and system continue to emphasise the importance of local interpretation and in many matters local managers have considerable discretion (Ellis, 1995). Within this structure personal relationship between the heads of the operating companies and the holding company’s executives are central in binding the company together. Nestlé’s organizational structure strongly fits the company’s external context. For most of the company’s products the key features of demand have been the diversity of consumer tastes and national regulations. These have been complemented by the absence of sufficient economies of scale to warrant centralised production on a global scale (Tayeb, 2000). Equally, while R&D is important constantly to improve and update products, many of Nestlé’s brands were introduced many years ago. Nescafe although a very different product today, for example was introduced in 1938. With the increasing convergence of tastes and national regulations in at least some areas of the world being standardised, the company recognises the need to co-ordinate some aspects of its operations across different markets. Nestlé has also taken steps to strengthen its regional management and strategic business units have been created for various product groups with the emphasis on integrating marketing, research and production at the country level for related products (Hill, 2009). Nevertheless, despite these changes the company continues to emphasise the advantage of decentralisation in prompting and maintaining local responsiveness.
Competitor Analysis (SWOT Analysis)
In the global confectionery sector, Cadbury has 10.5 percent market share (Annual Report, 2008). The world’s biggest confectionery market is in US, and Cadbury has the second largest market share of 34 percent in the gum product category. Cadbury is also a leading player in South America with core strengths in candy and gum with market share of nearly 20 percent (Annual Report, 2008). Strong market position provides the company better bargaining power and economies of scale. Cadbury has diversified its product by offering candy, gums and chocolate while each segment accounts for significant amount of sales. America generates the highest percentage of sales with 30.3 percent of the overall revenues compared to Europe and Asia Pacific regions. Cadbury also has a strong presence in emerging markets. Cadbury’s emerging markets confectionery grew on average by 12 percent per annum, making it the largest presence in emerging market business among all its peers. The strong presence in the emerging markets provides result in higher revenue growth and would diversify the company’s operation further.
Cadbury has presented a weak liquidity position in the previous year. The company current assets stood at US$2,635 million as compared to the current liabilities of US$3,388 million in FY2008. It describes the company has severe liquidity problems which could give negative impact on the company’s operational efficiency and its growth initiatives. The company’s employee efficiency is also low in Cadbury. It was measured by total revenues per employee. The revenue per employee stood at US$214,724 with 46,517 employees and total revenues of US$9,988.3 million in 2008. This figure is low compared to its other competitor like Hershey that has revenue per employee at US$410,000 in 2008.
The chocolate sales proved the most profitable for the US confectionery market, providing 50.6% of the market’s overall value in 2008. It shows that Cadbury has a strong presence in the US confectionery market and it is well positioned to cope the confectionery demand in the region. Premium chocolate is growing fast in many parts of the world. The awareness for dark chocolate among consumers is increasing because of the benefits of dark chocolate to health. The dark chocolate industry grew 18% over the last year. It would favourably impact the sales if there is increasing customer preference for premium products.
The raw materials include cocoa products for instance cocoa butter, cocoa liquor and cocoa powder processed from cocoa beans. Cadbury purchases its cocoa products from third party suppliers in West African, Far Eastern and South American equatorial regions. The increasing raw material prices could give significant impact on company’s profitability and cost structure. The tight labour market influenced the government to level up the minimum wage in the US. In 2008 the federal minimum wage rate remained at US$6.55 per hour and reached to US$7.25 per hour in 2009. Majority of Cadbury’s employee in US, so increased labour cost could give impact on overall cost and result in a decrease in its profitability.
Globalization is changing the world economy. It is a challenge, nations need to accept the threats and opportunities, if not they could be left behind as a people or nation. Nestlé pursuing a multi-domestic strategy when there is a high pressure for local responsiveness and low pressures for cost reductions. Changing offerings on a localized level increases a company’s overall cost structure but increases the likelihood that its products and services will be responsive to local needs and therefore be successful. Nestlé can strengthen its position as a well-being and nutrition company as consumers are becoming more health conscious. Nestlé would be able to capitalize on health conscious trends by increasing focus on nutrition. In terms of confectionery segment, Nestlé are able to leverage centralized research and strategies and apply them through renovation and innovation while respecting habit and local tastes.
A global strategy is a low-cost strategy. Organization that experience high cost pressures should use a global strategy in an attempt to benefit from scale economies in production, distribution and marketing. By offering a standardized product worldwide, firms can leverage their experience and use aggressive pricing schemes (Hodgetts, 2006). This strategy makes most sense where there are high cost pressures and low demand for localized product offerings. A global company is able to achieve global-scale efficiencies through product standardisation.
Economy situation in Western are actually facing decrease in output and growth, thus influencing the consumption of customers, especially in the retail business. Consumers are becoming more price sensitive and tend to spend less while demanding at the same time for customisation, product specialization and differentiation. Another trend is the shift from branded food and beverages towards cheap non-branded foods and beverage. Despite increasing non-brand cheap products offered by rivals, Nestlé finds itself in an even more embattled market and needs to develop a new strategy either away from branding or higher level of international market penetration. Since Nestlé 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. In these markets the consumer behaviour, macroeconomic environment and habits are different compared to western economies. Most of these markets are yet in a growth cycle and this clearly generates an opportunity because they are within emerging markets.
Nestlé should see to incorporate LC1, the yogurt’s product name into one strong performing product in each one of its Strategic Business Unit (SBU). Nestlé should provide one product in each of these SBU’s to introduce to the market. There is a huge line of products with in different areas of food and beverage industry which the LC1 product can bring a profit. So if the LC1 does well in certain areas of the industry but not others, Nestlé can shifts its focus from the weak product to the strong product. Introducing it to many different products in many different areas of the food and beverage industry giving LC1 a better opportunity of achieving success. Nestlé which already has a diversified food and beverage company has the benefit being able to explore an option such as this. In designing a strategy that would effectively place Nestle at the head of the probiotic industry in North America market would require several key components. North American consumers also need to be educated as the benefits that the probiotics LC1 brings. A strong marketing and advertising campaign would accompany this. They should be to quick to conduct all moves and enter into each market as quickly as possible to gain maximum market share.
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