Challenges in International Management - Nestle - Case Study Example

Running Head: INTERNATIONAL MANAGEMENT Challenges in International Management (Name) (Course) (University) Date of presentation: Lecturer: Challenges in International Management: Case Study of Nestle Company Overview Nestle is the world’s largest food and nutrition company with subsidiary companies in several countries across the world. The company was founded in 1905 following the merger of Anglo-Swiss Milk Company and Farine Lactee Henry Nestle, which were until then fierce competitors in the food and nutrition industry (Nestle Company, 2012). Nestle is headquartered in Vevey, Switzerland and the merger became a stepping-stone for the company’s internationalization program. By 1910, Nestle was operating profitable factories in Spain, United States, Germany and Britain. Both the first and second world wars had a lot of impact on Nestle international growth and profitability. The wars helped with the introduction of new products and production plants in many countries across Latin America, Eastern Europe and Asia (Czinkota, Ilkka & Moffett, 2008). In 1974, Nestlé’s management reached a decision to diversify the range of products outside the food industry. Subsequently, the company started to buy stakes in cosmetics and medical companies. Today, Nestle is one of the global leaders in the food industry and has more than 470 factories across the world. Nestlé’s success in the international business is attributed to the company’s strong sense of efficiency and strategic formulation of business objectives (Nestle Company, 2012). According to the information obtained from the company’s mission statement, Nestle is committed to the following business principles in its internationalization program: i. The company’s objective is to manufacture, distribute and market the products in such a way as to create value that can be sustained for the local communities, employees, shareholders, consumers and business partners. ii. The company does not strive to gain short term profits at the expense of successful long-term development plans. iii. Nestle recognizes that customers at the international market community are influenced by the company’s behaviours, beliefs and actions and, therefore, it has to act in a manner that best satisfies the interests of the customers. iv. The company holds the conviction that observation of local laws, rules and regulations is key to successful entry into the global market. The company maintains a steadfast commitment to follow and respect all applicable laws in the countries where it operates. v. The company is conscious that success in the international business market is a product of professionalism, conduct and responsible attitude of employees. As such, the company recruits highly knowledgeable and skilled workers and offers routine training and development programs to its employees. By adhering to the above strategic principles, Nestle has managed to build a brand with global presence. The company has invested huge sums of money in research and development programs as well as the development of knowledge management system, all of which have been fruitful. As of 2010, the company had over 265, 000 employees and 470 factory locations in about 90 countries (Nestle Company, 2012). This reinforces the view that the packaged food giant is indeed a multinational company. Nestle has employed efficient and highly effective supply chain management systems to coordinate activities between suppliers, production plants and factory. The company has a centralized human resource management system for responding to the needs of its human capital. All these strategic initiatives have enabled the company to shine in the international business arena (Czinkota, Ilkka & Moffett, 2008).  Internationalization Strategy Nestle is a highly internationalized organization. With active operations in more than 90 countries, an innovative international strategy is at the heart of the company’s competitive focus. The company’s competitive internationalization strategies are mainly associated with foreign direct investment in food businesses. Basically, the company aims to balance sales growth between the low risk and low growth countries of the developed world and the high risk and potentially high growth markets of Latin America and Africa. Nestlé’s management has long recognized the profitability possibilities in the high risk countries but has pledged not to take unnecessary risks just for the sake of profitability. Accordingly, the company uses hedging to maintain stead growth and profitability (Schwarz, 2002). Besides foreign direct investment, another important strategy that has been beneficial to the company’s internationalization program is the striking of strategic partnerships with well established large companies. In the early 1990s, Nestle and Coca Cola entered into a strategic alliance in ready-to-drink coffees and teas. The alliance allowed Nestle to use Coca Cola’s well established, global bottling system and expertise in preparing beverages. This move resulted in Nestlé’s rapid expansion into a number of Asian and Latin countries (Nestle Company, 2012). While operating in the developed countries of Europe and America, nestles has always strived to grow and gain economies of scale through foreign direct investment in big companies. For instance, the company licensed its LC1 brand to a large Germany-based dairy producer. The move enabled Nestle to enter the fiercely competitive but profitable Germany market with ease. In the developing markets, Nestle continues to grow by manipulating processing technology and ingredients to suit local conditions and by employing appropriate brands (Schwarz, 2002). Nestlé’s internationalization strategy for the Asian market has been to acquire or merge with local companies in order to take advantage of local business managers who know more about the culture of the local market than the American or European executives. The company’s strong cash flow and favorable debt-equity ratio leave it with strong muscles for takeovers. Recently, Nestle acquired Indofood, the largest noodle producer in Indonesia. The primary focus of this initiative was to expand Nestlé’s sales in Indonesia and nearby countries. Because of the varying cultural aspects of the Asian market, Nestle has employed a wide range of competitive strategies in its attempt to enter the Asian market. These strategies involve producing different products in different countries. In addition to food products, Nestle produces health products and this has helped reinforce the company’s competitive advantages. The company launched Nestle Nutrition as an independent business unit. The nutrition unit aims to offer superior business performance by delivering consumer-trusted nutrition products. Nestle Nutrition is a global business and has benefited largely from Nestlé’s international presence. The company has also introduced the Corporate Wellness Unit, whose role is to integrate the company’s nutritional value-added in beverages and food businesses. The unit strives to align the company’s Research and Development and scientific expertise with consumer benefits. The unit is also responsible for coordinating Nestlé’s horizontal and cross-business projects at the international stage to help address current customer concerns (Ball, 2006). The internationalization process Once a firm decides to expand the scope of its business into the international market, it must make decisions on when and how to internationalize (Fischer, 2003). Timing of market entry was a critical factor for Nestlé’s successful internationalization program. For instance, Nestle decided to expand into China and Indian markets when the economies of these countries were rapidly expanding and people had more money to spend on shopping. The company applied this strategy in number of other countries and the result was swift integration of the business into the local market community. Nestle has always exhibited tendencies to enter particular markets at specific times for strategic reasons. Research studies have highlighted the importance of timing market entry, suggesting that early movers in international markets perform better than late-market entrants (Jacob, 2005). Capitalizing on this wisdom, Nestle struck strategic partnership with companies in various countries, which resulted into successful market entry. The concept of strategic early or first movers suggests that pioneering companies are able to amass higher profits and associated benefits as a result of little or no market competition (Kidger, 2002). Nestlé’s early market entry into several foreign markets has had five main advantages for its business: i. Cost advantages: early market entry has allowed Nestle to reap higher economies of scale and accumulating experience about the nature of the market before the entry of competitors. This has in turn helped Nestle establish competitive advantages in various foreign markets as evidenced by market dominion. ii. Pre-emption of geographic space: nestle has strategically pre-empted its market competitors in some countries and has in the process secured dominion in geographic space and marketing channels. iii. Technological advantages: first-time move into foreign markets has helped Nestle integrate processes and products into the local markets and implement new innovations before entry of competitors into the market. iv. Differentiation advantages: Nestle’s reputation advantages have meant higher switching costs for buyers. v. Political advantages: in rare cases, Nestle has had the advantages of benefiting from foreign governments in raising barriers for late comers. This was the case in the dictatorial regimes of Latin America (in the 1980s and 1990s). Additionally, the company has reaped significant first-time advantages by expanding into the Russian market in the 1990s before its competitors made the move (Nestle Company, 2012). Factors Affecting Nestlé’s Internationalization Process Many multinational companies have realized that it can be quite difficult to expand internationally and sustain the long-term strategic objectives of growth. This happens to be the case even if companies offer cheaper or superior products compared to those offered by competitors (Peng, Wang & Jiang, 2008). The main factors that have influenced Nestlé’s successful internationalization program are: technological innovativeness; large number of skilled employees; political factors; economy and favorable internal environment. Nestle is an equal opportunity employer. This means that employees and job applicants are selected, recruited and trained without discrimination on age, gender, sexual orientation or religious background. Nestle promotes its employees based on relevant skills, performance and talents. The use of modern production and distribution technologies has given the company a competitive edge in the industry (Fischer, 2003). The globalization process has had a strong impact on Nestlé’s internationalization process. The company is trying to expand and consolidate its market presence in fiercely competitive foreign markets such as China. As it moves into these markets, the company has to consider the culture and preferences of the customers. The company also has to consider the government rules, economy and politics as they have a direct impact on the successful market entry (Ball, 2006). An important factor that has helped drive the company’s internationalization process is its sensitivity to diversity. According to Kao (2009) diversity is a reflection of a firm’s interpersonal relationships. These relationships result in a rewarding venture and increase the morale of workers. Nestlé’s management encourages diversity through the company’s policies and programs. The company has a proven success in leveraging the advantages of diversity and this can be attributed to its core values of management ethics. Nestlé’s international expansion is based on the philosophy of professional integrity. From the time it was formed, the company has based its reputation on dependability, trust and commitment to the community. This has made Nestle a household name. The company believes that giving back to the community can make the world a better place. Accordingly, Nestle has initiated a number of charity programs in many countries and continues to contribute to charitable causes. In addition to involvement in community matters, Nestle has a long history of environmental protection (Sak & Shaw, 2004). The company’s plants around the world have innovative programs for resource conservation, recycling and waste reduction. Nestle has occasionally been subject to government restrictions on opening plants in some countries. The company has also had to contend with the problem of adapting its organization to different cultural and national contexts, as well as, the problems of logistics in counties with poorly developed infrastructures. Reflection on Nestlé’s Successful Internationalization Program This paper has examined the process of international expansion by evaluating the case of one of the most visible companies to have expanded successfully into the international market. The discussion in this paper has shown that Nestlé’s pattern of entry into the international market rejected the notion that a company must saturate its domestic market before expanding into the international market. Instead, the company allocated resources to achieve growth and sustainability in a number of highly desirable markets in line with the traditional maximization objectives. In particular, Nestle made first-time moves into markets with promising demographics (Sak & Shaw, 2004). Although successful entry into international markets is dependent on entry strategies and the company’s financial strengths, external factors such as political, cultural and economic climate have play a significant factor (Ball, 2006). In addition, Nestle has made convenience a key factor in the internationalization process. Nestlé’s distribution centers are so prevalent in cities and suburban towns that customers are never a few minutes away from their favorite brand. Nestle has managed to weather economic downturns due to the affordability of its products and services. Because of the company’s ability to appeal to low-income customers, Nestle continues to get increased profits. The process of expanding a business globally requires a different expansion plans than the plans for the conventional business growth over time. It is, therefore, important for firms to consider new business strategies and to work from a global perspective in formulating strategic business plans (Ball, 2006). Ideally, the internationalization can help include a wide variety of goals and objectives which have been designed to ensure growth and survival in new markets. In order to realize the objectives of internationalization, it is imperative for firms to seek information that will allow them to formulate effective strategies. The benefits of internationalization can be described by the theories of foreign direct investment and multinational firms. Imperfections and financial gains are the main factors which influence firm’s decisions to nationalize (Ball, 2006). A key factor in the success of any multinational firm is the ability to appeal to a wide range of customers. Nestlé has managed to capitalize on this consideration by offering high quality, nutritious food products. The company is committed to the well being of its customers and has for this reason launched a nutrition and health programs. References Ball D. A., (2006). International business: the challenge of global competition. New York: McGraw-Hill/Irwin. Czinkota, M., Ilkka A. and Moffett M. H., (2008). Fundamentals of International Business.Washington: Wessex Publishing. Fischer, S. (2003). Globalization and Its Challenges, The American Economic Review, Vol.93, No. 2, pp.1-30. Jacob, N. (2005). Cross-Cultural Investigations: Emerging Concepts, Journal of Organizational Change Management, Vol. 18, No. 5, pp. 514-28. Kao, J. (2009). Tapping the World’s Innovation Hot Spot, Harvard Business Review, March, pp.109-114. Kidger, P. (2002). Management Structure in Multinational Enterprises: Responding to Globalisation, Employee Relations, Vol. 24, No. 1, pp. 69-85. Nestle Company. (2012). Nestle: Good Food: Good Life. Retrieved 15th April 2012 from, http://www.nestle.com/csv Peng, M., Wang, D. and Jiang, Y. (2008). An Institution-Based View of International Business Strategy: a Focus on Emerging Economies, Journal of International Business Studies, Vol.39, pp. 920-936. Quer, D., Claver, E., And Rienda, L. (2007). The Impact of Country Risk and Cultural Distance on Entry Mode Choice, Cross-Cultural Management. An International Journal, Vol. 14, No. 7, pp.74-87.   Sak, O. and Shaw, J. J., (2004). International Marketing: Analysis and Strategy. Boston: Routledge. Schwarz, F., (2002). Nestle: The Secrets of Food, Trust and Globalization. London: Key Porter Books. Read More