Strategy Execution
Q.2 Case study
Successful execution of the strategy for developing
markets requires a degree of flexibility, an ability to adapt in often
unforeseen ways to local conditions, and a long-term perspective that puts
building a sustainable business before short-term profitability. In Nigeria,
for example, a crumbling road system, aging trucks, and the danger of violence
forced the company to re-think its traditional distribution methods. Instead of
operating a central warehouse, as is its preference in most nations, the
country. For safety reasons, trucks carrying Nestle goods are allowed to travel
only during the day and frequently under-armed guard. Marketing also poses
challenges in Nigeria. With little opportunity for typical Western-style
advertising on television of billboards, the company hired local singers to go
to towns and villages offering a mix of entertainment and product
demonstrations.
China provides another interesting example of local
adaptation and long term focus. After 13 years of talks, Nestle was formally
invited into China in 1987, by the Government of Heilongjiang province. Nestle opened
a plant to produce powdered milk and infant formula there in 1990, but quickly
realized that the local rail and road infrastructure was inadequate and
inhibited the collection of milk and delivery of finished products. Rather than
make do with the local infrastructure, Nestle embarked on an ambitious plan to
establish its own distribution network, known as milk roads, between 27
villages in the region and factory collection points, called chilling centres.
Farmers brought their milk – often on bicycles or carts – to the centres where
it was weighed and analysed. Unlike the government, Nestle paid the farmers
promptly. Suddenly the farmers had an incentive to produce milk and many bought
a second cow, increasing the cow population in the district by 3,000 to 9,000
in 18 months.
Area managers then organized a delivery system that
used dedicated vans to deliver the milk to Nestle’s factory. Although at first
glance this might seemto be a very costly solution, Nestle calculated that the
long-term benefits would be substantial. Nestle’s strategy is similar to that
undertaken by many European and American companies during the first waves of
industrialization in those countries. Companies often had to invest in
infrastructure that we now take for granted to get production off the ground.
Once the infrastructure was in place, in China, Nestle’s production took off.
In 1990, 316 tons of powdered milk and infant formula were produced. By 1994,
output exceeded 10,000 tons and the company decided to triple
capacity. Based on this experience, Nestle decided
to build another two powdered milk factories in China and was aiming to
generate sales of $700 million by 2000.
Nestle is pursuing a similar long-term bet in the
Middle East, an area in which most multinational food companies have little
presence. Collectively, the Middle East accounts for only about 2 percent of
Nestle’s worldwide sales and the individual markets are very small. However,
Nestle’s long-termstrategy is based on the assumption that regional conflicts
will subside and intra-regional trade will expand as trade barriers between
countries in the region come down. Once that happens, Nestle’s factories in the
Middle
East should be able to sell
throughout the region, thereby realizing scale economies. In anticipation of
this development, Nestle has established a network of factories in five
countries, in the hope that each will, someday, supply the entire region with
different products. The company currently makes ice-cream in Dubai, soups and
cereals in Saudi Arabia, yogurt and bouillon in Egypt, chocolate in Turkey, and
ketchup and instant noodles in Syria. For the present, Nestle can survive in
these markets by using local materials and focusing on local demand. The Syrian
factory, for example, relies on products that use tomatoes, a major local
agricultural product. Syria also produces wheat, which is the main ingredient
in instant noodles. Even if trade barriers don’t come down soon, Nestle has
indicated it will remain committed to the region. By using local inputs and
focussing on local consumer needs, it has earned a good rate of return in the
region, even though the individual markets are small.
Despite its successes in places such as China and
parts of the Middle East, not all of Nestle’s moves have worked out so well.
Like several other Western companies, Nestle has had its problems in Japan,
where a failure to adapt its coffee brand to local conditions meant the loss of
a significant market opportunity to another Western company, Coca Cola. For years,
Nestle’s instant coffee brand was the dominant coffee product in Japan.
In the 1960s, cold canned coffee (which can be
purchased from soda vending machines) started to gain a following in Japan.
Nestle dismissed the product as just a coffee-flavoured drink rather than the
real thing and declined to enter the market. Nestle’s local partner at the
time, Kirin Beer, was so incensed at Nestle’s refusal to enter the canned
coffee market that it broke off its relationship with the company. In contrast,
Coca Cola entered the market with Georgia, a product developed specifically for
this segment of the Japanese market. By leveraging its existing distribution
channel, Coca Cola captured a 40 percent share of the $4 billion a year, market
for canned
coffee in Japan. Nestle, which failed to enter the
market until the 1980s, has only a 4 percent share.
While Nestle has built businesses from the ground
up, in many emerging markets, such as Nigeria and China, in others it will
purchase local companies if suitable candidates can be found. The company
pursued such a strategy in Poland, which it entered in 1994, by purchasing
Goplana, the country’s second largest chocolate manufacturer. With the collapse
of communism and the opening of the Polish market, income levels in Poland have
started to rise and so has chocolate consumption. Once a scarce item, the
market grew by 8 percent a year, throughout the 1990s. To take advantage of
this opportunity, Nestle has pursued a strategy of evolution, rather than
revolution. It has kept the top management of the company staffed with locals –
as it does in most of its operations around the world – and carefully adjusted
Goplana’s product line to better match local opportunities. At the same time,
it has pumped money into Goplana’s marketing, which has enabled the unit to
gain share from several other chocolate makers in the country. Still,
competition in the market is intense. Eight companies, including several
foreign-owned enterprises, such as the market leader, Wedel, which is owned by
PepsiCo, are vying for market share, and this has depressed prices and profit
margins, despite the healthy volume growth.
1. Does it make sense for Nestle to focus its
growth efforts on emerging markets? Why?
2. What is the company’s
strategy with regard to business development in emerging markets? Does this
strategy make sense? From an organizational perspective, what is required for
this strategy to work effectively?
3. Through your own research on NESTLE, identify
appropriate performance indicators. Once you have gathered relevant data on
these, undertake a performance analysis of the company over the last five
years. What does the analysis tell you about the success or otherwise of the
strategy adopted by the company?
4. How would you describe Nestle’s strategic
posture at the corporate level; is it pursuing a global strategy, a
multidomestic strategy an international strategy or a transnational
strategy?
5. Does this overall strategic posture make sense
given the markets and countries that Nestle participates in? Why?
No comments:
Post a Comment