Strategic management issues facing Nestle in international markets

Strategic Management Case Analysis

The business environment brings a number of challenges and issues for organizations. In order to operate profitably and competitively in the presence of uncertainties and threats in the external environment, business organizations have to formulate effective corporate, business, and international level strategies for the short run and the long run (Hitt, Ireland, & Hoskisson, 2007). The case discussed in this research paper highlights the major strategic issues which Nestle faces in international markets. This Nestle case study has been extracted from Hanson, Hitt, Ireland & Hoskinsson (2011: 564-577) as a real life strategic management case for business management students.

The paper starts with a brief introduction to the case study; that is, what are the major issues which Nestle has been facing in the given situation and what strategies its Board of Director has formulated to encounter these issues in the most effective manner. The paper proceeds by giving an ample introduction to the industry where Nestle operates and presents a detailed analysis of the external environment which directly or indirectly affects the financial and operational performance of the company. The analysis has been made in the light of different environmental forces which are present in the foods and beverages industry and can pose threats and challenges for Nestle in the given situation. The competitive environment has also been discussed in order to highlight the intensity of competition and rivalry among the top market leaders and small new competitors. A brief discussion on the firm's weaknesses, opportunities, and capabilities has been made in order to discuss how Nestle will be able to survive in the situation discussed in the case study. After a careful analysis of all the environmental and competitive forces, a set of recommendations has been proposed for the present and future strategies for the Corporate, business, and international level business segments.

Introduction to the Case Study

This paper presents a case study on the Strategic Management issues faced by Nestle; one of the leading multinational organizations in the consumer goods market. The case study has been taken from Hanson, Hitt, Ireland & Hoskinsson (2011: 564-577). The major focus of the whole case study is on two major strategic issues; internal and external growth and the strategies to maintain the market leadership in the presence of a strong competition. The first issue is to revive the company's organic growth in such an industry which has gone mature and has little potential for new investments. Nestle intends to create opportunities in this maturing market itself and gain the highest market share among its competitor organizations. The second issue is to expand the business operations in a view to become self-sufficient in all its major product categories. It wants to keep the crown of market leadership, develop the strongest customer base, and achieve high financial performance over years through competitiveness and innovation in its business processes. In addition to these major issues, the company has been facing certain environmental challenges which it has to meet by formulating effective marketing and operational strategies.

Nestle: Introduction to the Industry

Nestle is one of the largest manufacturers of foods and beverages in the world markets. It has expanded its business operations to all the corners of the world. Currently, it is serving a large number of customers from more than 130 countries with almost 8,500 different brands and 10,000 products. Its production units have reached to 500 in number that are set up in all the developed and most of the developing countries of the world. The food and beverage industry in which Nestle operates is the largest consumer goods industry with respect to consumer base, industry participants, and sales revenues (Nestle, 2012).

Nestle has targeted the food and beverage industries in all the developed, developing, and under-developed countries of the world by effectively defining its target consumers for each of its product category. The world's food and beverage industry is composed of a large number of businesses; all of which is in a quest to beat the other industry competitors and strengthens its own customer base and market share. For the last few decades, the industry has been showing an increasing trend towards maturity due to low growth rate in the consumer market and declining attractiveness for the new entrants.

Porter's 5 Forces & the Competitive Environment for Nestle

The food and beverages industry constitutes a large number of competitors that are offering their wide array of products for the final consumers. Being the market leader in its industry, Nestle has to focus on two things; to keep its top position in the industry intact and keep expanding into other geographical regions on the basis of its core competencies and competitive advantages. The following paragraphs discuss the intensity of competition for Nestle from five different angles using Michael Porter's Five Forces Model of Competition:

a. Rivalry among existing competitors -- the Competitive Environment for Nestle:

Nestle operates in the largest industry of the world where a large number of competitors have established their presence by offering high quality products and using effective marketing strategies. The food and beverages industry has been largely dominated by Nestle along with its two major rivals, Unilever and P&G. These three competitors have captured the greatest market share from the industry with immensely wide range of brands. As Nestle is the market leader, it has a big threat from these top competitors which are also among the most competitive organizations in the industry. In addition to Unilever and P&G, Nestle also has to face a stiff competition from numerous small competitors which are selling their products at comparatively lower prices.

b. Threat from the New Entrants in the Industry:

Although food and beverages industry has gone mature, but there is still a continuous emergence of new companies. These companies are expending a large amount on the promotion of their brands which are available in the same retail shops but at lower prices. Nestle wants to revitalize its competitiveness and continuous growth by capturing greater market share, but these new entrants have put hurdles in the achievement of these goals.

c. Threat from the Substitute Products:

The small well-established competitors and new entrants are offering the substitute products for almost all the brands of Nestle. These substitute products bring negative impacts to the sales of Nestle's top quality brands. In order to achieve its long-term objectives stated in this case study, Nestle has to formulate effective strategies to throw all those competitors out of the market that are selling inferior quality products to the Nestle's target consumers.

d. Bargaining Power of Suppliers:

Nestle products have a high level of acceptability among its customers (Nestle, 2012). This acceptability is the competitive advantage of Nestle which enables it to charge a fair price for its high quality brands. Nestle also keeps an eye on the performance of its supply chain that plays an important role in the effective implementation of its competitive strategies. Although Nestle is on the bargaining edge, its suppliers are satisfied with its financial performance and growth.

e. Bargaining Power of Buyers:

Due to the high quality and reliability of the Nestle products, the consumers are ready to pay a higher price for all the existing brands. The excellence in business operations has made Nestle the most competitive seller of food and beverage products in the world market. However, when some new competitor enters the industry, the consumers get attractive towards its products due to promotional ads and lower prices. The bargaining power of buyers becomes stronger when Nestle fails to compete with the new entrants on the basis of the prices of its products.

External Environmental Analysis

Opportunities:

The external environment of a business organization can also be discussed in terms of the opportunities and threats present in the industry. For Nestle, the most potential opportunity is to grow its business operations in the new geographical markets and establish its presence using its core competencies and strengths. Another attractive opportunity for Nestle is to make collaborative arrangements with the suppliers and distributors in its existing target markets so that they render their services in a more effective and reliable way. Nestle has to focus on its top six food brands which are losing their market share due to high sales and acceptability of the competitor products. To regain the previous level of market share, Nestle can make expenditures on the Research and Development section in order to know the answer why did the market share decline for these products and how can it revive their previous position in the short and long run.

Threats:

The biggest threat for Nestle is the industry competitors; both the established multinational brands and the new small competitors. These competitors are snatching Nestle's customers by offering innovative and improved products and efficient after sale services. Another threat for Nestle is the inflationary pressures in the world markets. The costs of doing business are getting higher and higher day by day while the sales revenues have shrunk due to low production in developing countries. The political instability in different economies and the risk of shortage of raw materials can also become big threats for Nestle's business any time (Waterschoot & Bulte, 1992).

Nestle's Resources: Tangible and Intangible

The most important resource which Nestle possesses is its financial capital. Nestle has a huge sales volume in all the major business segments in the world markets which give it attractive returns on its investments. The strong financial position also helps the company to generate funds for future investments and bring efficiency in its current business operations. The second resource category is Nestle's physical resources which are its large scale plants, machineries, and other organizational assets. The patents, trademarks, and copyrights are another resource category which greatly contributes in increasing its asset sizes. Moreover, the employees are also considered as the most precious asset at Nestle. The innovative procedures, intellectual capital, and technological investments are also important asset for the company.

Capabilities Identification

Nestle wants to make certain improvements in its business processes. The planned strategy is to re-design its current marketing strategies and boost up the sales of its top brands in the existing markets. The issues which it can face in the course of the achievement of its goals are stiff competition from top industry rivals, expenditures on the Research and Development, and investment needs of the present era. The capabilities which Nestle can utilize to achieve these strategic goals are its core strengths and distinctive competencies. These include; efficient business operations, well-established brand image, high level of brand loyalty, strong financial position, the highest market share in the industry, strong business relationships with the supply chain members, and confidence of the stakeholders on the company's Board of Directors. All these capabilities and strengths can be used to achieve the strategic goals and objectives (Jenny & Scammon, 2010).

Core Competency Analysis

Items for competencies

Rare

Valuable

Costly to Imitate

Non-substitutable

Product Design & Brand Quality

No

Yes

Yes

No

High Market Share

No

Yes

Yes

No

Customer Brand Loyalty

No

Yes

No

Yes

Research & Development

No

Yes

Yes

No

Value Chain Analysis

The company's value chain is supported by four major pillars; the human resources, organizational infrastructure, technological innovations in the business processes, and procurement of necessary raw material and long-term assets for the business. These pillars or the components of the value chain perform the best when they are equally supported by the members in the company's supply chain. From the suppliers of raw material to the end-distributors of the company's final products to the ultimate consumers; all have an important part to play in delivering the "Value" to the firm's most potential customers. Nestle can improve its value chain by delivering what the consumers actually expect from it. That is; the highest quality of products at very affordable rates.

How to Overcome Weaknesses

The major weaknesses of Nestle are its less effective marketing and promotional campaigns than its competitors, Unilever and P&G; the day by day decreasing sales of its top brands in the developing countries, and the declining internal organic growth in the maturing markets. Nestle can overcome these major weaknesses by winning the customer loyalty through improved products at lower prices than its top competitors. It can use different cost efficient marketing mediums that will promote its products to the potential consumers at very low burden on its marketing budget. It can also transform its weakness of declining organic growth by focusing on expansion strategies in the unreached market segments in the existing geographical markets (Francis, 2010).

Pulling it together: Recommending Strategies for Present and Future

On the basis of the external environmental analysis, competitive environment analysis, and the discussion on company's capabilities and value chain management, it can be recommended that it should formulate growth strategies for its current business operations in all those markets where it has captured the greatest market share. It will help it to strengthen its top market position and throw the new entrants and small firms out of the market. The business level strategies should be adopted in the new geographical markets where Nestle still has to grow with its full competencies and capabilities. It should adopt retrenchment strategies for those international operations which are giving it less sales revenues than other business segments. In developing countries, Nestle can choose a steady growth strategy for its top brands which will help it in revitalizing their previous market position (Jenny & Scammon, 2010). For the future strategies, it can be recommended that Nestle should never stop the expansion of its business operations in new markets as its competitors also possess the same strong financial position and customer loyalty. Any retrenchment strategy at business unit or international level will actually give an edge to the other competitors to beat Nestle in the short run (Hill & Jones, 2007).