Question

Course: International Business

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Case Study-1

In 1990s Nestlé faced significant challenges in its market growth. Despite of the stagnant population in western countries the balance of power was increasing from large scale manufacturers like Nestlé, toward supermarkets and discounted chain stores. In result, Nestlé decided to lessen its focus on developed markets like North America and its home based market in Switzerland to emerging market like India and China. The driving force behind the decision of expanding its market share in emerging market is simple, as the population grows and government decisions favoring market economies brings attractive business opportunities for public living at intermediate income.

Although many of the counties are still living under poverty line, even living on $1 per day shows optimistic signs for the future markets. For example: as the current economic forecasts continues, there will be 9 billion people living on this planet as compare to today’s population of $7 billion today, and coincidently the increase in population is all in developing countries. Nestlé uses the strategy which correlates the ratio of increase in income to use of branded food products, which means as a person earns more and has less time for making food in his/her home, they will automatically substitute for branded products.

In general the company’s strategy has been to enter emerging markets early before its competitors and build a substantial customer base by selling products which suit the local population such as infant formula, milk, and noodles. Nestlé narrows down its market share to many small niche markets, as opposed to general or one for all strategies. Nestlé keeps the goal of commanding the niche markets by gaining at least 85% of market share in every food product it launches. For example, by pursuing such a strategy, Nestlé has taken as much as 85 percent of the market for instant coffee in Mexico, 66 percent of the market for powdered milk in the Philippines, and 70 percent of the market for soups in Chile. As the income level rises in each niche market, Nestlé introduces an upscale version of the same brand to increase its profit level. Although Nestlé has become a global brand, it uses local identity to gain exposure in local markets. The company owns 8500 brands but only 750 of them are known internationally.

Customization is the key to Nestlé’s global brand identity rather than universalism, which means Nestlé, uses global brand identity but, from the internal point of view, it uses local ingredients and other technologies that resonate with the local environment and brand name that is known globally. The customization of Nestlé’s products causes many hindrances in carrying out its distribution of products from local farmers to factories. For example, in Nigeria the infrastructure placed is crumbling, trucks are old and political conditions are not suitable to carry out the processes successfully, so Nestlé adopted a new strategy to deliver its products to local warehouses which are Loco convenient to local farmers for milk production. Although this might

seem as an expensive solution, the local farmers have tripled their milk production and the supply of milk, which Nestlé has calculated as beneficent for the long term growth.

The execution of the strategy matches the planning of the strategy which is to plan globally and implement locally. Nestlé gives autonomy to its local branches based in different countries to make pricing decisions, and distribution decisions. Nestlé has expanded its growth by diversifying its product base to tomato ketchup and wheat base products such as noodle and tofu. Nestlé has expanded into 5 countries and expects to supply all food products throughout the regions namely, Turkey, Egypt, Syria, Dubai and Saudi Arabia.

Nestlé is also buying local companies in China and adapting its own portfolio for the Chinese market. Since many Chinese find coffee too bitter for their liking, Nestlé is working on a new “formula” to offer Smoovlatte, a coffee drink that tastes like melted ice cream. The company wants to be seen as a company that makes healthy food. As Janet Voûte, Nestlé’s global head of public affairs, said “it is a core business strategy”.

Nestlé has used its brand name as strength to generate sales and to expand its market share, which includes it customization of products to fit its target market’s profile. Although Nestlé has not always started from scratch, the company has used acquisition as a penetration strategy to expand and penetrate new international markets, which eliminates any local barriers to its competition. A few weaknesses which are related to the company’s quality measure resulting in product recalls. The company has decentralized its strategy units into 7 subunits in charge for different product lines, for instance, one – for coffee and beverages; another one focuses on ice cream and milk products. Nestlé brings its management level employees all around the world for 2-3 week training in its headquarters in Switzerland to familiarize them with their global culture, strategy and given them access to the company’s top management.

Answer the below questions:

Question 01: Explain the modes of entry adopted by Nestle to enter the international market

Answer 1

The entry modes adopted by Nestle has always been a success story itself and has always leveraged from the country-specific factors. Nestle believes in the true adaptation and goes by the mantra of Think Global, Act Local. In order to adapt itself to various countries and markets, Nestle has implemented various strategies in order to make itself a truly global brand while making people believe that it is truly an indigenous brand. Following are the modes of entry adopted by Nestle to penetrate the international markets:

1. Create a strong correlation between the income and branded products and thereby not making the single universal global products and the rationale for this concept is that as there will be a margin increase in the income, people will generally prefer branded products over the generic ones.

2. Leveraging from niche markets has always been the subject matter of the swiss brand and in any niche it operates or launches, it really makes sure that it gains 85% of that market. This not only makes it the leverage from the leadership, price or otherwise but it also offers the benefit of reinforcing the product wherein one supplement another due to the wider brand recognition it enjoys.

3. Customization and adaptation of the offerings are very part and parcel of the success story of Nestle. It makes sure to customize itself to the local conditions, environment and culture while keeping its true global identity intact. Nestle is a company that tells us how a company can customize itself while being truly global in its style of operating. It is a leading example of how it makes its plans globally and operates them locally by taking specifics of each market into consideration.

4. The decision-making style of Nestle is truly participative and democratic in nature. It offers greater autonomy to its local branches based in different countries to exercise pricing decisions and implement distribution strategy which is according to the market of that particular country. Because research shows us that when you decentralize your decisions and make people autonomous, it always comes up with a greater sense of responsibility and ownership.

5. Expansion of its empire by acquiring the local companies so as to eliminate the local competition and operate in an uncontested market space has always been the forte of Nestle's mode of entrance. It has in the past and still continues to use the penetration strategy as a mode of entering foreign markets by acquiring local players and thereby eliminating competition.

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