International Business Strategy.

BSMU 4154 This essay aims to connect business models like SWOT analysis, George Yips Drivers of Globalisation framework, VRIO framework, Ansoffs Product-market expansion grid, Porters generic competitive strategies, Porters International strategies, value chain, PESTEL and CAGE framework to a leading transnational Agro food firm. To incorporate these frameworks and models, 5 years strategy of Nestl has been studied. Betz (2001: p.132) states, A strategic firm model provides a perspective for optimizing both shortterm resources and long-term capital appreciation by rationalizing sales and profit utilization. According to Waal (2007) though, Nestl usually takes strategic planning as their parenting style, but they have taken number of means to enter in a country to fulfil their objectives.

Figure 1: The Choice of Entry Mode: A Hierarchical Model CHOICE OF ENTRY MODE

Non-equity modes Exports Direct export Indirect export Turnkey projects Other R&D contracts Comarketing Strategic alliances Majority JVs Conceptual agreement Licensing/ Franchising Joint ventures (JV) Minority JVs 50/50 JVs

Equity (FDI) modes Wholly owned subsidiaries Green-fields Acquisition Others

Source: Peng (2006: p. 231) As their strategic planning, Nestl has acquired, contracted and merged with number of companies. So it is evident that, Nestl usually undertake equity modes to enter in a country (Peng 2006). Nestls strategies to match its external opportunity and threats with internal strength and weakness can be judged through TOWS Matrix (Wheelen & Hunger 2004), which is based upon SWOT analysis.

Figure 2: TOWS Matrix

Internal factors (IF AS)

Strength (S) List 5-10 internal strengths here

Weakness (W) List 5-10 internal weaknesses here

External factors (EFAS)

Opportunities (O) List 5-10 External opportunities here Threats (T) List 5-10 External threats here

SO Strategies
Generate strategies here that use strengths to take advantages of opportunities

WO Strategies
Generate strategies here that take advantages of opportunities by overcoming weaknesses

ST Strategies
Generate strategies here that use strengths to avoid threats

WT Strategies
Generate strategies here that minimize weaknesses and avoid threat.

Source: Wheelen & Hunger (2004: p.115) In 2005, Nestl Waters, leader of bottled water market of middle/east Africa region, has formed a joint venture with 51% share with Boissons Gazeuses des Frres Zahaf Group of Algeria (Perroud 2005a, www.Nestl.com) and expanded their market share (Kotler 2004). This might give Nestl the advantage of their distribution channel, ability to eliminate the second player of the market, opportunity to market their other brands and acquire the strongest position in the middle of Maghreb countries with 34 million inhabitants. According to Johnson et al. (2008) this SO and ST strategies (Wheelen & Hunger 2004) have enabled Nestl to overcome geographical distance in terms of CAGE framework. This year, Nestl has sold its milk powder plants of Australia to Fonterra Company and Gorinchem unit of Netherlands to Mr. Jaap Vreugdenhill. Nestl has decided only to produce liquid milk products and outsource powder milk products from these two firms (Perroud 2005b, www.Nestl.com). Since these products are not Nestls key distinctive competencies (Wheelen & Hunger 2004), this linkage can minimize maintenance cost and add value by closer coordination with specialized supplier of raw materials (Mintzberg et al. 2003). Later in 2005, Nestl has entered in EU by engaging into minority Joint venture for 40% share with Lactalis, leader of yoghurt and chilled dessert markets (Perroud 2005c, www.Nestl.com). This merger has given Nestl the advantage to market their brands, Lactalis strong brand name and their strong customer relationship. This strategic move might gave Nestl the opportunity to close the geographical distance of CAGE framework among the EU nations (Johnson et al. 2008) and to learn about their marketing and commercial skills, efficient manufacturing and supply chain expertise (Mintzberg et al. 2003). This year Nestl has also acquired Delta Ice Cream and expanded position in growing ice cream market in Greece and the Balkans (Kotler 2004). Thus, Nestl eliminated the market leader of icecream market from Greece, Bulgaria, Macedonia, Romania, Serbia and Montenegro. The macro-

environment of Greece posed a constraint in terms of legal field of PESTEL framework, because Delta Ice Cream was listed on the Athens Stock exchange (Unknown 2005, www.Nestl.com). Regulatory approval was needed for this acquisition, which falls under the Government drivers of George Yips Drivers of Globalisation framework. According to Johnson et al. (2008) restriction on company acquisition is a legal constraint of PESTEL analysis and ownership regulation is a form of government driver George Yips Drivers of Globalisation framework. Figure 3: George Yips Drivers of Globalisation Framework

Market drivers
Similar customer needs Global customers Transferable marketing

Government drivers
Trade policies Technical standards Host government policies

Cost drivers International strategies

Scale Economies Country specific differences Favourable logistics

Competitive drivers
Interdependence between countries Competitors global strategies

Source: Johnson et al. (2008: p.297) [e-book] In 2006, with the acquisition of Dreyers ice-cream, Nestl has gained its proprietary technologies, those are used to produce Dreyer's Slow Churned Light, which tastes like classical ice cream but has half the fat and one third less calories; Dreyer's Dibs, bite-sized pieces of ice cream and HagenDazs Light (Tickle 2006a, www.Nestl.com). According to VRIO framework, which stands for value(V), rarity(R), inimitability(I) and organisational(O) of resource based view (Peng 2006), this hard to imitate rare value may protect Nestl from potential entrants, which is a force of Porters five force model (Bowman 1998). The learning objective (Mintzberg et al. 2003) was fulfilled by gaining Dreyers proprietary technologies and Nestl is planning to create intangible interrelationship by leveraging these technologies (Campbell & Luches 1998) by introducing locallyadapted new products to other markets (Dicken 2008). According to Ansoffs Product-market expansion grid (Kotler 2004), new technologies give the firm opportunity to develop new products.

Figure 4: Ansoffs Product-Market Expansion Grid

Current products Market penetration strategy Market development strategy New products Product development strategy Diversification strategy

Current markets

New markets

Source: Kotler, P. (2004: p. 100) The acquisition of Uncle Tobys in Australia strengthens Nestl's Nutrition, Health and Wellness positioning along with its 40% market share of breakfast cereal (Tickle 2006b, www.Nestl.com). This step might provide a opportunity for synergies, both in terms of cost and moving Uncle Tobys brands in the channels where Nestl has particular strength (Campbell & Luches 1998). Nestl has reached to an agreement in 2006 to sell its canned liquid milk businesses to Fraser & Neave Holdings Berhad, which will manufacture and distribute under licence of Nestl canned liquid milk products in Thailand, Malaysia, Singapore, Brunei and some other countries in the region (Perroud 2006a, www.Nestl.com). This may allow Nestl to rationalize its portfolio and concentrate on higher value-added brands (Dicken 2008). During the same year, Nestl has agreed to market its Nestea and green tea base drink Enviga through its 50/50 joint venture with The Coca Cola Company- Beverage Partners Worldwide (BPW) throughout world except, US and Japan market (Perroud 2006b, www.Nestl.com). As Datamonitor report (2010) has presented, they had licensed these two brands to TCCC to compete in US. Though there is a threat that TCCC could gain the formula of these two brands, the opportunity to take advantage of their distribution channel might offset the threat. Nestl Waters has formed an alliance with Grupo Modelo, because Mexico is the world's second largest bottled water market with a yearly turnover of 15 billion litres and average growth of 8% per year. In addition to the opportunity to be in a lucrative market, Nestl would gain privileged access to traditional Mexican distribution channels (Perroud 2006c, www.Nestl.com), allowing it to increase its market share over the coming years (Kotler 2004). This SO strategy (Wheelen & Hunger 2004) may enabled Nestl to remove two threats of Porters 5 force model - the threat of substitution and threat of rivalry (Bowman 1998) and add value to its value chain in terms of outbound logistics (Porter 1986).

Figure 5: The Value Chain

Source: Porter, M. (1986: p. 21) In 2007, Nestl has acquired the entire business of Novartis Medical Nutrition, which strengthens their position as a nutrition company (Perroud 2007c, www.Nestl.com). During the acquisition they have included the leading baby food brand of US, Gerber, in their portfolio (Perroud 2007b, www.Nestl.com). This leaping in the new area of business has enabled Nestl to learn Novertis special know-how and expertise and leverage it to 40 other countries to satisfy the demand of the customers (Mintzberg et al. 2003). This indicates their intention to undertake Market Development Strategy of Ansoffs four market growth strategies (Kotler 2004). In terms of PESTEL (Johnson et al. 2008), Nestl had also dealt with minor regulatory process with European Commission in France and Spain. This year, Nestl opened a milk processing plant in Pakistan and entered into a public-private partnership with the United Nations Development Programme (UNDP), which aims to train 5,000 women involved in farming in Pakistan (Tickle 2007, www.Nestl.com). Thus they have overcome the administrative and political distance of CAGE framework and political constraint of PESTEL framework (Johnson et al. 2008). Similarly, opening of the milk factory in the remote location of China enabled them to have access in lucrative location for farming (Perroud 2007d, www.Nestl.com). With broadening strategic co-operation with Barry Callebaut in Europe in 2007 (Perroud et al. 2007, www.Nestl.com), Nestl has decided to outsource (Wheelen & Hunger 2004) specialized high quality chocolate ingredients to its European chocolate factories, especially Russia, and add value to their value chain (Porter 1986). According to VRIO framework, Nestl has gained access to a value adding, rare, and hard to imitate opportunity, which is synergetic with organisation (Peng 2006). Backed by the strength of supply and distribution network Nestl Russiya has acquired Ruzskaya Confectionery Factory (RKF), the leading premium chocolate producer of Russia and added RFKs premium brands like omilfo and Ruzanna brands in their portfolio (Perroud 2007e, www.Nestl.com), which denotes the strategy of adding global brands with local jewels (Dicken 2008). Regulatory approvals of the Russian Federation authorities were needed to complete the

transaction. Though it might be taken as a legal constraint according to the PESTEL analysis in macroenvironment, but cost driver of George Yips Drivers of Globalisation framework offset that in terms of favourable logistics (Johnson et al. 2008). Nestls commitment to the premium chocolate market is also evident by their joint venture decision with Belgian luxury chocolate maker Pierre Marcolini. The partnership will allow Nestl to benefit from the know-how of the world's leading luxury chocolate makers (Mintzberg et al. 2003), while Pierre Marcolini will gain access to Nestl's global experience (Perroud & Goemaere 2007, www.Nestl.com). This strategic move has added and changed capability of both companies (Johnson et al 2008). In 2008, Nestl Nutrition facility was started in Konolfingen (Switzerland), which will produce newgeneration probiotic infant formula under the NAN brand and enable Nestl Nutrition to undertake the market of over 90 countries (Perroud 2008b, www.Nestl.com). According to Johnson et al. (2008) cost driver of Yips Drivers of Globalization is effective here in terms of economies of scale and country specific differentiation along with national characteristics enable firms to create differentiated products. Thus, Nestl has gained the opportunity to strengthen its position by sharing Konolfingen's position as a global manufacturing site for highly-specialised infant formula and healthcare nutrition. The new Nestl Nutrition industrial site will benefit from synergies with Nestl's Product Technology Centre, also based in Konolfingen, and create a tangible interrelationship (Campbell & Luches 1998). In 2008 Nestl has decided to acquire Santa Brbara Mineral Springs to gain 57% market share of Brazil (Unknown 2008, www.Nestl.com). 2008 is mostly compact with Nestls investment in different R&D projects like, coffee factory of Timashevsk of Russia (Zibareva 2008, www.Nestl.com), new R&D Center in Beijing (Tickle 2008a, www.Nestl.com), R&D facility in Switzerland to develop premium and luxury chocolate (Perroud 2008a, www.Nestl.com), R&D facilities for its out-of-home business in Ohio (Tickle 2008c, www.Nestl.com) and research program on specific nutritional need of athletes (Tickle 2008d, www.Nestl.com). This may help to secure their face-value during melamine crisis (Tickle 2008b, www.Nestl.com). In 2009, Nestl continues to invest on R&D centre in West-Africa to improve local agricultural crops (Tickle 2009a, www.Nestl.com), research units in Japan (Unknown 2009, www.Nestl.com), research on breakfast cereal solution in Orbe (Green 2009, www.Nestl.com) and Indonesian coffee and cocoa research institute (T. Hardjosubroto 2009, www.Nestl.com). Since, food industry is always under scrutiny of government; Nestls commitment to research may give them a favourable position to Government (Dicken 2008). Additionally, innovative product and technology will reduce threat of substitute and potential entrants of Porters five force framework (Bowman 1998). In a hypercompetitive industry like food and beverage, organizational knowledge is embodied in the firms core competences and value-adding activities (Stonehouse et al. 2004) and enable Nestl to undertake Product Development Strategies of Ansoffs Matrix (Kotler 2004). In 2009, Nestl has started Nespresso site in Avenches to support the growing market of its premium coffee brand Nespresso, which grew 30% over last 5 years, along with other premium and luxury products like Mvenpick of Switzerland ice-cream, S.Pellegrino and Perrier waters, Cailler, Perugina, Baci and Nestl Noir chocolate (Tickle 2009b, www.Nestl.com). This strategic step is bolstered by

country specific differentiation opportunity and Cost driver of Yips Drivers of Globalization in terms of economies of scale (Johnson et al. 2008). Nestl strategic steps like, acquisition of Delta and Dreyers ice-cream, RKF; merger with Lactalis; agreement with Barry Callebaut, Pierre Marcolini; starting plants in Switzerland to support premium brands helps them to differentiate their products. Nestls strategies for differentiation can be evaluated in terms of Porters Generic Competitive Strategies (Wheelen & Hunger 2004). Figure 6: Porters Generic Competitive Strategies Competitive Advantage
Lower cost Differentiation

Broad target

Cost leadership Cost focus

Differentiation

Competitive Scope Narrow target

Differentiation focus

Source: Wheelen & Hunger (2004: p. 118) As (Stonehouse et al. 2004) has stated, coordination and configuration of business activities generates core competency of the firm by adding distinctive value to their value chain. In the light of earlier discussion it is apparent that Nestl has taken basic global and complex global strategy of Porters (1986) International Strategy. Figure 7: Porters International Strategies
High

Complex global
High foreign investment with extensive coordination among subsidiaries

Basic global
Simple global strategy

Coordination of activities

Multi-domestic
Country-cantered strategy by multinationals or domestic firms operating in only one country Geographically dispersed

Export based
Export based strategy with decentralised marketing

Low

Geographically concentrated

Configuration of activities Source: Porter, M. (1986: p. 28)

Figure 8: Sales of Nestl during last 5 years

Source: Corporate author: Annual Report (2009) Besides the performance over last five years as shown in the above chart, Nestls strategies has made Nestl world leader in ice-cream with 17.5% of market share, number two player globally in healthcare with the acquisition of Novertis, and global leader in baby food market worldwide by the acquisition of Gerber, Nestl Waters, the world leader in bottled water with 19.2% market share, the number two player in breakfast cereal market with the acquisition of Uncle Tobys. It is evident that, Nestl undertakes the strategies on the basis of their strength like- the ability to leverage strong brand names customise products to local market conditions, R&D capability and coordinate global operation by recognising the weakness that, increasing brands can hamper overall brand equity where opportunities like- supporting their brand image, emerging and developing countries and growing market are available. Nestl is also aware about the threats of Government penalties, macro-economic factors and unethical business activities (Datamonitor report, 2010).

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Green, H. (October 2, 2009) Vevey, New Innovation Centre to accelerate research on breakfast cereal solutions. T. Hardjosubroto, B. (November 15, 2009) Jakarta, Indonesia, Nestl R&D Tours signed Cooperation Agreement with the Indonesian Coffee & Cocoa Research Institute. Tickle, R. (April 30, 2009) Vevey, Switzerland, Nestl opens R&D Centre in West Africa to improve local agricultural crops. Tickle, R. (June 10, 2009) Vevey, Switzerland Nestl opens major Nespresso production site in Avenches. Unknown (May 20, 2009) Vevey, Nestl launches first research unit in Japan [Online]. All available from: http://www.Nestl.com/MediaCenter/PressReleases/?Tab=2008 [Accessed 26th April 2010]