university BA 388T - Case study - Nestle Strategy Management and Execution

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Case study In Nigeria 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 a crumbling road system aging trucks and the danger of violence forced the company to re think its traditional distribution methods 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 for example Instead Nestle 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 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 Rather than make do with the local infrastructure Nestle products 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 seem to 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 In 1990 316 tons of was in place in China Nestle s production took off 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 term strategy 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 its existing distribution channel Coca Cola captured a 40 percent share of the 4 billion a year market for canned coffee in Japan which failed to enter the market until the 1980s has only a 4 percent share leveraging Nestle 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

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