Pricing:
Before committing resources produce overseas, a company may want to test the market by exporting so as to sell the product at the price it would charge if it product locally. A company with functional global channels, like Nestle, may be able to complete this test marketing before companies in the importing country can persuade their government to restrict imports. Nestle tested the U.K. market in this way by exporting for a year from Canada to see if enough of a market would develop to justify completing a frozen-food plant to make its Lean Cuisine products. Shipping such dishes as spaghetti Bolognese in refrigerated ships and paying customs duties made the cost of this exported products much higher than the U.K. selling prices. However, the cost of this test was small compared to the value of the information gained and the amount of Nestlé’s eventual commitment.
Functional Organization Structure: Nestlé’s control mechanisms are clearly defined
Geographic Division Operational Structure:
Nestle use geographic division. The structure is useful and functional when maximum economies in production can be gained on a regional rather than a global basis because of market size or the production technologies for the industry. Nestle successfully adopted this structure because its foreign operations are large and are not dominated by a single country of region. Its regional sales were roughly divided into four: Americas region, including Latin and South American countries, have about 31 percent. Europe region, including Turkey and Eastern European countries has about 38 percent. Africa Asia and Oceania region, including Russia contributes 17 percent. And others hold 14 percent of its total sales.
Strategic Corporate Level Decision Making Headquarters:
A major responsibility of Nestlé’s corporate management is to give the company strategic direction. To do this, it decides in which geographic areas and to which products it plans to allocate efforts. For example, in the 1980’s Nestle became less dependent on chocolate and emerging economy markets by placing more emphasis on culinary products and on the North American market. In the 1990, it placed more emphasis on emerging economies, especially China. Throughout most of its history, Nestle has concentrated in manufacturing, marketing, and wholesale distribution and has avoided vertical expansion into plantations or retail food sales. To maintain this control, its corporate management handles all acquisition decisions as well as those regarding which products it will research at its headquarters in Switzerland, where a specialized staff decides in which currencies it will be held and to what countries it will be transferred.
Effective Business Level Decision Making Divisions:
Despite the centralized directives described above, Nestlé’s country and product managers have a great deal of discretion in central matters, especially marketing. Most product research is centralized so that duplication of efforts is minimized. When headquarters develops a new product, corporate management offers it to the country managers and may urge initial trials. However, it does not force them to launch a new product if they do not find it acceptable. If country managers introduce the product, they are fairly free to adopt it as long as corporate management does not find the changes harmful. For example, one of Nestlé’s best-selling products, Nescafe instant coffee, is blended and colored slightly differently from country to country.
Weaknesses
Stressful Control in Diversification:
To control its international business, Nestlé relies heavily on budgets and reports, as well as on information-gathering visits to foreign operations. The company has several policies to being corporate and subsidiary management closer together; however, they often time consuming and stressful for managers both physically and mentally. One policy is to alternate people between jobs in the field and jobs at headquarters. For example, the CEO of Nestle USA has to spend one week of each month at Vevey Switzerland. Another policy is to schedule meetings and training programs to bring large groups of managers together. Still another policy is to ensure that corporate headquarters management can converse with subsidiary management in French, English, German, and Spanish (The executive board conducts business in English). Further, the compensation system and management style seeks to limit turnover among employees.
Hidden Cost in Foreign Distribution:
When companies consider launching products in foreign markets, they must determine what final consumer price will be to estimate sales potential. Because of different national distribution systems, the cost of getting products to consumers varies widely from one country to another. In many countries, the roads and warehousing facilities are so poor that getting goods to consumers quickly, at a low cost, and within minimum damage or loss en route is problematic. In Nigeria, Nestle has had to build small warehouses across the country instead of depending on a central warehouse one would normally expect based on the country’s area. Roads are such poor condition that travel is slow and trucks are prone to breakdowns. Further, because of crime, Nestle uses armed guard on its trucks and allow them to travel only during daylight hours.
Control Problem on Acquisitions:
A policy of expansion through acquisition can create some specific control problems. Nestlé’s acquisitions have blurred the established lines of responsibility. For Nestle, some of its U.S. acquisitions resulted in overlapping geographic responsibilities and markets, as well as new lines of business with which corporate management had no experience because acquired companies are unlikely to have the exact product and geographic operations to fit Nestlé’s structure, Nestle must accommodate these operations. For example, Nestle acquired Libby, McNeill & Libby, and a U.S. company with substantial international operations, including a subsidiary in the United Kingdom. Nestle had to iron out not only how Libby would relate to Nestlé’s existing U.S. operations but also whether the U.K. subsidiary should continue to report to Libby or report to Nestlé’s European operations instead. There was a gradual transition by which the subsidiary eventually reported to the European operations. In another case, Nestle acquisition of Stouffer Foods put it into hotel ownership for the first time. Because Stouffer had been highly profitable and because corporate management at Nestlé’s Swiss headquarters lacked hotel experience, initially many more decisions than usual were made at the subsidiary level.
Control Problem on Ownership Sharing:
Many company actions require new decisions on where to place control. Nestle prefers to gain first-in advantages in markets; however, when this is not possible, Nestlé’s policy is to expand largely through acquisition of existing companies or establishing a joint venture with local company in order to achieve maximize use of both resources. However, ownership sharing also limits the flexibility of corporate decision-making. Nestle shares ownership with Coca-Cola in a joint venture for the production and sale of canned coffee and tea drink, such as Nestea or Nesquik, and Nestle has less autonomy for this operation than for those it owns wholly because Coca-Cola has an equal voice in decision making.
Sourcing Raw Material:
Although headquarters researches conditions affecting commodities and mandate amounts and prices for purchase of supplies, Nestle relies its sourcing of raw material heavily on suppliers. Mass production requires great amount with decent quality raw materials and constant supply, Nestle has to depend on mass firm suppliers, such as large coffee beans farm in Yunnan. Coffee bean was the major raw materials of Nescafe and Nestlé usually procured coffee beans from one farm that produced high quality coffee beans. However, reliance on one farm would reduce its bargaining power on suppliers.
Opportunities
Substantial Usage Gaps:
Companies may have different size gaps in different markets. Nestle found that less chocolate is being consumed than would be expected on the basis of population and income levels. Nestle found that in many countries more than 80 percent of the population has never tasted a chocolate bar. They project that if more people in those countries could be persuaded to try chocolate bars, the company’s sales should increase with the market increase.
High Market Growth Rate in China and Emerging Economies:
The Chinese non-alcoholic beverages market was valued at over US$4 billion in 1990. It was predicted that the market would maintain its annual growth of 20%. It was projected that coffee consumption in the country would reach 318,000 packets (one packet equals 60kg) by year 1995, doubling that of 1990. The increase is due to a trend among China's young consumers to try new things. Additionally, Shenzhen's Special Economic Zone (SEZ) is a boomtown in Guangdong province just across the border from Hong Kong. The average annual income per person here was 4,205 Yuan, while expenditure was 4,176 Yuan. Shenzhen was followed by Guangzhou, also in Guangdong Province, with an average annual income per person of 2,906 Yuan. The Xiamen SEZ, in Fujian province, came third, helped by infusions of money from capitalist kinsmen in Taiwan. These places provide suitable bases for developing profit centers.
Threats
Usage Gap in the U.S. Market
The U.S. market shows great usage gap and weak growth rate in sweetened food. Nearly everyone in this market has tried most chocolate products, but per capita consumption has fallen because of growing concern about weight. To increase chocolate consumption in general, Nestle altered marketing programs with other Swiss chocolate companies, such as Jacobs Suchard, Lindt & Sorungle and Barry Callebaut, for a short time promotion chocolate as an energy source for the sports minded. However, this promotion was not successful. Moreover, this promotion benefited its competitors such as Mars and Hershey because promotion of building general consumption is most useful and beneficial to the market leader.
Ethical Dilemma
Critics and consumer organizations have complained that Nestle promotes products to people who do not understand the products’ negative consequences, such as infant formula sales in emerging economies. Nestle have the largest share of infant formula sales in emerging economies and because its name-identified products facilitated the organization of boycotts. Critics strongly argued that promoting infant formula increased bottle-feeding, and mothers frequently overdilute formula and give it to their babies in unhygienic condition because of low incomes and lack of education. Nestle forced to cease advertising that could discourage breast feeding, limited free formula supplies at hospitals and banded personal gifts to health officials.
