The purpose of this report is to asses, evaluate and analyze Nestlé's Company industry and comprehend how the organization can create a key plan for their business relations. The external analysis would then be done using the PESTLE and The Porters 5 analysis techniques.
By the end of this assignment, the future strategy will be mentioned as well as my recommendations about Nestle that will fit into strategic orientation in order to perform better in their business market. Continue to expand and execute its learning approach as the chosen large company by using different strategies.
The second part of this assignment explains what Foreign Direct Investment is and how it can help develop an organisation within a developing country. An analysis will be done on how the organisation makes decisions and what influences them to make those decisions. The assignment will also evaluate the organisations response to challenges that they could have faced, along with the solutions to those responses.
When running a business it is important to understand what makes them successful and what helps them gain their edge against competitors within their market place. Certain parties ie share holders expect the company to make profits and gain above average returns. The international company Nestle will be used to further explain the external factors. Kindly refer to Appendix 1 for a general overview and organisational profile of Nestle.
PESTEL is a method that can be used to help the organisation understand the overall market environment such as market growth/ decline and market risks for a particular industry, business, product, or project. It is often an essential part of strategic, marketing, and business planning.
1. Political – This refers to the involvement and intervention of the government within the economy. For instance, if the governmental tax increases this will cause the Nestle selling price to increase too. This will lead to a decrease in sales and the number of customers while the stock quantity will stays the same. Nestlé reassures its clients that their products are manufactured, imported and distributed under the strictest and best hygienic and sanitary regulations in order to be consistent and safe. Nestlé's products are always come with the seal of guarantee; this allows customers to be more self-assured and confident about buying Nestlé's products. Quality control also plays a large role within the political factor too, this is to mainstream the quality of the products produced by Nestle and make sure that the quality of goods in different countries is consistent.
2. Economic – Interest rates and Income distribution can majorly affect the bottom line of a company like Nestle. For an instance, if the income of the customer increases then the demand of the product of may also increase.Even though Nestlé is one of the leaders in the food industry it still shares the same knowledge and expertise with more local, small and medium companies. It helps business owners to compete in the new free trade environment which will ultimately promote the industry and the economy by increasing the overall market growth. By having their own local productions, Nestlé would no longer need to import any raw materials from other countries. This is will help in cutting their overall costs and will help them save more money. This will also benefit the consumers as now the customers would be able to get fresh local products at a lower cost. Overall this would help in increasing customers, sales and would help Nestlé gain a profit.
3. Social – These are cultural demographic variables and aspects which are closely linked to the market and customers need. Nestle would make a marketing strategy according age distribution or gender role before producing a new product. Nestlé tries to make their products generalized so that it suites everyone e.g. people from any area, any culture, any age, and income will drink water. It is not any luxury item which is used by a specific people. Nestle creates products that can suit almost all ages. And For example, Nestlé segment their products into different of age groups ie for infants, they have Nestlé baby foods while young people can drink Milo, Nescafe, chocolate and cookies. In India, Vietnam and Kenya Nestle have the Maggi brand with many kinds of Spicy sauces. The product can vary in countries, depending on the demand and requirements of the consumers.
4. Technology - The technology that Nestle uses assists in reducing costs and at the same time increasing quality. Technology also helps in increasing production, leading to an increase in output and an overall increase in goods sold. Mobile technology and internet is rapidly taking over various markets. Nestlé could use this technology to help in promoting their products all over the world. By Nestle shifting to a more advance technology they would be able to reach a wider community of people. The customers would be able to get any information they want from the Nestle website. Nestle employees could also use these services to find out what are the current trends in the market and implement those changes to better Nestlé's sales. They would be able to adjust the products being produced to better suit the local taste and cultural flavours in each country. New products could be created according to the customer's needs and popularity within the country. Technological factors can affect Nestle massively and can help in gaining a better understanding of their customers in different regions of the world.
5. Environmental – There are many environmental factor that Nestlé needs t abide by since it is working in the food industry. Some of these factors include regulatory, social, political, economic, technological, and market factors. Organisations try to follow and appease these factors to remain afloat and maintain their competitive edge. As a large corporation Nestlé is affected by all of these environmental factors. Nestle respects the environment and is committed to having an environmentally sound business. They make sure that those practices are consistent throughout their branches all over the world, thus taking into account the need to preserve natural resources and save energy.
In addition, the company has already pledged its support to the different agricultural and livestock methods that preserve soil and protect water supply, they use the least amount of energy and only safe chemicals. Protecting the rights of its potential market is important in order to ensure their support to the Nestle products. The research and development team has also been seeking a new kind of packaging which is environmentally friendly hence transforming those harmful materials into eco – friendly recyclable materials that would be suitable for both the customers and the environment.
6. Legal - The legal factors are related to the legal environment of the organisation and the impact on the demand and cost. For an instance, Nestle created and provided a health and safety covers for their employees. Nestle would pay the fee for their employees via their free legal help scheme with personal medical/ legal cover.Another factor that could greatly impact Nestle is, because Nestlé operates and sells their products in over a hundred countries. They are being regulated for the specific country's laws and taxes, whether it is through employment or their products. By being briefed with the countries' laws and regulations, Nestlé and other corporations would be able to create a good relationship with the countries' government for the future of their corporation. Nestle could use these relations to be able to test out and market new products, gaining an overall competitive edge against rivals and creating a bond between Nestle and different countries.
Michael Porter (1979) gave a framework by virtue of which the competitive advantage of companies can be assessed in the market in which they operate in. The framework includes an analysis of five coexisting forces that affect a business' ability to compete (Michael Porter 1979).
Keeping in mind the global market in which Nestle operates in, the Porters five forces analysis will be carried out keeping a general view of the entire world as the potential market for Nestle.
Threat of New Entrants: Nestle despite being in a food and nutrition industry faces the serious threat of new entrants in the market. Weather this threat is domestic or from international firms, it exists because it is an industry where the barriers to entry are very low. Nestle in Kenya for example have low barriers to entry and many small domestic players can enter the market and challenge the market of nestle through their pricing or product offering which is tailored to the local culture and tastes.
Bargaining Power of Suppliers: The bargaining power of suppliers of Nestle is very low especially in regions where the countries are economically backwards such as Pakistan or Bangladesh. That is because Nestle being such a giant in the market has the ability to bring lots of new business to the suppliers and therefore the suppliers have to produce the raw materials according to the outlines set by the company or they can be replaced.
Bargaining Power of consumers: The bargaining power of the customers of Nestle is high. That is because it is a brand which greatly relies on consumer appreciation for the product. If a product is launched in any part of the world where the consumers do not like the taste, they will refuse to buy it. Similarly in third world countries the consumer base is very price sensitive. This raises their bargaining power if Nestle wants to penetrate, then it will have to reduce its prices to their affordability level.
Threat of Substitutes: Threat of substitutes for Nestle is also very high. In all areas of its operations there are multiple other firms that are offering either similar products or substitute products. For this purpose Nestle has to ensure that it offers a product experience that cannot be imitated and is demanded by its consumers.
Industry Rivalry: Industry rivalry for Nestle is very high in no matter what part of the world it operates in. In United Kingdom it faces threat of competition from brands like Kellogs, in Kenya it faces competition from local brands and brands such as Temmy which has started to venture into the food industry.
When Nestlé was applied to the Porter's Five Forces Model it demonstrated a profitable but competitive market for the food processing industry. The model portrays that Nestlé is in a fairly comfortable position within the food processing industry, alongside recognising the threats to its current market share. Currently, the model recognises a slight threat of new entrants into the market and a considerable threat of substitute goods. Additionally, the model shows that Nestlé tends to preserve and maintain the upper hand over its competitors and suppliers. Nestle customers also have a large amount of bargaining power, as Nestlé needs to adhere to customer wants and needs in order to maintain their stand in the market. This is because there are so many close substitutes' customers could be easily diverted. Lastly for the Industrial rivalry, the model demonstrates a large amount of competition and rivalry within the food processing industry.
According to the Kenyan market and Nestle's impact on the customers, the factor that could affect Nestle the most could be mainly Threat of new entrants, even though customers like the international brand name and the quality of Nestle's products they still may want to support local and upcoming brands. Nestle could team up with a local company like Temmy's and use their local produce to enhance the quality of output. By doing this Nestle would be able to gain some hold in the local market and test out the more localized products. Temmy's on the other hand would be able to gain from the Nestle name and create a profit from being supported.
This is a venture or investment made by a company in a certain country, into another company based in another country. Companies that make the investment into new countries have a higher degree of influence and control over the other company the investment is being made into. Open economies with a good growth and skilled workforce tend to attract more foreign direct investments than closed economies. FDI provides an inflow of capital and investments to help increase in job opportunities, technology and skills in the receiving country. Organizations who contribute abroad are in all likelihood looking to exploit less expensive wages, progressed infrastructure and skilled workforce in a less controlled business environment. The organisation would additionally need to have the capacity to buy and sell goods without any limitations. Keeping in mind the end goal to help FDI, the country would need to make an appealing environment for other organizations to come and contribute.
There are three components of FDI;
FDI has turned into an important source of privatized external financing especially for developing countries. This source is much different from other external private capital flow as it is motivated largely by the investor's long term goals of making an overall profit for the organisation through using directly controlled production activities. Foreign bank lending and portfolio venture do not invest in activities controlled by portfolio investors or banks. These are often motivated by short-term profit considerations which can be influenced by a variety of factors including interest rates. Investment s in production facilities in developing countries is much greater in relation to FDI. Not only can FDI add to capital formation and investible resources, but, more importantly it is also a means of transferring skills, production technology, innovative capacity and managerial and organisational practices between locations, along with accessing a much more diverse international marketing network.
When dealing with foreign direct investment, the first to benefit from this is always the enterprises that are part of the transitional system this basically includes the parent firms and affiliates. These assets can also be transferred to domestic organisations and larger/ wider economies of host countries that is if the environment is favourable. The strength of capturing spill over' from foreign firm's s relies on the supply and distribution bonds between domestic firms and foreign affiliates.
FDI can affect the economic, social and political development of host countries. FDI forms one of the most important links between developing and industrial countries and increasingly among developing countries. FDI can promote technological changes in developing countries in a number of ways. It can have direct impact through its contribution to higher factor productivity, changes in product and research development. It can also have an indirect impact through collaboration with local research and development institutions and technology transfer to local downstream and upstream producers. This can also happen through the effects on presence of foreign affiliates' technology on composition of production and efficiency of local producers (UN, 1993). There is growing evidence of economic spill over's from FDI inflow, such as transfer of managerial and technological expertise to the host countries However in highly distorted private sectors, FDI may simply transfer monopolistic profits to foreign multinationals corporations (Pitchford, 1995).