Multinationals in Emerging Markets by means of Nestlé in China

Table of contents

Table of contents

Table of figures

List of abbreviations

1 Introduction

2 Theoretical Background
2.1 Reasons and Motivation behind Internationalization
2.2 Foreign Direct Investment
2.3 Being-international Strategies
2.3.1 Multinational Organization
2.3.2 Global Organization
2.3.3 Transnational Organization
2.3.4 Local Integration
2.4 Porter’s 5 Forces
2.5 Competitive Environment in Emerging Markets

3 Analysis: Nestlé in China
3.1 Company Introduction
3.2 Nestlé’s International Strategy
3.3 The Chinese Agro-Food Market
3.4 Nestlé in China
3.4.1 Bargaining power of suppliers
3.4.2 Bargaining power of customers
3.4.3 Threat of substitutes
3.4.4 Competitive rivalry within the industry

4 Conclusion

List of References

List of References (Internet)

Appendix

Table of figures

Figure 1: The Integration / Responsiveness-Framework

Figure 2: 4-Level Structure of product markets in emerging countries

Figure 3: The Nestlé Brand Tree

Figure 4: Product Offer Nestlé - Chinese Market

List of abbreviations

illustration not visible in this excerpt

1 Introduction

The growing interdependence of countries and internationalization of companies, is one of the most extensively discussed topics of the last decades.^{[1] [2]}

Not only international trade has risen strongly, but also foreign direct investments (FDI) have been increasingly conducted by expanding companies worldwide.^[3]

Companies widening their range by seizing opportunities internationally are most likely able to fuel their growth, whereas the position of organizations that only operate nationally is continuously weakened.^{[4] [5]}

Therefore, especially big multinational corporations from developed countries, like Nestle or Unilever, strive to steadily expand their global presence in order to thrive in a highly competitive global market.^{[6] [7]}

Whereas emerging countries, like China or India, are popular to invest in for MNCs, internationalization is increasingly including companies from those developing nations as well.^[8] Additionally, those Emerging Market Multinationals (EMNCs) are not only gaining power on an international level, but are also becoming effective local competitors for multinationals in their home markets.^[9] Hence, losing their market shares to the local competition, MNCs are forced to rethink their strategy in emerging markets.^[10]

According to the new challenges multinationals have to face in developing markets the following paper aims to analyze the competitive environment in emerging countries and thus derive promising approaches for MNCs to successfully stabilize their position.

The analysis will be based on a theoretical background, including the description of general reasons for internationalization, foreign direct investments as an entry mode as well as the “Being International Strategies” according to Bartlett/Ghoshal (1989) and broader relevant models. Afterwards, the current situation and competitive environment in emerging markets will be outlined.

The analysis itself will be conducted on the example of Nestlé in the Chinese market in order to further assess MNCs’ position in developing countries. After giving a short company introduction, the Chinese food processing industry as well as Nestlé’s internationalization strategy will be examined. In order to further assess the company`s position and performance in China Porter’s 5 forces framework will be applied.

To conclude, general implications for the competitive situation in emerging markets and MNC’s strategies as well as an evaluation of Nestlé’s position in China are derived and outlined.

2 Theoretical Background

Globalization is especially characterized by an interdependence beyond country borders and hence an increasing importance of multinational organizations.^[11]
Reasons and strategies for internationalization can be multifaceted. The following part is therefore giving a sound overview of reasons, concepts and frameworks applicable for determining a MNCs’ internationalization strategies as well as prevailing challenges multinationals have to face in emerging markets.

2.1 Reasons and Motivation behind Internationalization

A company can call itself international, when its activities abroad contribute to a great extent to achieving and ensuring its business objectives.^[12] Even though this includes various types of international organizations, the term “multinational enterprise” in this paper only refers to companies having control over a foreign investment.^{[13] [14]} Those enterprises pursue diverse motives and goals by expanding internationally.^[15] According to Meckl et al, four overall categories of motives for internationalization can be identified:

1. “Market seekers”: Companies looking for new, potential markets abroad, by reason of experiencing saturated markets and low price levels in their home market on the one hand and promising expansion rates in foreign markets on the other hand.^[16]
2. “Strategic asset seekers”: Companies acquiring assets from foreign enterprises in order to strengthen their global competitiveness and network resources.^[17]
3. “Efficiency seekers”: Companies striving to rationalize structures of established investments, by benefitting from economies of scale, cost reduction and risk diversification due to differing factor endowments in various countries.
4. “Natural resource seekers”: Companies seeking to access and obtain particular types of resources, such as human capital or natural recourses, that are not available in the home market or can be acquired at lower cost abroad.^{[18] [19]}

Most likely not only one but a combination of the previous categories is relevant to an organization when going international.^[20] Furthermore, those motives can be divided in two types: Reactive and proactive reasons.^[21] Proactive refers to acting in advance as well as anticipating and proactively seizing promising opportunities abroad (e.g. realizing economies of scale), rather than reacting to situations that already occurred (e.g. saturated markets).^[22]

2.2 Foreign Direct Investment

Whereas companies are often entering new markets through export or licensing, market entries through foreign direct investments (FDI) have become increasingly popular during the last 30 years.^[23] A FDI refers to a direct investment in another country by either establishing business operations or acquiring business assets in order to attain ownership or effective control over facilities or enterprises abroad.^{[24] [25]}

Hence, internationalization can be understood in many different ways, such as international trade, cross border activities or combining different cultures and languages.^{[26] [27]}
However, as mentioned before, becoming a multinational enterprise requires a big commitment to foreign markets as well as an investment abroad. Therefore, FDIs are considered as the main means for internationalization in the following course of the paper.

A new market may be entered by taking the form of a greenfield investment by building up a new entity from the ground.^[28] However, the majority of market entries is carried out by setting up a joint venture, or completing an acquisition of or a merger with an existing local company, as M&As or partnerships provide quicker access to the new market as well as to established supply and distribution channels.^{[29] [30]}

The motives for both types of FDIs are going almost entirely hand in hand with the motives of internationalization, including:

- Resource-seeking FDI,
- Market-seeking FDI,
- Asset-seeking FDI,
- Efficiency-seeking FDI.^{[31] [32]}

Consequently, MNCs benefit from new location advantages of the host country, global organizational learning and an expanded resource endowment through FDIs, which often enables them to gain momentum over their local competitors abroad.^[33]

2.3 Being-international Strategies

After having invested in foreign markets, companies have to define their strategy for managing their business globally. In this context firms are facing two contradicting forces. On the one hand, MNCs are experiencing a pressure towards adaption to the host country’s local environment (local responsiveness) and on the other hand a pressure towards standardization of all activities of the value chain in order to achieve economies of scale (global integration).^[34] As depictured in figure 1 (Annex), companies choose between four different strategies (according to Bartlett/Ghosal), depending on the actual pressure of local responsiveness and global integration:^{[35] [36]} In the following the “international strategy” is left out, since this concept is not relevant for the further analysis.

2.3.1 Multinational Organization

The multinational strategy emphasizes responsiveness to the unique circumstances that occur in each country’s market.^[37] Therefore, foreign subsidiaries are allowed to operate rather independently in order to respond to local customers’ preferences and needs.^[38] Whereas the single foreign entities achieve high efficiency, synergies and economies of scope between subsidiaries and parent company can hardly be realized.^[39]

2.3.2 Global Organization

The global strategy refers to a complete standardization of all systems, resources and processes in order to realize economies of scale and cost reduction.^[40] Hence, standardized products are sold globally without adapting to consumer taste or preferences. Furthermore, decisions are highly centralized and the control remains at the parent company.^[41]

2.3.3 Transnational Organization

While the other three strategies focus on either one of the two forces, the transnational strategy tries to simultaneously respond to both local responsiveness and global integration to leverage specialized knowledge and promote worldwide learning.^[42] Parts of the value chain, which directly affect the customers, are decentralized and adapted to local needs. Other activities are globally centralized in order to realize economies of scale at the same time.^[43] Even though the transnational strategy combines the advantages of global and multinational strategy, it is quite difficult to implement and coordinate.^[44] Nevertheless, by reinforcing the idea of “Think global, act local”, successfully executed, this strategy leads to high flexibility and efficiency.^[45]

2.3.4 Local Integration

Additionally, one rather new strategy can be added. Local integration is an approach that goes beyond local adaption. The concept refers to companies getting integrated in local supply, distribution, talent and community networks as well as the society itself, rather than simply adapting their product/service and marketing to the new market.^[46] Companies ought to treat the new markets as “second homes” instead of remaining a foreign “visitor”.^{[47] [48]} Consequently, the firm remains globally coordinated, but has to get completely embedded into the new market and society. This implies that the global organization has to adapt in order to implement newly gained knowledge and models on a corporate level (“integrate locally and adapt globally”).^[49]

2.4 Porter’s 5 Forces

Every industry is shaped by competitive forces. Once a company determined its international strategy, it is useful to identify a company’s position due to assessing the balance of power within the target industry or sector.^[50]

Therefore, Porter developed the Porter’s 5 Forces framework, which identifies five competitive forces that shape every industry:

1. Bargaining power of suppliers;
2. Bargaining power of customers;
3. Threat of new entrants;
4. Threat of substitutes;
5. Competitive rivalry within the industry.^[51]

The model is largely used to evaluate an industry’s attractiveness, a company’s position as well as the potential range of operation within an industry. It is a helpful tool for determining an enterprise’s competitive strategy.^[52]

2.5 Competitive Environment in Emerging Markets

Especially in developing markets, choosing a successful competitive strategy becomes increasingly challenging for multinational enterprises.

Emerging countries are becoming more and more interesting for MNCs. Developing countries like the BRICS already account for half of all economic activities worldwide, and therefore have become important markets for multinational enterprises.^[53] This is also reflected by a growing amount of FDI inflows into developing nations, which accounted for more of half of all foreign direct investments in 2009.^{[54] [55]}

However, while emerging markets have started to grow rapidly, many local companies took their chances and flourished quickly, becoming new global players. These so-called emerging market multinationals (EMNCs) do not only enter the global market and internationalize to developed countries, but also become main competitors for MNCs in developing countries.^{[56] [57] [58]} Big global players like Nestle or Unilever are continuously losing market shares in emerging markets to local competitors.^[59]

Thus, it occurs that MNCs are lacking capabilities in emerging markets that EMNCs apparently provide. Therefore, it is important to take a look at the customers and their needs in those markets.

In developing nations product markets are generally divided into four different levels, as depictured in the image below.^[60]

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: 4-Level Structure of product markets in emerging countries
Source: cf. Meckl, R., 2010, p. 322.

The global level, which presents the smallest segment, includes customers that demand high quality products, which are comparable to offerings from developed countries.

The “glocal” segment consists of consumers, who prefer locally customized products that still equal global standards.

Local products on the other hand are characterized by aiming to meet the regional preferences and are offered in a lower price range.

The biggest segment, however, is the “bottom-level” including customers, who can only afford very cheap and simple products.^[61]

Typically, MNCs solely meet the needs of customers on a global and “glocal” level.^[62] Multinationals often have difficulties in coping with general regulations and developable infrastructure, handicapping their mostly complex business models.^[63] Compared to that, local companies are able to develop their own market concepts and excel due to their valuable understanding of products on a bottom and local level. Consequently, EMNCs attain a strong position in their home markets and simultaneously push their multinational competitors aside.^[64] Moreover, local competitors generally benefit from established networks with government and society, by collaborating with the regional community, creating mutual value and shaping regulations in their favor.^[65] Even though multinational companies still remain dominant in terms of leveraging superior technology and assets, new approaches are necessary in order to further persist competitive in emerging markets.^[66]

[...]

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^[1] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 1.

^[2] cf. Soubbotina, T., 2004, p. 83.

^[3] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 1.

^[4] cf. Holtbrügge, D. / Welge, M., 2010, p. 30.

^[5] cf. Mead, R. / Andrews, T., 2009, p. 230.

^[6] https://www.academia.edu/5366973/Nestl%C3%A9_Global_Strategy_INTRODUCTION

^[7] cf. Holtbrügge, D. / Welge, M., 2010, p. 30.

^[8] cf. Deresky, H., 2014 p. 25.

^[9] cf. Santos, J. / Williamson, P., 2015, p. 45.

^[10] cf. Santos, J. / Williamson, P., 2015, p. 45.

^[11] cf. Meckl, R., 2010, p.1.

^[12] cf. Meckl, R., 2010, p. 4.

^[13] cf. Shenkar, S. / Luo, Y., 2008, p. 55ff.

^[14] cf. Luthans, F. / Doh, J, 2012, p. 302ff.

^[15] cf. Mead, R. / Andrews, T., 2009, p. 231.

^[16] cf. Meckl, R., 2010, pp. 6-7.

^[17] cf. Meffert, H. / Burmann, C. / Becker, C., 2010, p. 64.

^[18] cf. Meckl, R., 2010, p. 6-7.

^[19] cf. Meffert, H. / Burmanm, C. / Becker, C., 1982, p. 64.

^[20] cf. Meckl, R., 2010, p. 7.

^[21] cf. Deresky, H., 2014 p. 196.

^[22] cf. Holtbrügge, D. / Welge, M., 2010, p. 32.

^[23] cf. Hill, C., 2007, p. 239.

^[24] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 1.

^[25] cf. Holtbrügge, D. / Welge, M., 2010, p. 54.

^[26] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 1.

^[27] cf. Hansson, A. / Hedin, K., 2007, p.6.

^[28] cf. Meckl, R., 2010, p. 16ff.

^[29] cf. Hill, C., 2007, p. 244.

^[30] cf. Shenkar, S. / Luo, Y., 2008, p. 55ff.

^[31] cf. Shenkar, S. / Luo, Y., 2008, p. 55ff.

^[32] cf. Luthans, F. / Doh, J, 2012, p. 302ff.

^[33] cf. Hill, C., 2007, p. 246ff.

^[34] cf. Daniels, J. / Radebaugh, L. / Sullivan, D., 2006, p. 392.

^[35] cf. Hill, C., 2007, p. 426ff.

^[36] cf. Meier, H. / Roehr, 2004, p. 77.

^[37] cf. Meckl, R., 2010, p. 124.

^[38] cf. Daniels, J. / Radebaugh, L. / Sullivan, D., 2006, p. 397.

^[39] cf. Holtbrügge, D. / Welge, M., 2010, p. 132.

^[40] cf. Holtbrügge, D. / Welge, M., 2010, p. 133.

^[41] cf. Daniels, J. / Radebaugh, L. / Sullivan, D., 2006, p. 398.

^[42] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, pp. 34-35.

^[43] cf. Meckl, R., 2010, pp. 125-126.

^[44] cf. Meckl, R., 2010, pp. 125-126.

^[45] cf. Meffert, H. / Burmanm, C. / Becker, C., 1982, p. 71.

^[46] cf. Santos, J. / Williamson, P., 2015, pp. 49-50.

^[47] cf. Santos, J. / Williamson, P., 2015, p. 53.

^[48] http://knowledge.insead.edu/strategy/why-local-companies-are-winning-in-emerging-markets-4488

^[49] cf. Santos, J. / Williamson, P., 2015, pp. 53-54.

^[50] cf. Michaux, S., 2015, p. 5.

^[51] cf. Hill, C., Jones, G., 2008, p. 42

^[52] cf. Michaux, S., 2015, p. 5.

^[53] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 103.

^[54] cf. Hill, C., 2007, p. 240ff.

^[55] cf. Meckl, R., 2010, p. 31.

^[56] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 105.

^[57] cf. Santos, J. / Williamson, P., 2015, p. 45.

^[58] cf. Meckl, R., 2010, p. 322.

^[59] cf. Santos, J. / Williamson, P., 2015, p. 46.

^[60] cf. Meckl, R., 2010, p. 322.

^[61] cf. Meckl, R., 2010, pp. 322-323.

^[62] cf. Meckl, R., 2010, p. 323.

^[63] cf. Morschett, D. / Schramm –Klein, H. / Zentes, J., 2015, p. 107.

^[64] cf. Meckl, R., 2010, p. 323.

^[65] cf. Santos, J. / Williamson, P., 2015, p. 47ff.

^[66] cf. Santos, J. / Williamson, P., 2015, p. 47.