224305 NAN Infant Formula PDF

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Running Head: NAN Infant Formula

NAN Infant Formula

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(04 March, 2016)

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Outline 1.0 Introduction 1.1 Problem statement 1.2 Aim and objective 1.3 Significance of the study 1.4 Limitations of the study 2.0 Situational analysis 2.1 Threat of new entrants 2.2 Threat of substitute 2.3 Supplier bargaining power 2.4 Buyer bargaining power 2.5 Competitive rivalry 3.0 Literature review 4.0 Methodology 5.0 Findings 5.1 Respondents demographic characteristics 5.2 Analysis of findings 6.0 Conclusion 7.0 Recommendations 8.0 Future research

3 Executive Summary Effective brand management is critical in organisations’ pursuit for competitive advantage either in the local or the foreign market. Companies are increasing expanding into the international market in the quest to maximise profitability. Firms’ performance in the international market is not only dependent on how effective the marketing strategies are formulated. On the contrary, firms’ management team must ensure that ethical and regulatory principles are complied with. As a leading multinational corporation, Nestle’ has identified the UAE as an attractive market for its infant formula product, NAN. Nevertheless, the advertising strategy that the firm has adopted through collusion with health care facilities in the UAE in the quest to increase its sales revenue of its NAN infant formula product is not unlawful but also unethical. The study’s findings illustrate that Nestle has managed to develop remarkable reputation in the international market. However, its failure to apply ethical principles in its advertising process in the UAE might diminish the gains that the firm has already made. On the basis of the research findings, the study recommends Nestle to adjust its approach to marketing by investing in marketing research, brand management, training its employees, and adhering to ethical marketing practices.

4 1.0 Introduction Marketing is a vital strategic management component that influences enterprises long term competitiveness (Langen, Grebitus & Hartmann, 2013). However, its contribution to an organisation’s strong performance is influenced by the effectiveness with which it is implemented. Different companies are progressively entrenching cross-border market expansion in the quest to generate high sales revenue and profits. Sele (2006) posits that multinational corporations [MNCs] are progressively identifying viable market opportunities outside their domestic market. The BRIC countries [Brazil, India and China] and countries in the Middle East and North Africa region have over the past decades been considered as the most attractive markets (Sele, 2006). The attractiveness of these countries is increased by their economic performance and high population. These countries have experienced significant increase in the number of MNCs entrants into different economic sectors (Sele, 2006). To generate sales revenue from the international market, the MNCs are increasingly integrating diverse marketing strategies. One of the strategies involves advertising. The marketing strategies should not only adhere to the best marketing practices but should also be ethical. There are different cases of ethics involved in marketing. One of the notable cases arise when marketers overemphasis on a vulnerable market segment in the pursuit for sales revenue (Jeurissen & Ven, 2006). Advertising has over the years been characterised by cases of controversy and scandals. Jeurissen and Ven (2006, p.430) identifies ‘Benetton’s controversial series of ads which featured delicate subjects such as discrimination and HIV/Aids, in order to sell colourful clothing at the higher end market’. Klein, Laczniak and Murphy (2006) accentuate that most ethical cases in marketing involve product safety,

5 misleading advertising campaigns and illegal product pricing schemes amongst others. The violation of the stipulated laws and obligations further constitute unethical marketing (Klein, Laczniak & Murphy, 2006). Adherence to ethical factors contributes to improvement of a brands’ image. This in turn culminates in development of high brand trust and hence the consumers’ purchase intention. Thus, the probability of generating sustainable revenue and profit is increased (Langen, Grebitus & Hartman, 2013). 1.1 Problem statement Over the past years, Nestle has been involved in aggressive market expansion. One of the markets that the firm has entered entails the United Arab Emirates. Its decision to enter the UAE market was informed by identification of the huge market potential with reference to baby food products. IBFAN (2006) assert that the UAE is one of the most attractive baby food markets. Thus, the intensity of competition in the market is substantially high, which increases the probability of the industry players violating the stipulated code of operation. The UAE government recognises breastfeeding as an essential element in promoting the society’s welfare. Efforts to restrict the promotion of alternative products to breast milk have failed due to political interference. IBFAN (2006) asserts that ‘the health of many babies continue to be at risk because they are not breastfed’. Nevertheless, the UAE has adopted the International Code of marketing operation that the industry players are required to observe in their marketing practices. One of the Code’s stipulations entails restricting the promotion of products in healthcare facilities. Documented literature identifies an increase in public outcry on multinational corporations’ involvement in immoral economic colonialism (Sele, 2006). A notable example relates to Nestlé’s involvement in aggressive commercialisation of its pure

6 life in Pakistan. The company’s marketing activity was misleading and hence against the welfare of the Pakistan community. Despite Nestlé’s success in positioning itself in the global food industry, the firm has been involved in cases of unethical marketing practices in the international market. In an effort to achieve a competitive edge in the United Arabs Emirates baby food market, Nestle broke the code of conduct by colluding with stakeholders in the medical profession. The firm influenced medical professionals to prescribe new mothers in the UAE to use its baby formula brand NAN. Langen, Grebitus and Hartmann (2013) contend that despite the intensity of competition in the food market in the emerging and industrialised economies, consumers have a choice on the product to purchase. Thus, firms should not engage in unethical marketing practices. On the contrary, Langen, Grebitus and Hartmann (2013) affirm that effective product differentiation should be used as a strategy for influencing the consumers’ purchase decision. Nestlé’s violation of the International Code in marketing its NAN infant formula product in the UAE and the international might limit the firm’s capacity to develop sustainable competitive advantage. Therefore, it is imperative for the company’s management to appreciate and adopt ethical marketing practices. 1.2 Aim and objective The purpose of this paper is to examine the ethical issue associated with Nestlé’s violation of the International Code in marketing its NAN formula product in the UAE. To achieve the research goal, the research will focus on the following research objectives. i.

To examine the impact of Nestlé’s violation of the International Code on the company’s image.

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To explore the impact of the ethical issue at Nestlé’s on customers’ intention to purchase the NAN infant formula. The above research objectives will be achieved by answering the following

research questions. a. What impact did Nestle violation of the International Code in marketing the

NAN brand have on the company’s company image? b. What effect did the violation on the International Code have on the customers’ intention to purchase the NAN infant formula? 1.3 Significance of the study The study’s findings will provide Nestle’ management team comprehensive understanding on the impact of its unethical practice on the company’s competitiveness in the international market. By relying on the market intelligence generated and the study’s recommendations, Nestle’ management team will be in a position to undertake the requisite adjustments in its marketing practices. Subsequently, the likelihood of Nestle restoring its image and competitiveness will be improved substantially. 1.4 Limitations of the study The study specifically focuses on the issues associated with Nestlé’s violation of the International Code in its marketing practices. Moreover, the study is limited to the company’s operations in the United Arabs Emirates. 2.0 Situational analysis The UAE baby food market has undergone notable evolution over the past few years. The market’s growth has been spurred by different factors such as increase in the rate of urbanisation and emergence of a middle class population. Moreover, the high rate at which women are directly being involved in the labour

8 market has increased the adoption of convenience-oriented lifestyles with reference to taking care of their babies (Nielsen, 2015). Thus, baby formulas and processed baby foods have increasingly become desirable. The involvement of a large number of women in employment has made most mothers consider replacing breast milk with baby formulas. The preference of the baby formulas arise from the need to balance between the infants’ nutritional needs and the mothers’ demand for convenience. The Asia-Pacific market accounts for 49% of the total global sales of baby food products while North America and Europe accounts for 19% and 27% of the total sales. The Middle East and North Africa markets are characterised with the highest rate of growth (Nielsen, 2015). The UAE recorded the highest rate of growth with reference to baby formula sales at 20.6% between 2012 and 2014 (Nielsen, 2015). The graph below illustrates the growth of the baby food market between 2012 and 2015 across the emerging economies. According to graph 1, the UAE is has a considerably high potential for growth compared to other economies. CAGR %, 2012-2014 United Arab Emirates Taiwan Russia Brazil Saudi Arabia Table 1

20.60% 13.50% 12.70% 13.30% 11.90%

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Graph 1 Source: (Nielsen, 2015) The baby food companies are investing in aggressive marketing strategies in an effort to generate sales revenue (Ken Research, 2014).The high growth potential of the baby food market has remarkably shaped the baby formula market in the UAE. Between 2012 and 2017, the baby food market in the UAE is expected to grow with a CAGR of 16.8% with reference to revenue (Chibber, 2014). In an effort to exploit the market opportunity available in the UAE, Nestle announced its decision to invest $120 million for the construction of a processing plant in Dubai World Central. The processing plant was expected to be operational by the end of 2015 (Valdini, 2016). The prevailing situation in the UAE baby food market can well be illustrated by the Porter’s five forces. 2.1 Threat of new entrants; low The UAE government is committed to stimulating the country’s economic growth through promotion of international trade. Subsequently, the government has increasingly relaxed international trade barriers hence establishing international

10 cooperation. The country’s economy is projected to experience robust growth arising from the oil and non-oil sectors (United Arabs Emirates, 2014). The UAE is further the largest export markets, which increases its attractiveness to international companies. This makes the threat of entry to be substantially high. Nevertheless, Nestle’ has managed to establish a substantial competitive advantage hence limiting the impact of the threat of new entry. The new entrants are required to establish a high competitive advantage in order to survive in the market. 2.2 Threat of substitute; high The attractiveness of the UAE baby food market has increased the presence of diverse baby food and formula brands. Thus, the market is characterised by numerous baby formula substitutes. The large number of substitutes pressurises the industry players to ensure that their products remain competitive. 2.3 Supplier bargaining power; high The operational efficiency of the baby food processing companies is directly influenced by the relationship established between the firm and the suppliers. The suppliers of the raw materials used in the production of baby food and formula products can influence the competitive advantage of the food processing companies. For example, setting the price of the raw materials at a high point can limit the processing companies’ capacity to set competitive prices. Additionally, the suppliers can influence the acceptance of the final product in the market because of the quality of the raw material. Nestle has managed to develop a strong relationship with its suppliers located around the world. The firm ensures that the suppliers adhere to the stipulated quality requirements.

11 2.4 Buyer bargaining power The availability of numerous substitutes of baby formula products in the market has led to significant increase in the consumers’ bargaining power. This has arisen from the remarkable decline in the cost of switching to a competitive product. This presents a challenge for baby food producers to ensure that their products are of high quality in order to minimise the likelihood of switching to a competing product. 2.5 Competitive rivalry; high The industry is characterised by a large number of baby food processing companies. Some of the dominant players include Kraft Foods, Mars Incorporated, Danone and Mondelez International Incorporation. These companies are a major source of rivalry to Nestle. Apart from the international companies, the baby food market in the UAE is further characterised by local companies. One of the notable companies entails the Hassani Group of companies, which is one of the largest local firms. These companies are increasingly adjusting their operational strategies in the quest to develop their global market share. Nevertheless, Nestle has managed to develop a strong market position. To gain an edge in the Islamic countries, baby food processing companies are progressively introducing a wide range of halal baby food and formulas. Subsequently, the UAE market is currently experiencing an increase in the brand of baby food products (Simpson, 2012). In summary, the UAE baby food market is very attractive, which creates opportunity for the baby food processing companies operating in the industry to generate revenue and profit. However, the capacity to tap the market opportunity depends on the strategic management practices adopted by a firm.

12 3.0 Literature review Development of a strong brand comprises one of the most effective approaches that an organisation can adopt in the quest to attain a high competitive advantage. Companies experience challenges in developing competitive advantage through introduction of new products. On the contrary, companies are increasingly acquiring other brands in an effort to enter new markets. Nestle has over the past few years acquired different companies such as Breyer’s Grand Ice Cream, and Ben and Jerry’s Homemade Ice Cream (Bolling & Gehlhar, 2005). Despite the adoption of such strategies the importance of developing a strong brand in the existing and new markets should not be underestimated. M’Zungu, Merrilees and Miller (2010) emphasises that brand constitutes a vital intangible resource in the improvement of an organisation’s capacity to survive the increasing complexity of the contemporary business environment. Scholars and business practitioners are progressively being concerned on how to exploit the benefits associated with a strong brand. This shift in organisation’s marketing management has arisen from development of understanding on the correlation between an organisation’s financial equity and brand equity. M’Zungu, Merrilees and Miller (2010) conceptualises brand equity to be comprised of different aspects that include brand association or image, brand awareness, brand loyalty, and perceived quality. The level of brand awareness has a significant impact on the consumers’ purchase decision. Additionally, brand awareness influences the customers’ perceived value of a product and hence its brand image (Sinha, Ahuja & Medury, 2010). In the quest to generate sustainable competitive advantage, it is fundamental for organisations to establish strong mental associations. Companies are increasing the volume of their investment in marketing

13 activities such as advertising. Nevertheless, most companies have not developed sufficient understanding on the value of establishing strong mental representation. The mental representation developed influences the customers’ behaviour (Friedman & Leclercq, 2015). However, the success with which an organisation leverages on brand equity is influenced by the effectiveness of its brand management approaches. Eisingerich and Rubera (2010, p.66) argues that ‘brand management is a complex set of activities that involve managing relationships with customers and other stakeholders, while accounting for a firm’s own past actions and reputations and competitors’ actions, in an effort to build a strong image that wins consumers’. There are different considerations that organisations should consider in the brand management process. One of the considerations entails brand orientation. This approach focuses on establishing and sustaining a relationship with the target customers in order to protect the brand’s identity. Past studies conducted shows that brand orientation improves the effectiveness with which the marketing strategy adopted improves a firm’s performance (M’Zungu, Merrilees & Miller, 2010). This arises from the fact that the memory created in the customers mind on the brand increases the likelihood of the customers’ continued usage of the product (Sinha, Ahuja & Medury, 2010). In the process of implementing the different brand management practices as an approach to improve performance, it is essential for organisation’s management team to avoid being involved in negative business events. Negative events include any activity conducted by an enterprise that might culminate in development of negative thoughts regarding a company and its products amongst the target customers (Li, 2015). Therefore, a positive correlation exists between a company’s

14 involvement in negative events and brand attitude. A negative event instils a sense of fear in the consumers’ purchase decision process. Nestlé’s violation of the Ethical Codes stipulated by the UAE government with reference to marketing of baby formula product in the country’s healthcare facilities constitutes a significant negative event. Li (2015) emphasises that negative events can lead to destructive effects on a company’ image and hence its competitive advantage. For example, Nanjing Guanshengyan, a Chinese company was declared bankrupt due to its involvement in using expired materials. Similarly, the Toyota Motors was forced to recall a significant proportion of its cars because of default braking system. However, Toyota Motors has experienced significant recovery in its recovery in its performance over the recent past because of effective brand management (Li, 2015). Thus, avoidance of negative events is fundamental. 4.0 Methodology The purpose of this study is to generate knowledge on the impact of the ethical issue involving the violation of the International Code in Nestlé’s quest to gain an edge in marketing its NAN baby formula brand in the UAE on the company’s performance. The study intends to gain extensive understanding on the impact of the ethical issue on the company’s competitive advantage. To achieve the study’s purpose, a number of research procedures have been taken into consideration. First, the study is based on the exploratory research design. Hair (2006) identifies the capacity to discover new relationships, ideas, patt...