Internationalization process of Nestle PDF

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Executive Summary Nestle is one of the market leaders of the whole world. It has activities in more than 125 countries. Due to its diversified product and dispersed function in different countries its internationalization process, internationalization structure and organizational structure is very e...

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Executive Summary Nestle is one of the market leaders of the whole world. It has activities in more than 125 countries. Due to its diversified product and dispersed function in different countries its internationalization process, internationalization structure and organizational structure is very educative based on theory of internationalization, internationalization strategy and theory of organizational structure. As we go through Nestlé’s function and its history, we found that they used Uppsala Internationalization model for internationalization. They used mixed organizational structure (generally focused on geographical division) and multi-domestic strategy for getting to the position they are currently in. Their analysis helped us a lot in gaining insight regarding international business. Keywords: Internationalization, Organization, Structure, Strategy, Product, Licensing, Nestle Process, Strategy etc.

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1. Introduction Nestle is the largest food company by revenue. It has business in more than 125 countries. This Swiss company has around 10,000 different products and more than 250,000 multicultural employees all around the world in 2016. But this global market leader did not become international in a day. It took them 150 years before reaching the current position. As an international company, they are not only fighting the international organization like themselves but also the domestic competitors of respective operating countries. So their process of becoming international was not an easy task. In their road to become international. This global giant used Process Theory of Internationalization (PTI) and they tried to follow OLI paradigm. To manage their gigantic organization they had to follow a complex organizational structure and business strategy. Functions of this global company is a great exemplification of modern day international business.

2. Objectives of the Study In the era of globalization and capitalism, giant international companies play a great role in both global and local market. So, business graduates like us need to study about them and learn about international business.  Direct Objective

 To analyze the internationalization process of Nestle.  To identify their organizational structure.

 To identify their internationalization strategy.

 Indirect Objectives

 To apply theoretical knowledge of International business into real world.  To know about global Market leader Nestle.

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3. Methodology of the Study The report is a qualitative research and based on secondary data collected from internet so the methodology of the report is very straight forward and simple. Step 01 Selecting an international Organization

Step 02 Collection of Information

Step 03 Studying Theory

Step 06 Developing and Completing the report

Step 05 Developing Findings

Step 04 Comparing theoritical knowledge with Practical data

Figure 01: Methodology of the Report

Firstly, we looked for an organization having operation in multiple countries and we selected Nestle for our research due to its huge market share in global food and beverage market and availability of information regarding the organization. Secondly, we collected information related to nestle based on our research objectives. Almost all the data is collected from internet through website of Nestle, their annual report, booklet and other related articles providing information regarding Nestle. Thirdly, we discussed different theories related to internationalization process, internationalization strategy and organizational structure. The theoretical analysis is highly dependent on book named “International Business: Environments and Operation”. We also collected available definitions and discussions providing insights into theoretical review. In the fourth stage, we compared our theory with the collected information of Nestle and tried to find a matching with the theoretical description and practical functions of Nestle for identifying their internationalization process, internationalization strategy and organizational structure. Lastly, we gathered our findings on Nestle and presented it in the report.

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4. Literature Review As the report is based on internationalization process, organizational structure and internationalization of Nestle. So, we focused on discussing different theory and definitions related to that topic.  Internationalization Process In the recent decades firms are going international at a rapid speed. Due to globalization and development of communication internationalization of firms has become a global phenomenon. Internationalization process originated by Johanson and WiedersheimPaul (1975) and Johanson and Vahlne (1977), has been a resurgent over the recent years (cf. Eriksson, Johanson, Majkgard, and Sharma, 2000). The consequent researches within this subject matter were accomplished by empirical research of Sullivan and Bauerschmidt (1990), Leonidou and Katsikeas (1996), Eriksson et al. (2000), and Vyas and Souchon (2003) (Cheng et al., 2005). According to Wikipedia, “internationalization is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. There are several internationalization theories which try to explain why there are international activities.” “Internationalization is a continuous process of choice between policies which differ may be only marginally from the status quo. It is perhaps best conceptualizes in terms of the learning curve theory. Certain stimuli tempt a firm to shift to a higher export phase, the experience (or learning) that is gained then modifies the firm’s insights, prospects and indeed managerial capacity and competence (Fillis, 2001); and new stimuli then induce the firm to move to the next higher export stage, and so on” (Cunningham and Homse, 1982; cited by Ajdari, 2007; p. 3). Prior to the seminal work of Oviatt and McDougall in 1994 where they pointed to the intriguing fact that internationalization can be viewed as an entrepreneurial act, the research streams focusing on entrepreneurship and internationalization were only rarely combined (Andersen, 1993). Several studies from the 1970s supported the notion that firms initially gain a strong foothold in their domestic market before they leap into international markets. Hence, international business research mainly focused on established firms whereas the entrepreneurship literature focused on domestic market dimensions.

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Over the past decade the literatures on entrepreneurship and internationalization have been more closely related in terms of the effort to describe and understand the phenomenon of infant firms that operate internationally right from inception. The international business literature embodies different theoretical models that attempt to explain slow and incremental internationalization processes of firms. The most recognized approaches are stage models such as the Swedish “Uppsala Internationalization Model” and the American “Innovation-related Internationalization Model” (Andersen, 1993). In the late 1980s, researchers began to question the universality of these stage models. Johanson and Mattsson (1988) proposed that firms that initiate their internationalization process in an already internationalized market (cited by Andersen, 1993). A few years later, the term “born globals” created for this type of firm (Rennie, 1993). Madsen and Servais (1997) adopted this term, which has been used by many international marketing and business researchers since then. According to Wikipedia, The definition of a born global firm is “a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries.” According to Reiner et al. (2008) in seeking the reasons for internationalization, Ferdows (1997) acknowledged “access to low-cost production”, “access to skills”, and “proximity to the market” as the three main strategic causes for selecting a location. Due to him, Dunning (1998) differentiates between “resource seeking”, “market seeking”, “efficiency seeking”, and “strategic asset seeking” as the main types of FDI. A more complete and full list is supplied by Vereecke and Van Dierdonk (2002), who empirically test Ferdows’ model and find strong empirical evidence for most of its elements. In particular, they present eight potential advantages of relocation:

(1) Proximity to suppliers; (2) Availability of labor; (3) Availability of skills and know-how; (4) Proximity to market; (5) Socio-political advantages; (6) Competition; (7) Energy etc.

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So far, Reiner et al. (2008) have acknowledged a number of factors which make influence on internationalization. These are: market knowledge (Johanson and Vahlne, 1990); level of product standardization, level of country development (Vernon, 1979); entry mode or control (Anderson and Gatignon, 1986); strategic reasons (Ferdows, 1997; Dunning, 1998; Vereecke and Van Dierdonck, 2002); importance of local resources and local market (Bartlett and Ghoshal, 1989); role in the operations network (Vereecke et al., 2006); driver of the supply chain (Gereffi, 1999). These factors are certainly not independent of one another. Rundh (2006) have defined internationalization “as the process of increasing involvement in international operations”. A different view is taken by Calof and Beamish (1995, p. 116) who define internationalization as “the process of adapting firms’ operations (strategy, structure, resource, etc.) to international environments”. However, internationalization is a dynamic and not a linear process. Due to rapid changes in the international marketplace a firm can also de-internationalize from a market by dropping a product (Calof and Beamish, 1995) or reducing investments in a particular market or by withdrawing from international activities altogether (Benito and Welch, 1997; cited by Rundh, 2006). A withdrawal can also lead to resources being used for activities in another market area or for a more competitive product that will contribute to a better competitive position (Rundh, 2006). Research on internationalization falls into two broad classifications: Andersen (1993) has reviewed these internationalization models as ‘The Uppsala Internationalization Model (UModel)’ developed by Johanson & Wiedersheim-Paul (1975); Johanson & Vahlne (1977), and ‘The Innovation-Related Models (I-Models)’ developed by Bilkey & Tesar (1977); Cavusgil (1980); Reid (1981); and Czinkota (1982).  The Uppsala Internationalization Model (U‐M): ohanson & Wiedersheim-Paul (1975) conceive the internationalization process as an incremental process involving four stages: no regular export activities, export via independent representatives (agents), sales subsidiary, and production/manufacturing. Johanson and Vahlne (1977) develop a theoretical model to explain the internationalization process of the firm. This model is focused “on the development of the individual firm and particularly on its gradual acquisition, integration, and use of knowledge about foreign markets and operations and on its successively increasing commitment to foreign markets.” (Johanson and Vahlne, 1977, p.23).According to the

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model (Figure 2-1), the state aspects are market commitment (resource commitment to the foreign markets) and market knowledge about foreign markets and operations. The change aspects are decisions to commit resources and performance of current business activities (Andersen, 1993). “The basic assumptions of the model are that lack of such knowledge that is an important obstacle to the development of international operations and that the necessary knowledge can be acquired mainly through operations abroad” (Johanson and Vahlne, 1977, p.23). The gradual acquisition of knowledge amplifies foreign commitments (Karadeniz and Göҫer, 2007). The increasing experience and knowledge about foreign markets lowers the perceived risk and transaction costs, thus increasing the commitment to foreign markets (Karadeniz, 2007). Camuffo et al. (2007) improved the “Uppsala Internationalization Model” by adding technological knowledge and customer-supplier interaction as important determinants of the process, stating that cross-border expansion into a neighboring country might shorten the time required to accumulate knowledge and to control the facility in the target country (cited by Reiner et al., 2008).

 Innovation‐related Internationalization Models (I‐M): It is important to consider that most researches of I-models are restricted to SMEs, and the use of a cross-sectional design (Andersen, 1993). Applying cross-sectional researches excludes studies of the moves by a firm from one stage to the next, since a modification in the level of participation for a firm at one stage will automatically lead it (by classification) to the next stage (ibid.). Due to Andersen (1993) in order to establish a chain model, a longitudinal design should be used. Through that it would be achievable to study the alterations of other variables that may make clear a move from one stage to the next (ibid.). The firms are categorized into different stages due to one or a small number of characteristics of their international involvement (ibid.). According to him the classification process, is a critical issue. We might differentiate between at least two explanations of a model: (1) A continuous process, and (2) A discontinuous process, where the stages are disjunctive. Apparently, the I-models assume a discontinuous process (Andersen, 1993).Andersen (1993) summarizes the most well-known models in Table 2-2 explaining the internationalization process from an innovation-related perspective.

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 Organizational Structure Businesses need structure in order to survive. Without structure, there’s very little clarity and focus; nobody knows whom to report to and responsibilities are passed around like a hot potato. Structure is the reason why we refer to businesses as “organizations.” There’s an organized flow of leadership and authority in which every individual is supposed to have a clear idea of what they do, whom they supervise, and whom they ultimately report to. The term organizational structure refers to the formal configuration between individuals and Organizations exist to achieve goals. These goals are broken down into tasks as groups regarding the allocation of tasks, responsibilities, and authority within the organization (Galbraith, 1987; Greenberg, 2011). ‘The formal arrangement of roles, responsibilities, and relationships within an organization- is a powerful tool which implement strategy’ (Daniels et al., 2016: P.617) Very early organizational structures were often based either on product or function (Oliveira & Takahashi, 2012). The matrix organization structure crossed these two ways of organizing (Galbraith, 2009; Kuprenas, 2003). Others moved beyond these early approaches and examined the relationship between organizational strategy and structure (Brickley, Smith, Zimmerman, & Willett, 2002). This approach began with the landmark work of Alfred Chandler (1962, 2003), who traced the historical development of such large American corporations as DuPont, Sears, and General Motors. He concluded from his study that an organization’s strategy tends to influence its structure. He suggests that strategy indirectly determines such variables as the organization’s tasks, technology, and environments, and each of these influences the structure of the organization. The basic dimension of an organization is the type of decentralization it employs. The three types of decentralization are the following:

 Vertical decentralization is the distribution of power down the chain of command, or shared authority between super-ordinates and subordinates in any organization.

 Horizontal decentralization is the extent to which non administrators (including staff) make decisions, or shared authority between line and staff.

 Selective decentralization is the extent to which decision-making power is delegated to different units within the organization. In school districts, these units might

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include development divisions. Instruction, business, personnel, public relations, and research and development decision. Using the three basic dimensions—key part of the organization, prime coordinating mechanism, and type of decentralization—Mintzberg suggests that the strategy an organization adopts and the extent to which it practices that strategy result in five structural configurations: (Fred C. Lunenbur, 2012): I.

Simple structure,

II.

Machine bureaucracy,

III.

Professional bureaucracy,

IV.

Divisional form, and

V.

Adhocracy.

“MNEs must horizontally differentiate their operations- that is, managers must divide the company into discrete units that are assigned responsibility for specialized tasks. More specifically Horizontal differentiation describes how company designs its formal structure and performs three functions” (Daniels, 2016, P-620)I. Specify the total set of organizational tools. II. Divide those tasks into subsidiaries and divisions so the work gets done. III. Assign authority relationships to make sure work gets done in ways that supports company strategy. Based on the function Daniels suggested international organizations can have following types of organizational structureI. Functional Structure II. Divisional Structure

a. International Division Structure b. Product Division Structure c. Geographic division Structure III. Matrix Structure. “A Functional Structure is the ideal way to organize work when company’s product share a common technology and competitive pressures push for a global strategy. A functional structure helps managers to gain economies of scale by arranging work responsibilities and relationships in the most efficient format”. (Daniels, 2016, P-620)

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That is, in a functional structure only production people work with production, finance people work with finance etc. In a functional structure decision making ability is centralized.

CEO

Production

Marketing

Production Asia

Marketing Asia

Production Europe

Marketing Europe

Chart 1: Functional Structure In case of divisional structure Daniels suggest that, “they use divisional structure to specify them according to outputs. Each division in a company is assigned responsibility for a different set of products or markets. In theory, an MNE can opt for an international division, a global product structure or a worldwide area structure”. (Daniels, 2016, P-622) “The divisionalized form has the middle line as its key part, uses standardization of output as it prime coordinating mechanism, and employs limited vertical decentralization. Decision making is decentralized at the divisional level. There is little coordination among the separate divisions. Corporate-level personnel provide some coordination. Thus, each division itself is relatively centralized and tends to resemble a machine bureaucracy. The technostructure is located at corporate headquarters to provide services to all divisions; support staff is located within each division. Large corporations are likely to adopt the divisionalized form”.(F.C. Lunenberg,2012)

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International Division Structure refers to “Grouping each international business activity into its own division puts internationally specialized personnel together to handle such diverse matters as export documentation, foreign-exchange transaction and relation with foreign governments. This structure’s quick response to environmental changes enables the company to deal with several different markets . CEO

Industrial Division

Automotive...