Managerial Decision Making Essays Examples

Description of the Business

Nestlé was formed by Henry Nestlé in 1867 who was a pharmacist. The company’s headquarter is located in Vevey ,Switzerland. In short period the company started to grow and expand, and also offering a large variety of products including dairy products, confectionery, coffee and tea, bottled water, ice cream, baby food, breakfast cereal, snacks, milkshakes, seasonings, performance and healthcare nutrition, pharmaceutical products, cosmetics and pet food. Nowadays, the company is a corporation which has multiple stockholders. Throughout its continuation, Nestlé has merged with some international companies as well. Nestlé operates in 83 countries, in five continents. It has more than 509 factories (Rath, Das, Sinha and Bhamkar, 2012).
The quality of Nestlé's products made the brand easily acknowledged, even its slogan of the brand, "Good Food, Good Life" is recognized worldwide. Since Nestlé is a company which operates in the global market, it means that its products are readily available worldwide. Nestlé over the time has developed and continues to maintain a strong reputation in the Food Industry. Nestlé is on the stage of brand insistency, which means that costumers insist on getting Nestlé's products, and this is considered to be a big gain for the company (Rath et. Al, 2012)
The legal status of Nestlé is a corporation, which is a business that includes stockholders. Focusing on the company’s management is important to consider Nestlé’s Board of Directors, made up by 14 people and led by its Chairman Peter Brabeck-Letmathe. The day to day management of the company is taken care of by the Executive Board. The 13 designated Board Members manage diverse parts of the global business. According to the Global 500, the stockholders equity is 46,006.2 million dollars (Cherry, 2011).
Since Nestlé is a huge corporate, they produce on large amounts of products hence cost effective. Moreover, they are using environmental friendly techniques of production to save electricity and avoid air, water pollution.
Nestle has gone through many mergers as well, in 1905 it merged with Anglo-Swiss milk company and in 2002, Nestle joined hands with Coca-Cola beverages for the market research of certain beverages, like cold coffee. Nestle is now also merged with L’Oreal. All these mergers have helped the company to expand their market shares in international market.

Financial position of the company is exhibited through graphs as follows:

There is a long-term evolution in investment of share capital by institutions as shown below:
The evolution of share prices among different years:
Risk or Uncertainity in Operations
The financial analysis of company indicates that the company has enough assets to sustain in long term but paying off short term debts that make about 60% of total debt, will be a serious problem for the company itself. However, the company uses different debt ratings such as Standard and Poor’s and Moody’s and Fitch that declare their debts in category A, which is meant to be very good (Cherry, 2011).
The company is exposed to credit risk with different financial instruments such as liquid assets, non current financial assets, derivatives or trade receivables. To overcome this threat company uses credit limits to review their investments on daily basis. The purpose of doing this is to shift risk from liquid assets to others. Company has risk of meeting commitments with payment liabilities and for tackling this problem Nestlé obtains credit facilities of about 10 billion CHF. So it has liquidity risk as well. Nestlé faces market risk as well because its working involves exchange rates, interest rates and market prices that affect firm’s value of assets and liabilities.
In 2003, due to sharp changes in interest rates the company showed dynamic revenue increase despite of the flat sales. For example, in Europe sales increased by 3.2 percent (stable currency) and in America sales headed by 5.2 percent, although they fell by 15 percent in actual. Such as in Nestle Waters Unit reported a 9.5 percent increase in 2003, although in real terms sales were flat as compare to the previous year (Rath et. Al, 2012).
Generally, the company is facing risks and reduced profitability (reduced gross profit margin). This is an instructive situation that can deter investors and that can be caused either for exterior reasons, mismanagement or both. The negative working capital (-2,851 in year 2013) is a mixed result of a decrease on sales and a management decision that must be analyzed also as a long-term strategy. Given that they boosted the investment in emerging markets. The situation may worsen due to external reasons as there is decrease on revenues in Europe and America; these were the areas where economic crisis strongly struck. However, a trivial turn down of the company does not imply a dreadful situation. Nestlé still have lot of strengths; such as the high significance of the equity, a restricted level of leverage, a small existence of non-current liabilities, a good fiscal management, low interests expenses and high values of Return on Asset (ROA) and Return on Equity (ROE). If the situation persists and there will be more alarming risks and less profitability. But until now Nestle is in a good position to invest in (Cherry, 2011).

Effect of Governmental Regulations

Corporations are required to follow local government legislations as well when it is operating globally. Nestlé is operating and covering over 100 countries worldwide. So, in each country they are regulated by the specific country’s laws and taxes. By following that specific country’s laws, the company stands in good relation with the political presence as well and they expect co-operation from government in future dealings. The presence of increased taxes by local government also forces the company to increase its prices (Rath et. Al, 2012).
For example, Nestlé operates in Saudi Arabia and United Arab Emirates where Nestlé faces the Islamic Law and has created the Nestlé Hallal Committee to foretell the Hallal products produced by Nestlé Malaysia. Another example is the criticism that Nestle received for the promotion of infant milk formula, instead of breast feeding, which was later regarded as baby killer by many countries and now the company itself is against it (Cherry, 2011).

Inputs to Production Process

The goods and services produced by the company depend upon the factor of production. First factor is the enterprises that bear all loss, whereas managers are involved in exercising day to day control. The second major input for production is the land on which cocoa trees grow. Cocoa is grown in Central and South America, the west coast of Africa and South East Asia. Most cocoa farms occupy between one to three hectares. Another important factor is the labor. Plant and equipment required for manufacturing and distribution of products is an input also termed as capital (Rath et. Al, 2012).
As a major buyer Nestlé seeks to be as closely involved in the supply chain as possible, to ensure quality and fairness. Currently Nestlé is involved in examination of potentially forced child labor in fields and in low level plants as well. Although labor is an important factor of production but company keeps a notice of child labor happening in West Africa (Cherry, 2011).

Product and Market Development

Nestle is a huge corporate operating in a number of continents, thus it needs to develop new products for the existing markets and to develop new markets as well. As the company spreads its operations in new markets, it has to formulate strategies in order to capture the market segment accordingly. In market development strategy, the company takes an already existing product to a new market. Nestle has performed this task many times. For example, this can be seen as when Nestle introduced Kitkat to other foreign markets. Or when it took Nescafe coffee to China, the company was involved in market development. Product development is when a company remains in the same market it is presently working but starts to inflate its product line. Nestle was seen using product development when while staying in European market it started to venture into health and other nutritional products, for the purpose of expanding its product line(Cherry, 2011).
New product development requires more financial funds than introducing an already established product in a new market. Because an existing product may work well in some areas and may not earn well in others but there are still chances for it to earn something. Contrary to that a whole new product can be a hit or a total turn down and may not be acceptable anywhere at all. More market research is done when a new product is going to be introduced. So when Nestle introduced new product, more finance was required for it which can be recovered first through penetration and then gradually increasing its price (Rath et. Al, 2012).

Price Flactuations

Pricing strategy involves selling the product at the right price. It may be for the purpose of increasing sales or to promote a product or to get a competitive advantage. Nestle tries to capture niche markets by gaining at least 85% of the market share by any of its products, until that product becomes a renowned commodity in that area. For example, in this way Nestle has captured 66% of Mexico coffee market. Then eventually with the rise in income levels of people of that niche, company introduces premium versions of that product (with increased prices).
The presence of substitutes in the market makes the product more price elastic and thus with $1 increase in price can bring down sales volume and vice versa. Nestle has many substitutes available whether in cereals, water or chocolates but the quality standards strictly followed by the company makes its products differentiate with others. Hence Nestle products are not highly price elastic, neither price in-elastic. Nestle creates a winning situation by keeping competitive prices, by keeping in view competitors prices for the same product too. Although with the increase in the prices of raw material and other manufacturing and distribution charges, the prices of products show an increasing trend (Rath et. Al, 2012).

Competitive Environment

Nestle is operating in highly competitive environment, new pressures due to any barriers or new entrants in the market will pose more pressure on company’s business, earnings and its growth prospects. To compete with its rivals, company uses its competitive intelligence to manage risks and enhance the quality of strategic decisions. Due to the extraordinarily large size of the corporation, large economies of scale manufacturing, marketing and administration has been possible. Mergers with other entities have opened the gates of innovation and flexibility in operations. Nestle has global R&D centre that facilitate market research prior to product development or market development (Thompson, Peteraf, Gamble, Stickland and Jain, 2013). The company has faced much competition, for example in U.S Nestle has strong competitors that own 37 percent of total market share but many of them have alliances with Nestle to capture over 100 countries. Pricing decisions are done by company keeping in view the expenses being incurred on the production and when these expenses are added to decide profit margins, the final price is decided. However, company strives to compete on prices as well due to the price elasticity of consumer goods in the market. Company also considers an important indicator of company’s profitability, which is operating profit, which is the actual profit in hand. The more profit in hand can lead to production of new products or designing premium versions of already manufactured products to gain more profit margins (Cherry, 2011).

Non-price competitive strategies

Nestle is involved in a number of activities which encompasses environmental sustainability and corporate social responsibility. For example, Nestle is a member of an NGO working for the elimination of forced child labor particularly in cocoa farms of Africa. Moreover, the company is contributing a lot for the better living standards of the small farmers of Africa, for providing them education and health facilities. Sending them to field schools also provide them with awareness about different diseases and ways to prevent them. In China, Nestle started factory and farmer scheme (2009) to give farmers technical support but it eliminates suppliers for the company. In Nigeria, company initiated an awareness program regarding HIV among people. Most of all, Nestle is a big corporate that provides employment to a huge number of people around the globe. The EcoShape water bottles are also a non-price competitive advantage for Nestle that provide their brand with an edge in the market (Thompson et. al, 2013).
All these society concerned activities make it easier for the company to win the hearts of local people and hence they find themselves attached to their products in some way.

Profitability Analysis

While analyzing the company’s financial statements from the over the past five years, the company’s gross profit, operating profit margin, net profit margin has been showing declining trend with some improvements seen in after the year 2011, the company’s profitability has not been able to capture the state of profitability in the beginning of 2007. The company has gone through adversity between year 2010 and 2011, where its return on assets (ROA) has decreased from 30.76% (2010) to 8.41% (2011). Apart of that, return on equity (ROE) has declined from 61.80% (2010) to 15.99% (2011) (Cherry, 2011).

Recommendations

Nestle has made some wrong decisions in the past; most highlighted among all is the introduction of infant milk formula as a substitute of breast milk, which was opposed by dieticians and mothers as well. The company however tried to cover up its mistake instead of accepting it. It portrayed a wrong image in customers and hence company’s revenues drop in 2010. Nestle has also been accused of digging pure drinking water from areas of Pakistan and leaving poor villagers with dirty water, fostering danger to human lives particularly children. Recently, nestle was also asked for compensation by a non-government organization, for spying on them. All these cases lead to decline in company’s sales because it pictures bad image of the company. Nestle being a huge corporate has captured markets worldwide, but with the passage of time it is becoming difficult for the company to retain its quality. Moreover, prices are increasing with the increase in price of material, production and distribution costs. The presence of unnecessary sugar and other food preservatives can clash with the company’s slogan of providing good food. For the wellness of its customers and providing healthy food items, the use of organic food ingredients is recommended. The company should use R&D to develop unique combinations with organic ingredients.

References

Cherry, K. (2011). Nestlé. Strategic marketing management.
Exchange rates affect Nestlé profits. (n.d.). Retrieved February 13, 2015, from http://www.beveragedaily.com/Manufacturers/Exchange-rates-affect-Nestle-profits
Rath, S. P., Das, B., Sinha, M., & Bhamkar, A. (2012). Nestlé–from People to Planet: The Global Corporation. International Journal of Business and Management Tomorrow, 2(6).
Thompson, A., Peteraf, M., Gamble, J., Strickland III, A. J., & Jain, A. K. (2013). Crafting & Executing Strategy 19/e: The Quest for Competitive Advantage: Concepts and Cases. McGraw-Hill Education.