Read the case study and answer all the questions.

[50 Marks]

Nestl in China

In the beginning of the 1980s, China asked the world's largest food company - Nestl - to come and build 'milk streets' in the country. China was unfamiliar with how to produce milk and turned to Nestl, whose core business is actually milk powder. From that time the company has grown strongly in China and now has almost 4 000 employees, 200 of them foreign expatriates.

Today, Nestl is regarded as having come from Swiss roots and turned into a transnational corporation.67 Nestl is argued to have its foundation in its history for being locally adaptive. During the First World War, Nestl gave its local managers increasing independence to avoid disruptions in distribution.68 This resulted in a great deal of Nestl's operations being established at other locations than its headquarters in Switzerland.

Another cause was the company's belief that the consumers' tastes were very local and that there were no synergy effects to be gained by standardising the products. However, in 1993, the company started to rethink its belief in localisation, due to the increasing competition in the industry. Nestl has acquired several local brands, influenced by its own country's culture, causing Nestl to standardise where it is possible.

However, although the company is growing in China, it is not always selling products with as much margin as desired. The downside is that they must have lower margins in order to be competitive, which might not always be profitable. On the question, 'Why does Nestl have to be in China?', the following was expressed:

"It is because China is a large country and if you have a company that is present in more than 100 countries, you see it as a must for all international companies to be present there. We supply all over the world and it is our obligation to bring food to the people - which is the company's priority."

Nestl entered China with a long-term strategy to focus on the long-run perspective. Nestl's overall approach is stated to be 'Think global and act local!' The company's strategy is guided by several fundamental principles, such as the following:

Nestl's existing products will grow through innovation and renovation while maintaining a balance in geographic activities and product lines.

With regard to the local Chinese employees, they receive a few days of Nestl education to learn about the Nestl culture, but the expatriates have less training going to another country. It is up to the home country to decide if it is necessary to train expatriates before sending them on an often three-year foreign assignment.

However, the leadership talent is highly valued within the company and consequently Nestl has developed courses for this. The managers can independently develop their leadership talent without any connection with the specific company style or culture. Community centres have been developed to help expatriates with their contacts, supporting these expatriates psychologically and even offering language training.

A major challenge indicated for Nestl in China is in building long relationships to establish Nestl as the leading food company. A difficulty is to bring the products to a more acceptable level in terms of profitability. Legal difficulties are also more important than in any other country.

Other challenges are the issues concerning change, about which the following was expressed:

Change happens every couple of months here - that is how the environment is. A lot of employees come from other more stable countries and sometimes find it difficult with all the changes. Change is how things are in China - it is normal. When something doesn't change, that is when you get worried! It is expected to change! This is different from other countries where changes can be difficult to get.

Questions

1.Explain if Nestle used franchising to expand in China or not. Also discuss how franchising can be used to expand the distribution channel [15]

2. Nestle in the case study was invited to operate in China, if this is seen as entering into a strategic alliance, discuss the factors to be considered. [15]

3. As from the case study it is obvious that Nestle had to adjust of how to do business in China, discuss how the environment in China enabled corporate entrepreneurship in Nestle. [20]

Total Marks: 50