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STUDENT I.D 0660848/1

MODULE TITLE INTERNATIONAL BUSINESS

WORD COUNT 2550

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Question 1

Select a specific multinational company of your choice.

a) What do you understand by the term 'value chain'? Suggest how

patterns and trends in international business activity might influence
the company’s value chain over the next five years or so. Carefully
explain the reasoning behind any changes you might predict. (50%)

b) How might the future logistical operations of the company be influenced

by the changes you have identified to the value chain in Part a) above?
Explain your reasoning. (50%)
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Question 1a

A value chain is a string of companies or collaborating players who work together

to satisfy market demands for specific products and services (Hanfield and
Nicholas, 2002 pg 11). It involves the breakdown of the entire collection of
activities performed by companies into ‘primary’ and ‘secondary’ activities. The
goal of the primary activities is to generate a profit margin by creating value that
exceeds the cost of the product or service. It includes the following:
I. Inbound Logistics - the receiving, warehousing and inventory control of input
materials
II. Operations - value-creating activities that transform the inputs into the final
product
III. Outbound Logistics – activities required to get the finished product to the
customer including warehousing
IV. Marketing and Sales – getting buyers to purchase the product by advertising
V. Service – activities that maintain and enhance the product’s value such as
repair services

The primary activities are facilitated by support activities referred to as secondary

activities. The secondary activities are as follows:
I. Procurement – this involves the purchasing of raw material and other inputs
used in the value-creating activities
II. Technology Development – this includes research and development and
other technology development
III. Human Resource Management – this involves the recruiting, development
and compensation of employees
IV. Firm Infrastructure – this includes activities such as quality management anf
finance

Another component of the value chain is margin. This term implies that
organizations realize a profit margin that depends on their ability to manage the
linkages between all activities in the value chain. That is, the organization is able
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to deliver a product/service for which the customer is willing to pay more than the
sum of the costs of all activities in the value.

Patterns and trends in international business are partly as a result of strategic

choices taken by firms with an international orientation and may influence the
value chains of companies.

Nestlé is a Multinational Enterprise whose parent company is located in Vevey,

Switzerland. It is the world’s largest food and beverage company, with factories
or operations in almost every country in the world. One of the main patterns and
trends in international business activities is the creation of more globally
dispersed value chains. This would surely increase the competition worldwide,
thus Nestlé would have to adopt the most efficient and appropriate production
and marketing locations in order to compete, survive and prosper.

The move from bi-polar world economy that was dominated by North America
and Europe to tri-polar world economy that is dominated by North America,
Europe and South-East Asia is also a pattern and trend in international business
activity that might may also influence Nestlé’s value chain. The inclusion of
South-East Asia has influenced the all the primary activities of the value chain
because of increase production as a result of now obtaining green coffee from
countries such as China, Phillipines, Malaysia, Indonesia and Thailand. For
example, 90% of the green coffee destined for the two instant coffee factories in
the Phillipines are purchased directly from farmers in the coffee growing areas of
the country.

Another pattern and trend in international business activity that might influence
Nestlé’s value chain over the next five years is the changing area patterns of
international income. According to the World Bank’s Global Economic Prospects
Report, although the global economy is dominated by rich industrial economies
such as the United Kingdom, United States of America, Japan, Germany, France
and Italy, it is projected that China, India, Indonesia, South Korea, Thailand and
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Taiwan will all have moved into the top ten economies. Nestlé’s value chain
activities in these developing economies would most likely increase as a result of
greater productivity and profit margins, due to an increase in the demand for its
products, because of greater consumption resulting from being one of the rich
industrial economies.

Changing area patterns of international costs may also influence Nestlé’s value
chain over the next five years. One of the main factors that determines the
location of Nestlé’s subsidiaries is in regions where international costs are low
thus Nestlé would most likely seek to increase its value chain activities in regions
of low international costs or establish operations in such regions where they have
not yet been established, and decrease its value chain in regions where the
international costs are high. For example, Nestlé Argentina has increased milk
production because of several critical assets that contribute to its competitive
advantage. Argentina has low feed costs since the milk producing regions co-
exist geographically with its vast cropping regions. Land that is utilized for
pastures are adequate and human capital is high and fairly cheap.

Dramatic rises in several mediums of international communication is also a

pattern and trend in international business activities that might influence Nestlé’s
value chain. Worldwide studies have discovered a positive correlation between
the extent of the telephone network and internet usage, for example according to
the 2003 Human Development Report, international telephone calls has risen
from 33 billion minutes in 1990 to over ninety billion minutes by the end of 2002
and the number of internet hosts have risen from 1.7 in 1990 to 17.8 in 2000.
Modes of international communication are secondary activities of Nestlé’s value
chain and the increasing use of communication allows for efficient support to be
given to its primary activities from sourcing raw materials for the creation of its
products to the distribution of the products to the marketplace. Nestlé Chile
benefits from the use of three international fiber optic networks and satellite
services that ensures fast and dependable connectivity with the rest of the world.
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Another pattern and trend that might influence Nestlé’s value chain is
international travel. According to the 2003 Human Development Report, the
number of international tourists more than doubled from two hundred and sixty
million travelers a year in 1980 to over six hundred million travelers a year in
2002. This has resulted in Nestlé increasing its production via an increase in the
raw material and machineries in order to facilitate the greater levels of
consumption. However, as a result of the terrorist attack in the United States of
America on 11th September, 2001, there have been a decline in tourism
worldwide, thus the primary and secondary activities of Nestlé’s value chain has
also declined.

The international growth in leisure pursuits is also a pattern and trend in

international business activities that might influence Nestlé’s value chain. In
today’s advance technological economies, there has been an increase in leisure-
time availability compared to a century ago where the majority of the time left
over after the necessities were utilized for earning a living. This has resulted in
major implications for the consumption patterns, since greater leisure pursuits
have lead to an increase in the level of consumption for Nestlé’s products thus
the company’s production would have to increase via an increase in
procurement, operations, outbound logistics, marketing and sales.

International growth in ageing population is also another pattern and trend in

international business that might influence Nestlé value chain. The median age
at which 50% of the population is below and 50% above rose from 23.6 years in
1950 to 26.4 years in 2000. This has resulted in an adequate supply of labour of
working-age and was a major influential factor in determining Nestlé’s productive
operations worldwide since it is used in the process of transforming inputs into
final product.

Another pattern and trend in international business that might influence Nestlé’s
value chain is the growth of regional trading arrangements. Since Nestlé’s
parent company is located in Switzerland, it benefits from the European Union
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Regional Trading Arrangement. The company purchases raw materials at

cheaper prices because tariff walls between the member countries have been
removed.

Rapid growth in world trade and investment is also a pattern and trend in
international business activities that might influence Nestlé’s value chain. An
increase in the export of Nestlé’s products would be facilitated by increasing
production levels and this would thus affect both the primary and secondary
activities of the value chain. The increase in foreign direct investment worldwide
and the prospect of the generation of high profit levels might also be motivating
factors to Nestlé in expanding its operations to other countries. This would
therefore involve the increasing the primary and secondary activities of its value
chain.

It can therefore be concluded that Nestlé’s value chain is vital to the company
and patterns and trends in international business activities are influential factors
to the value chain.
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Question 1b
The future logistical operations of Nestlé would influenced by the changes to its
value chain that resulted from patterns and trends in international business in
several different ways.

The move from bi-polar to tri-polar world economy would enable Nestlé to have
guaranteed supplies of raw material such as coffee, cocoa and milk. The
procurement process of the value chain for the parent company would not only
be more efficient but also those for other subsidiaries, since excess supplies can
be sold to them because they are usually abundant as a result of being obtained
from several countries. For example, the Nestlé’s Factory located in Iran,
sources raw materials such as corn oil, sugar, wheat flour and rice flour from
local Iranian sources while other raw materials that are not available are usually
imported from international suppliers.

Due to changing area patterns of international income, the attention of market-

oriented companies will be increasingly drawn to economies such as China,
India, Indonesia, South Korea, Thailand and Taiwan. The demand for Nestlé’s
products in these countries would most likely increase as a result of greater
consumption in rich industrial economies. In the process of increasing
productivity levels in these economies, Nestlé’s primary activities of its value
chain such as inbound logistics and operations would increase. Outbound
logistics such as advertising and other marketing strategies would be necessary
since Nestlé would most likely face competition because the changing area
patterns of international income would have drawn them to economies such as
China, India, Indonesia, South Korea, Thailand and Taiwan. For example, the
world’s second largest food and beverage corporation after Nestlé, that is Kraft
Foods, is currently investing over 200 million US dollars in China. It is building a
biscuit factory in Beijing, which is expected to go into operation later this year.

The future logistical operations of Nestlé would also be influenced by changes to

its value chain resulting from changing area patterns of international costs. If
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international costs decrease in regions where Nestlé has its operations, the
company would most likely increase its productive capacity and export to regions
where costs are high and where the company does not have any established
subsidiary. In instances where international costs have increased, Nestlé would
have to decrease its productive capacity and import from other subsidiaries or in
extreme circumstances it would be forced to terminate its operations.

The dramatic increase in various modes of international communication would

most likely enable Nestlé to increase its production, sales and profit margins.
Arrangements for purchasing raw materials and other inputs in the value-creating
activities can be done via phone calls, emails or online chat, thus preventing the
wastage of time spent traveling to meet for personal interaction. Nestlé would
also be able to efficiently promote its products at low costs by utilizing mediums
of international communication such as the telephone and internet. For example,
Nestlé has a website for Nesquik, Golden Nuggets and Cookie Crisp. The site
has a range of games to encourage children to spend time on the site. The final
game asks children to look for hidden items around the site, which also shows
advertising messages in the form of product logos and brand icons.

As a result of the decline in international travel, Nestlé’s value chain activities

have correspondingly decreased resulting in lower production and sales of its
products. Nestlé can either produce at this low level or it can pursue the option
of producing at the same capacity as before the attack on the World Trade
Center. The excess production that cannot be absorbed by the market can be
exported to regions where Nestlé have not established its operations.

An increase in the value chain activities as a result of international growth in

leisure pursuits in advanced industrialized economies would most likely cause
production levels to increase to satisfy the increase in the level of consumption.
Also, in instances where the economy is benefiting from international growth in
leisure pursuits and Nestlé have not establish its operations as yet, this would
surely be one of the most important factors in determining its location.
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As a result of the international growth in ageing population Nestlé would most

likely benefit from an adequate supply of labour in order to carryout its
operations. The demand for Nestlé products that are consumed by this age
group is likely to also rise leading to increase in production, sales and profit
margins.

Due to the advantage of obtaining raw materials at lower prices as a result of the
existence of the European Union Regional Trading Agreement, Nestlé would be
able to increase its sales by reducing the prices of its products. This would most
likely lead to the generation of higher levels of profits for Nestlé. For example,
presently agricultural raw materials, principally milk, coffee, cocoa, cereals,
vegetables, fruit, herbs, sugar and spices are vital factors affecting the costs of
Nestlé’s manufactured food products and as a consequence, the company’s
business performance.

The future logistical operations of Nestlé might be influenced by changes to the

value chain that has resulted from the rapid growth in world trade and investment
in two ways. Firstly, by exporting its products to regions where it has no
established operations, the exports can earn foreign exchange for Nestlé and
thus increase its profits. Secondly, if Nestlé establishes operations in other
countries as a result of the growth in investment, its operations would therefore
be larger thereby increasing prospect for greater profits.

It can therefore be concluded that patterns and trends in international business

might have a great influence on Nestlé’s value chain over the next five years or
so, and the future logistical operations of Nestlé would be influenced by the
changes to its value chain that resulted from patterns and trends in international
business in several different ways.

Word Count – 2550

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Bibliography

Beardwell, I., Holden, L. and Claydon, T., Management and Organisational

Behaviour. 6th Edition. Essex: Pearson Education Limited.

Handfield, R., and Nichols, E. (2002) Supply Chain Redesign, Financial Times
Management.

Wall, S. and Rees, B. (2004) International Business, 2nd edition, Financial

Times/Prentice Hall.