Nestle Ice Cream in Cuba

Executive Summary

Nestle became the leading producer of consumer products in the world when ‘Anglo-Swiss Condensed Milk Company’ was established.  Since this period, the company has been doing well in terms of employees, annual sales, market capitalization and report on quality. Since 1866-1930, the company has gained a rapid innovation, it expanded internationally in countries like U.S, EU, China and others and   it established product diversification which accelerated the corporate growth (Walker & Bell, 1).  However, after few decades, the Cuban government developed economic policies   and ‘Soviet-style’ which controlled the foreign investment and this led to a dramatic change to multinational companies. Note that the Cuban government was interested with   developing a national economic sovereignty and   this political and economic decision among other factors led to the collapse of the Soviet Union. The collapse led to economic crisis which affected the Nestlé Company. For example, the Castrol regime regulated and discouraged foreign investment as well as joint ventures. Even though Raul Castrol created economic reforms for foreign investment, the new policies affected labor and marketing making Nestlé’s foreign investment to lag behind (Walker & Bell, 1).   

 Due to the challenging environment in the foreign investment, Nestle decided to start an ice cream business in the Cuban market and for this reason, the company made an agreement with the Castro regime in 1990 (Walker & Bell, 2). After a long period of government approval process, the new Nestle-Coralac company was established in Havana.  However, the company met difficulties such as supply shortage and government regulation which hindered partnership between the company and farmers. The company also faced marketing challenges since Coppelia was a well-known ice cream parlor which sold ice creams at low price and there was no mass media communication to advertise the new products (Walker & Bell, 2).  Other challenge was that the purchasing power of consumers was poor and they could not be in a position to buy CUC-dominated goods.  To address these challenges, Netle-Coralac created a marketing strategy of providing high-quality products to tourists and few Cubans with high purchasing power.  

Later, the Obama administration decided to create diplomatic relations and currency unification   and both opened opportunities and challenges.  For example, Nestle-Coralac Company   could trade with U.S markets and make a large share. On the other hand, currency unification could open market opportunities and on the hand bring inflationary pressure and competition in local markets (Walker & Bell, 7).  At this point,  the company should now focus on making strategies that will help enjoy a competitive advantage in trade liberalization and more importantly implemented strategies as well as solutions to address challenges in currency unionization. The rationale behind the decision of making  business strategies for the matter at hand is because;  trade liberalization will create a path for economic development  through export and import and currency unification  will maximize efficiency gains, the company will  also gain an exchange rate stability  and stay away from competitive devaluations(Walker & Bell, 7). Thus, the role of strategic decision is to plan on how to set goals and achieve objectives.

Question 1

In Cuba, one major characteristic of the operating environment which the foreign firms should know is that it is controlled by government regulations. This means that business ventures need approval from the government and the venture  has a fixed time period which means that  the contract  will come to an end  unless the joint agreement decide  to renew the contract.  The economic and  financial system challenges  were rooted from  the collapse of Soviet Union and the foreign direct investment  is viewed  as  a way to  acquisition of technology, diversification and  new  resources of management(Walker & Bell, 1).   An apparent character trait is that it has a selective framework toward foreign investment and it does not show any effort in creating an attractive environment   but rather, the government focuses on making foreign investment a way of strengthening and improving the socialist system. For this reason, the movement has strict consideration on foreign investment to ensure that investment will bring technology, capital and expand the markets (Walker & Bell, 1).  

Other characteristic of the operating environment is that Cuba has limited financial information based on performance of foreign firms. The government   does not show concern on finding reliable information based on foreign investment activities and this hinders a comprehensive financial analysis.  Thus, foreign investors should know that public disclosure of financial data especially on statistics for international economics, annually, economic cycle in different sectors and countries data is limited(Walker & Bell, 7). The limited data offered is an indication that the Cuban government does not value or see the strategic importance of foreign investment.  In other words, failure of the government to update overall figure hinder a comprehensive analysis of presenting the real value of foreign investment. Note that during Cuban Revolution, the government implemented the ‘Soviet-style’ which is based on centralized decision on investment, State ownership and a centralized economic planning.  As a result, the ‘Soviet-Style’ led to economic reforms which made many joint ventures and international players to cease from foreign operations (Walker & Bell, 3).  Foreign investors recognized that   there is a big difference on goals of globalization as Cuban government had a ‘resource-seeking investment’ while foreign investors had a ‘market –seeking investment’ (Walker & Bell, 4).  Rather than allowing foreign investors to control ownership and have a direct control on the venture, the Cuban government   shows a dominating power which hinders economic development of foreign countries.

            Other characteristic  is that the currency system   in Cuba  affects labor and marketing  in that  foreign investors  use the governmental   labor agencies to  employ workers  and the end results are that  the business operations are controlled by the bureaucracy in terms of  price control, security,  income tax,  export controls among other regulations (Walker & Bell, 7).  A point to note is that the Cuban government operates businesses with its own needs and interests with aim of increasing productivity and developing the economy.  On currency system, the Cuban government use Convertible peso and Cuban peso in business operations. For example, consumers purchases products with Convertible peso while Cubans or employees receive the payment through Cuban peso. Note that foreign firm pays workers with Convertible peso while the Cuban government pays them with Cuban peso-this is an indication that Cuba uses the U.S dollar in running State enterprises. Generally, foreign investors should know that the   Cuba has a centralized economy with excessive bureaucracy.  On top of that, Cuban government is selective since it needs investors who will boost growth and bring economic development (Walker & Bell, 7).

Question 2

 It is worth saying that the ice cream business has been successful since the implementation of business strategy. Even though the Nestle-Coralac  initially faced challenges  due to  shortage of suppliers, governmental regulation, low purchasing power  and the existence  of other  business, it managed to  overcome all these challenges and  gained a cultural legacy  due to its quality products.  First, the strategy that helped the company to enjoy a higher profit is that of manufacturing a high-quality ice crime and finding a target group.  In this case, the company concentrated on tourist and Cubans who had a high power and who could be in a position of purchasing CUC-denominated products.  Under this strategy, the company focused on simplification and standardization of products (Walker & Bell, 6). On simplification, it ceased from manufacturing unnecessary varieties and retained only chocolate and strawberry. It also   reduced the size and parked the products on half-liter containers. On standardization, Nestle-Coralac ensured a consistent stocking of the flavors and local distribution to retain locations, restaurants and all tourist destinations. It also ensured that products were well organized and presented a high-quality image. Since mass media communication was a challenge, the company advertised the products in-store promotion where they created brand awareness and many consumers recognized the brand. Given that the company used CUCs in selling the products, the typical retail price was $1.50-$2.00 which most Cubans could not afford (Walker & Bell, 6).  Note that the company targeted tourists and Cubans with a high purchasing power and these consumers made the company to be highly recognized by 2012. The products were ranked as the thirteenth foreign brand where the recognition was 60% compared with Coppelia which was 73%.  Even  though the government did not offer a comprehensive  financial  analysis on global ice cream business  or on foreign firms operating  in Cuba,  InsideSources reported  an annual report  in 2014  and showed that  the trade operating profits was 15.5% while  U.S business unit and  global crime business were 18.8% and 16.4% respectively.  The total   profit margin was estimated to be 15% (Walker & Bell, 6). This means that the ice cream business was a success and the higher profitable was influenced by the business strategy.

 

Question 3

With the current market position and potential changes on the horizon, that is, currency unification and diplomatic relations, Nestle need a strategic planning based on critical success factor-setting goals and objectives and strategies to achieve them- and future scenario planning-analysis future circumstances and environments , factors for critical uncertainties  such as social and political forces and  set strategies  to address the uncertainties which may affect the organization operations (Walker & Bell, 7). Generally, for Nestle to position it’s for future success, it should set a strategic planning. For example, it should focus on typical strategic planning-conduct organization analysis on present situation and plan for the desired future and how it will achieve success. In this case, the company should think of two things, that is, its current success (foreign food brand), the changes on currency unification and diplomatic relations. On diplomatic relation, the company should strengthen the commercial affairs with U.S and create strong state-to-state relations. With diplomatic relations and currency unification, it means that it should set strategies to achieve a success foreign trade, be ready to create import-export relation, and trade agreement, build a strong trade co-operation and strengthen the bilateral relations. Given that the Cuban government has plans to unify the currency system, the new system will allow effective business operation since there will an institutional framework controlling the currency of transaction in the markets and prices (Walker & Bell, 7). The currency system will also open opportunities in terms of maintaining economic equilibrium, stimulate foreign direct investment, minimize the fiscal deficit and use the currency unification to set national prices. However, to find a position for future success, Nestle should be aware of possible challenges such as price distortion which as a result will affect the prices of internal markets in international market and corporate balances (Walker & Bell, 7).

 Generally, in order to have a strong position for future success, Nestle should retain the strategy it selected for local markets on marketing mix. This has to do with the price-the company should focus on the selected group of consumers, that is, tourists and Cubans with a higher purchasing power. It should strive to meet the needs and desires of the target group since these consumers are interested with the products (Walker & Bell, 6). In addition, it should maintain its pricing method, that is, same price and consistent pricing and be ready to adjust the prices in case of change in the market condition. To maximize output, the company should maintain the exclusive distribution of products so that the target customers can get the products at the respective stores and more importantly, build brand loyalty (Walker & Bell, 6).  On promotion, the company should promote the products in in-store promotion until the government allows the use of commercial advertising.

Question 4

 There are prospects for future investment and economic growth in Cuba in that the country has economic policy designed to reform the economic model. So far, there is  reformation  on  growth  of small-scale business, authorization of non-state cooperatives,,  cut of subsidies  that does not bring  a sustainable development,  legalization of  economic freedom in terms of  firms autonomy in making investment decisions,  legalization of mass communication and among other structural reforms(Walker & Bell, 6). The economic reforms  will  create path for  foreign investment and economic development  since the government  is ready to create  a well-functioning economy by setting  fair rules to  all firms including  joint ventures, private, public and  other corporations. Also note that the diplomatic relation has allowed U.S firms to build telecommunications infrastructure and this show that the Cuban govrement is willing to bring economic development and to cooperate with foreign investors in achieving the goals (Walker & Bell, 7).

 Generally, potential for prosperity is strengthened by the relationship between Cuba and U.S and their efforts in forming political and economic ties.  The relation will allow the two to solve the structural issues and more importantly eliminate the trade embargo which affect effective business operations between U.S and Cuba (Walker & Bell, 7). Cuba alone may not be in a position to tackle the exiting political and economic issues but on friendly terms, U.S will neutralize the condition and ensure that Cuba build a new economic structure. Thus, future investment and development are influenced by the diplomatic ties aimed at re-establishing the diplomatic relationship. Even though the economic growth will be on long-term period due to the historical imbalances and economic isolation, Cuba and U.S have plans to unify the currency and end the trade embargo. This is an indication that there is a prospect for growth as the diplomatic relation will first solve all the underlying problems such as structural problems on monetary policy, poor capital stock, reform the manufacturing environment among other issues that hinder economic growth (Walker & Bell, 7).

 

 

 

 

 

 

 

 

Work cited

Walker Russell & Bell Kyle. Nestle Ice Cream in Cuba.  Kellog School of Management. 2018