International Business Strategy – Case Study on Unilever Essay Sample
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International Business Strategy – Case Study on Unilever Essay Sample
Every multi-national corporation has a business strategy that enables it to get ahead of its competitors. Unilever, as one of the global leaders that offers consumer goods including brand name foods, personal-care items and household products and owns an extensive global operation network in almost every country, has also developed its unique set of business strategies.
Unilever is strong in making head start in emerging economies and has been making significant contributions to the economic growth in these countries. Emerging economies are developing countries that in general have less compatible infrastructure, in particular, for economic activities to take place effectively and majority of their populations are living in conditions that are below international standards. At present, over 44% of Unilever’s sales come from emerging economies and further growth in consumption is expected in near future.
This is in fact more than enough to take Unilever somewhere better than being the second largest in the global consumer goods market; nonetheless, as competition intensified, Unilever started losing the hang of it.
Since Mr. Patrick Cescau became Unilever’s sole Chief Executive in 2005, series of operation reforms were initiated. The strategic evolution under Cescau’s management brought Unilever out of its dreadful situation and is regarded as one of the company’s milestones. The company is finally back in position to make the most out of the fortune it was handed.
The purpose of this report is to critically analyse the strategies that have propelled Unilever to succeed and the corresponding theories behind them. It will also give recommendations to Mr. Cescau as to effectively addressing transnational theory of trade.
Unilever first began as a result of a merger between Lever Brothers, a British soapmaker and Margarine Unie, a margarine producer in the Netherlands, aimed at achieving cost reduction through economies of scale. The company grew by constantly acquiring businesses that produce various consumer goods. Unilever has its own plants, factories, distribution networks and supply chains, all of these added to the uniqueness of the company as none of the others in the market manufactures and sells like Unilever does.
The growth of emerging economies has made significantly impact to the growth of Unilever. They are growing so fast and dynamic. International trade analysts believe that these emerging economies will soon take up half of the world’s total consumption of consumer goods. Being the world’s second-largest consumer-goods company, Unilever operates in over 100 countries across the world and is experienced in starting businesses in emerging economies. It has approximately 180,000 employees worldwide with headquarters in Rotterdam and London. Unilever is one of the four market leaders for ready-meals and among the top three for foods and personal-care items. More than 150 million people consume its product daily.
Regardless to its great product range and in-depth knowledge of local culture, Unilever is constantly recognised as the second-largest after Procter & Gamble (P&G). The management of Unilever was forced to review its corporate strategies and has identified several issues causing this deficiency. Unilever has allocated too many resources to addressing cultural differences and differentiating products and over-autonomous in managerial levels created unnecessary complexity and duplication of procedures, which are seen to be the core factors leading to poor performance.
Unilever immediately put together a series of actions aimed at slimming corporate structure to simplify decision making process and minimise possible conflicts between the top management. The reforms led by Cescau were very effective; the company achieved higher sales figures in the following year and growth was expected to continue further. However, the battle for emerging-economies remains tough as competition is fierce.
MACRO-ENVIRONMENT & DEGREE OF GLOBALIZATION
Macro-Environment – Emerging Economies
Although every economy is distinctive in its own way, developing countries with emerging economies such as China, India, Venezuela in Latin America and Pakistan, do share some common characteristics. They have large territories with high population and tend to have intensive economic developments taking place which as a result, giving them unbeatable growth potential as compared to developed countries. Similarities can be identified from the macro-environmental factors of these developing countries:
Political – These emerging economies have stable governments with various international trade policies in place. In addition, they are current members of World Trade Organization which are committed to provide a free trade environment by lowering import tariffs and removing trade barriers.
A stable government and political environment are the basic criteria for economic growth; therefore, governments of the above stated developing countries strive to ensure political stability for their economic reforms to proceed effectively.
Unilever has a fairly good relationship with the governments of the countries in which it operates. For example, in its South African branch, the company collaborated with a French business school to study the impact that the company has on the country. The study found that the direct jobs attributed to the company were 3000 and indirect ones were 100,000. It was also established that 0.8% of employment opportunities, and 0.9% of GDP in South Africa is attributable to Unilever. This inspired Unilever to think of further initiatives that the company can take to participate in the affairs of South Africa. This fosters the relationship with the government when carrying out its business activities.
Economic – All of the above countries have initiated economic reforms, such as privatization of public services, reduction of control on foreign trade and investments, promotion of free trade etc, in order to boost domestic economic performance. Besides, these economies in recent years tend to have maintained steady growth. Among the above countries, China in 2006 has a GPD growth rate of 11.1% recorded, while the growth rates in India and Venezuela in the same year were 9.7% and 9.0%. Pakistan has also achieved impressive economic gains; however the growth rate is dampened due to high inflation and growing current deficit, leaving its real GDP as 6.6%.
As living standards improved, the need for necessities is expected to increase. The population, given stronger purchasing power, will consider goods that are of better quality and branded items will become more popular. The population will also become more health and hygiene conscious, driving greater consumption of personal care items. These consequences are all very favourable from Unilever’s perspective.
Social – most of the emerging economies have concerns over the ever-increasing population. Overpopulation does create certain issues affecting economic growth as it will contribute to unemployment rate and become a burden to the government as it suggests more capital to be invested in maintaining the necessary benefits for the citizens.
However, population can suggest the highest potential consumption volume to be consumed. It could derive into helpful figures revealing the company’s current market share and are indicative in setting sales targets. At present, Unilever’s food businesses are generating ï¿½22 billion in which emerging economies constitute 30%.
Technological – technological advancements make communications more convenient than ever before. People from emerging economies can easily gain access to information available on the internet. Better product knowledge will be developed over time, allowing them to make more appropriate choice addressed to their needs.
Information and communication technologies are also important to Unilever. Timeless communication over the internet and video conferencing provide a worldwide platform for exchange of information which is definitely an advantage in terms of market research and improving decision making processes.
Given each country has issues inherited from its historical background, variations in practices and cultural impact, it is impossible to have two identical economies. However, the macro-environments of developing countries proved possible similarities, which in fact make strategic planning for global operations more efficient.
Degree of Globalization
Globalization provides companies with access to wider markets; on the other hand, consumers are benefit from greater product choices by removing boundaries between nations for transaction and trading purposes. It is an integration of domestic economies into an international economy through the trading of goods and services, investments and the flow of capital from one country to another and is seen as a key force in promoting worldwide economic development as well as the national economic growth. The ever-advancing communication technologies offering companies the potential to gain global reaching their operations, have also encouraged globalization.
Global businesses often operate at one of the four basic levels of globalization:
Multidomestic – the first level of globalization. Businesses at this level consist of several independent units that operate in various countries, where communication between these units are minimal.
International – the second level of globalization. Businesses at this level have headquarters based in one country and branch off in other countries. Most international companies are likely to impose the rules and regulations in the home country on other branches and show little concern in local cultures.
The third level is transnational. Companies at this level have some sort of integrated business units in other countries. They tend to make greater effort to address local needs and appreciate cultural difference.
Truly global is the fourth level of globalization. The truly global companies see the world as one single market and believe that an overall strategy would be compatible for their worldwide operations, and loosely differentiated strategies and products to ensure global achievements.
Unilever is undergoing a transition from being a transnational company to a truly global company. This can be proved by its current streamlining of management and restructuring of company’s portfolio together with Cescau’s new definition of the company, ‘One Unilever’. The reforms under Cescau’s management show the effort of unifying the company, where it will rely on ‘one formulation, one packaging design, and one marketing strategy’ as compared to its previous fragmentation approach. Researchers believed that truly global is the ideal form of globalization, however, it is also the most difficult to sustain due to limited monitoring and controlling because of the distance between branches.
STRATEGIC DEVELOPMENT & ACQUISITIONS OF UNILEVER
Unilever’s strategic development in the past decade can be summarised based on several key acquisitions and the removal of businesses that are not as profitable. Key acquisitions include Bestfoods, which is the second largest cash acquisitions of the company in history, Amora-Maille, Ben & Jerry’s and Slim.Fast Foods. The portfolio, which originally consists of 1600 brands, has been reduced to 900 brands. ï¿½6.3 billion was injected to the company as a result of the sales of businesses without acceptable growth. The objective of the restructuring of portfolio led by the company’s Chief Executive Patrick Cescau, is to ensure that constant focus is being placed on the company’s core categories, i.e. food products as well as household and personal care items. Skin and body, hair and deodorant businesses gained impressive growth figures, constitute ï¿½2 billion in addition. This significant increase was largely attributed branded personal care items including Lux, Rexona and Dove. Together with the streamlining of management and corporate restructuring, resulting greater clarity of leadership, simplification of operations and removal of unnecessary complexity. The restructuring activities from various perspectives worked alongside to improve the company’s performance while reducing operation costs at the same time.
Apart from modifying the internal structure, Unilever, as to address the increasing public awareness of health and the associated change in diets, has introduced its first functional food – cholesterol-lowering spreads, which has gained recognition from FDA and EU. Since this initiation of health promotion, Unilever has continuously launched various Health Institutions in different countries across the world. It also introduced the Nutrition Enhancement Programme, assessing the levels of trans fats, saturated fats, sodium and sugars in 16,000 products and modify products as necessary.
In 2004, a new brand was developed and launched together with the new company logo of Unilever. The new Unilever logo was designed with the aim of promoting the new brand image, with core focuses on the diversity of its products, people as well as the company itself.
Under the theory of comparative advantage, Peng (2001: 34-42) suggested that, a country or organization will specialize in producing products that it can easily manufacture, due to the advantage that it has over its competitors. Even if the company has no absolute advantage, the theory states that it should at least identify the products which it has relative advantage and specialise in manufacture them. Unilever Indonesia has a comparative advantage in that, hard-working labour is sufficiently supplied with relatively cheap labour costs where Unilever has no reason for not taking full advantage of the situation offered. In fact, Unilever has setup manufacturing plant in Indonesia and used it to not just produce goods for the local market, but to produce for exportation purposes to other countries in Asia. This clearly demonstrates the application of the comparative advantage theory.
Under the absolute advantage theory, a country or organization should produce what it is best at. Casson (1999: 35-52), suggested that, to some people, this approach is not practical in real life. Unilever has produced household goods for many years. Branded detergent, for example ‘Lifebouy’ are well known throughout the world. Since Unilever has specialised in this class of products for a long time, it can be said to have absolute advantage. This is the reason Unilever enters markets with new brands and they end up taking over competitors’ brands and dominating the market. Unilever’s ‘Clear’ is clearly an example of such. ‘Head & Shoulders’ was unchallenged in the antidandruff category in Philippines until ‘Clear’ came into the market and has very quickly overtaken this leading brand of P&G.
According to the globalisation theory, basic commodities have a global market and that products are differentiated due to cultural and legal differences among countries. The theory goes on to the differences in cultural and economic institutions do exist and fragmentations are resulted. Hindustan Unilever is the largest company in India that produces consumer goods, as well as being the biggest advertiser of Unilever products in India. Its major strategy is product differentiation, through manufacture of products that suit the needs of different social classes. For example, when detergents are categorized according to how wealthy the users are. This is in line with the sophisticated globalisation theory, and products are differentiated to meet the economic needs of the diverse society. In Indonesia, there is ‘micro-marketing,’ and Unilever markets hair conditioner in Makafar, with strong emphasis on the use of sea minerals as one of the ingredients; while in Jakarta, the compositions have insignificant impact to the demand of it.
This supports the sophisticated globalisation thesis which says that fragmented markets are eventually realised.
The globalisation theory also suggested that extraordinary rise in trade and investments resulting in a globalized economy is expected after the World War II. Unilever operates in almost all countries across the world and managed to penetrate new markets successfully. From Africa, Asia, Europe, North and South America and the Middle East, most Unilever products are known. It has contributed a lot towards economies of countries it operates in. For example, in South Africa, direct jobs attributed to Unilever are 3000 and indirect ones were 100,000 (Steib 2008: 10). It is also clear that 0.8% of employment opportunities, and 0.9% of GDP in South Africa is attributable to Unilever. Unilever is one among many multi-nationals that contributed investments to many countries. These trends point to the truth about the globalisation theory and the massive increase in investment since WWII.
According to the international theory, the global economy consists of sets of interconnections between markets and countries and multi-nationals, linking the bits and pieces together to form the global economy as a whole. Unilever has recently re-launched ‘Clear’ to compete with P&G. This shampoo has done very well in the markets that it was launched and was introduced to seven different markets, in the first half of 2007. Unilever decided to introduce ‘Clear’ to the Western markets. It will be the first product of its kind ever to be brought to the Western markets where research and creation took place outside the typical Western laboratories, but in the developing countries. In the event if ‘Clear’ was well accepted by the Western markets, the recognition gained would be remarkable to the transitions of developing countries. This shows consistency with the international theory that multi-nationals link up the different parts of the world.
The factor endowment theory states that a country or organization should export products which compositions are extensively abundant and import products made scarce resources. Unilever came about as a result of a merger between Lever Brothers and Margarine Unie. The common interest that both companies possessed was palm oil. They setup overseas plantations to grow palm oil immediately after partnership and importing the palm oil to their countries. This is consistent with the endowment theory as palm oil is a scarce resource in both of these countries.
INTERNATIONAL STRUCTURE & CONTROL MECHANISM
Unilever has always had two chairmen, one from Netherlands and the other from Britain until the restructuring of it management in 2005. Patrick Cescau, the British joint chairman became the sole Chief Executive. This alteration of Unilever’s management was to ensure that instructions are received from one single point and minimize the likelihood of conflicts and unnecessary confusions.
In China, Unilever has three companies, each had a chairman to report to the regional presidents. This was changed, and currently, all divisions are headed by one person.
When there is one leader, decisions are likely to be made faster as consultation can be eliminated. This is particularly crucial when the decision has to be made urgently. Revenues in Unilever China increased soon after the changes, and in 2006, it reported sales of about ï¿½600million, and currently has an annual growth rate of between 20% and 30%. Previously, it used to report an annual growth rate of between 8% and 9%.
Unilever has a personal care division that does most of its sales. The sales are also mostly done in emerging markets. This division has knowledge of how to discover and penetrate into new markets. This is an advantage that Unilever has over its competitors. For example, about thirty years ago, deodorants were unpopular and rarely seen in supermarkets. Today, the total sales of deodorants reached ï¿½$400million. Unilever had 50% of the deodorant market in Argentina in 1999, the market share had increased in 7 years to 70%. The company is still keen on increasing revenues through further penetrating markets.
Unilever as a huge company has plans to acquire other smaller companies in a bid to expand its operations. It is also planning to do away with brands that are not aligned with its plans to produce healthy foods. In line with these plans, in 2007, it sold Boursin, which is a brand of cheese to a French company.
Basically, under the management of Cescau, brands are packaged and marketed alike as opposed to the past where every market did its own packaging and marketing. This reduced complexity and eliminated duplication of efforts. This is because everything is centralised and decisions are made by one person as opposed to the past practice.
Unilever has strong controls in its manufacturing process since the company does the whole manufacturing process. High standards of safety are guaranteed at the source due to absence of outsourcing. This is an advantage since in the case of safety fears, its products are not affected, for instance, recent safety scares about Chinese toothpaste. The weakness comes in the long supply chain, which exposes Unilever’s products to the possibility of being tampered with. This may cause an influx of counterfeits.
INTERNATIONAL HUMAN RESOURCES MANAGEMENT
The organisational structure at Unilever has one CEO and then managers below him. This ensures that there is a clear chain of command when issuing and implementing decisions. Unilever is currently aiming to increase efficiency of its operations. Many changes have been made that affect its human resource. Since 2004, the company has reduced its staff by close to 44,000 and it is still planning to reduce its workers further. Its plan is to close 50 more factories and 75 regional centres. Further job cuts revealed in 2007 include a reduction of the workforce by 20,000 within four years from then. All these changes appear drastic, but there is an advantage that the company will reap from all this. The company is likely to increase its efficiency and it is estimated that the changes will save at least ï¿½1.5 billion annually.
GLOBAL MANUFACTURING & MATERIALS MANAGEMENT
Unilever has a distinct advantage in its nature of operation in the manufacturing sector, which is manufacturing and selling household goods, personal-care products and food. Its competitors usually deal in one of these, but not all. An example is Nestle, from Switzerland, which is the largest of its kind in the world, only deals in food.
Unilever has competitive advantage in the fact that it tailors its products to specific markets. It practices product differentiation, since most markets have unique needs that have to be satisfied. This has worked very well for it, for example, in India, before women wash their hair, they oil it. Most shampoos from Western countries are unable to remove oil and for that reason, they do not report good sales. Unilever focused on that strength and re-invented its shampoo, thereby satisfying the needs of the market.
Hindustan Unilever is one of the branches that generate most revenues. It is the largest ompany in India that produces consumer goods a well as being the biggest advertiser. Its major strategy is product differentiation, and it produces different products to suit the needs of different classes in society. For example, when producing laundry detergents, ‘Surf Excel’ is made for the well off people, ‘Rin’ for the middle class and ‘wheel’ for the poor. Over 70% of its shampoo is in the form of sachets that are only used once, and are cheap. This kind of product differentiation ensures that all classes in society are catered for and no one is left out. It is a great strategy of meeting the needs of the market as well as maximising the revenue received.
In addition to product differentiation, Unilever uses the ‘micro-marketing’ approach in some of its markets. This is a strategy where a product that fits the whole market is produced. For example, its branch in Indonesia, markets hair conditioner in Makafar where strong emphasis is placed on the sea minerals in the product, however, it has less effects in Jakarta.
Unilever discovered that its competitor, P&G was ahead in the US$40 billion shampoo market. Since the company has strong roots in emerging markets and these are the major users of such products, Unilever introduced a new product ‘clear’. This shampoo has done very well in the market and was introduced to seven different markets in the first six months of 2007. After five months, this brand overtook P&G’s brand to acquire roughly 16% of the market. This brand is about to be taken to Western markets and it would make it the first brand that has been launched in an emerging market.
APPLICATION OF TRANSNATIONAL STRATEGY
Transnational strategy allows benefits to be attained in global strategies. Overseas structures are integrated with business structure and empowered to be innovative. It is an approach where the management brings its subsidiaries, headquarters and operations together so that these components can cooperate in their functions. In such strategies, companies create alliances with suppliers, customers and other stakeholders in the business thus creating relationships that work well for the business and to balance the pressure for local responsiveness and global integration.
In the case of Unilever, Patrick Cescau needs to balance demand for local management of the company, with demand for foreign management. Local responsiveness demands or pressures exist as a result of the differences in preferences and tastes among the local market. Other demands include the differences in distribution channels in different countries. He should be careful to balance the pressure present for local responsiveness and simultaneously transfer the core competencies.
Further reduction of costs makes their products more affordable to consumers than those of competitors. The CEO should also ensure that value is added to the products that are produced by Unilever, so as to be able to sell more, than those of the competitors. This is because the modern world consumers insist on quality when purchasing products. This is consistent with the absolute advantage theory, which advices firms to produce what they are good at. Unilever has many years experience in producing household goods and has good reputation.
The CEO has a choice of either using a strategy where he make sure that his company sells more products to the existing markets, or adopt the strategy where he penetrates new markets in order to increase sales.
The CEO should advice the management of his company to study and understand the global trends concerning the products that are produced. He should also make sure that the management studies trends that occur in other branches since some valuable skills may arise from one of the many branches and might be useful in running of the company. This is in line with the international theory, which states that the world economy consists of sets of interconnections between markets and countries and multi-nationals, serve to link the separate world economy parts. Branches in different parts of the world may gain from knowledge that is acquired in other parts of the world since the world is interconnected, according to the international theory.
The CEO should make sure that any valuable knowledge is transferred from the home country to other branches of the company and vice versa. This will ensure that all branches gain equally from any technology or knowledge that may arise in future. The CEO should however be prepared to face difficulty in balancing the contradictory demands that the company is expected to fulfill.
Unilever has grown to be a multi-billion company through the leadership of the CEO, Patrick Cescau. He has introduced changes in the operations and structure of Unilever that has seen the company grow faster than its competitors. He can help the company grow further by using the transnational strategy, which links the local pressures and international pressures. This will facilitate transfer of technology from overseas branches to local branches and vice versa.
The years ahead could be difficult not only for Unilever, but also its competitors. This can be attributed to the problems that the US economy is currently facing. These problems are likely to be replicated in the world markets and prices of food are expected to rise. The company may be forced to raise its prices in order to cover the production cost associated. This may lead to a decrease in sales particularly in emerging economies.
The growing concerns of healthy diet and the organic food trend may also increase the challenges in Unilever’s food sector as most of its food products are cholesterol and preservatives laden.
Continuous effort in managing its big distribution network and large supply chain is also a notable factor determining the company’s success in the future. Nevertheless, Patrick Cescau has proved to be an effective CEO and will lead Unilever through these challenges.