UNILEVER: REDEFINING STRATEGIES FOR A GLOBAL FUTURE
Unilever illustrates many of the challenges faced in developing and managing a global strategy.
Brand culling and underperformance
When Patrick Cescau took over as CEO of Unilever in 2005 the company was still suffering from the shock of its first ever profit warning. The previous CEO, Niall Fitzgerald, had developed a five-year ‘Path to Growth’ plan which involved reducing the company’s portfolio of brands from 1600 to 400 in the belief that focusing resources and effort would deliver the target 5-6 percent growth per annum. However, the sales of a number of high-profile brands, such as Surf and Slim-fast, significantly underperformed expectations.
By 2007, the performance of Unilever was back on course with sales growth of 3.8 percent and profits up 7 percent. The turnaround was achieved by focusing resources on those specific products with the most potential for growth, for example its care brands such as Dove and Lifebuoy, its ‘vitality’ brands that encourage health living, such as Knorr Vie, Flora and Blue Band Idea.
Restructuring the organisation
Cescau also changed Unilever’s organisation. He slimmed down the executive board and removed one of the two joint executive chairmen. Previously one represented the British side of the business and one the Dutch, a tradition started in 1930 when Lever Brothers, a British soap maker, merged with Margarine Unie of the Netherlands. Unilever’s global business started in the nineteenth century when the two companies sent out young men on ships from Rotterdam and Liverpool to various parts of the world to build businesses, set up plantations, build factories, establish distribution and supply systems. Because of the long communication lines these companies developed a high level of independence which then became difficult to manage due to the complexity, and they changed to achieve a more efficient and effective global business. But this early colonisation meant that Unilever has a more established position in many emerging markets than its rivals and so the opportunities are greater. However, this meant that until Cescau’s reorganisation, Unilever operated as a federation of national business. The chairmen of country operations were responsible for managing everything from the local supply chain to advertising and human resources and they wanted to be self-sufficient. This led to complexity and fragmentation. The executive in charge of marketing deodorants across Europe recalls that the firm’s Swiss marketing director argued that a different size roller ball was needed on the deodorant dispenser because Swiss armpits were of a different size! It took some persuasion before the standard sized product was accepted.
While the old structure encouraged entrepreneurship in the national businesses it inhibited exploitation of innovation – any local innovation would have only a 50 percent chance of being adopted in one more country and innovations in food often stayed local.
For example, despite the success in Europe of Pro Activ, the range of cholesterol-lowering margarines, yoghurt and drinks, it had not been adopted in the US despite the obesity and coronary disease problems there. Cescau believed the reason was the ‘not invented here’ syndrome – but the brand was eventually launched in the US in 2007.
The role of the country operations became one of ‘getting things done’ and managing relationships with the big customers – the retailers, instead of consumers. Indeed Cescau took on personal responsibility for the biggest retailers – Walmart and Tesco. Support services such as HR, IT Management and business processing were outsourced. The company continued with considerable rationalisation. For example, there were 64 variants of tomato soup in Europe. The 64 pieces of advertising for the Pond’s range of beauty products in Asia was reduced to 4. Two or three adverts were created for Axe (Lynx in the UK) where previously there were 30 or 40. However, cultural difference still needed to be respected, particularly in advertising. For example, in the Dove ads women in Brazil hug one another, but that is not acceptable in the US where they stand slightly apart.
At an operating level there was additional complexity, for example the company had three operating companies in China, each of which had its own Chairman, who reported to two regional presidents, who answered to two members of the executive committee. The rationalisation Unilever undertook resulted in a loss of over 50, 000 jobs worldwide, the closure of its 50 of its 300 factories and 75 of its 100 regional centres. Its top management tiers alone were cut from 1200 to 700 people.
Focusing on growth
For the next CEO, Paul Polman, the recession of 2008 changed the shape of world markets. He could not see prospects for economic or business growth in developed markets for at least five years, but Unilever’s emerging markets in Asia, Africa and Latin America had become ‘decoupled’ from the developed economies and were showing sales volume increases of 10 percent per annum. As 50 percent of Unilever’s revenue came from these markets the company could be optimistic.
Polman was the first ‘outsider’ to become CEO of Unilever and even more surprisingly had previous spells working for rivals, P&G and Nestle. Following the earlier underperformance of Unilever, some analysts were still critical of the growth prospects for the company but Polman saw no reason why the company could not double in size from its current £33 billion. The aim was to make the company leaner, faster and more focused on consumers and customers through quicker innovation, more centralisation and pay incentives. Polman had a marketing focus and believed that as the aim was growth more money should be spent on marketing whereas the restructuring required a financial focus and executive. Unilever is probably unique among its major rivals in that its products range from food, to household goods to personal care products. Although this might appear to be a disparate range of products Polman believed that the connection between the businesses was that the customers buys the complete range and so there was no reason for Unilever to divest itself of some of its businesses.
Company integrity
Polman had a strong belief too in company integrity, believing that the communities that the companies work in should also be successful. His view was that it is necessary to work together to solve global warming, poverty, water shortage, population growth and obesity. Unilever aims to balance tis desire for growth with addressing these aims, for example, by producing detergents that use less hot water, making healthier ice cream and reducing the environmental impact of its packaging. Producing concentrated versions of its laundry products reduced packaging usage by 10-20 percent saving 1300 tonnes of plastic and 1700 tonnes of cartons in 2008. It also took 2350 Lorries off the road and saved 26 football fields worth of shelf space. Using concentrated packs could save 4.3 million tonnes of CO2 a year, the equivalent taking a million cars off the road.
Another environmental concern is the production of palm oil, a raw material that is widely used in half its best-selling foods, such as Kit Kat and Flora margarine and in its toiletries, such as Dove soap. Unilever has strongly opposed palm oil producers in Indonesia were alleged to be destroying rainforests by Greenpeace and the BBC, Unilever cancelled the contracts. The clearing of jungles results in loss of habitat for endangered species such as orang-utans and snow leopards and the release of huge amounts of greenhouse gases.
Developed markets
The era of ‘continual consumption’, which generated growth in the US and Europe, ended with the recession as consumers are increasingly sought to pay as little as possible for what they need, for example, by substituting the branded products for own brand label alternatives. For a long period the customer promotion and discounts (two for ones and 20 per cent free) were used to maintain loyalty, but to win more market share, or grow the market again innovation was needed. The key to innovation for companies like Unilever, P&G and Reckitt is to know what customers want before they know it themselves. Unilever is innovating new shampoos, deodorants and washing powder. Innovation should be about not reducing prices. Consumers want something better and Unilever have introduced Dove conditioner, which repairs damaged hair, deodorants, which are effective.
However, the big brands must be cost competitive to prevent loss of business supermarket own label products. This has meant that supermarket own label products, which make up 20 percent of the Unilever’s European markets, have not gained significant additional market share and in the US, where own label is only 12 percent of the markets, only a small proportion of branded market share has been lost.
Unilever’s emerging markets
The growing affluence and population in emerging markets and its strong market position over a long period is the reason for the Polman’s optimism. Unilever is the largest manufacturer of deodorants in the world with brands such as Rexona, Shields, Lynx, Axe and Sure and has, for example, a 70 percent market share in Argentina. But only 7 out of 100 Asians use deodorants and many Russians only use them for special occasions, such as weddings, so there is huge potential.
From its colonial heritage, Unilever had a strong position in many markets the jewel in the crown in Hindustan Unilever, - listed on the Mumbai stock exchange – which is India’s biggest consumer goods company and biggest advertiser. It caters for all segments by adapting products and prices, for example, offering Surf Excel or the affluent, Rin for the ‘aspiring classes and Wheel for poorer people, who generally live in the countryside. One-use sachets amounts to 70 percent of shampoo sales as India’s poor cannot afford to buy a bottle.
Social and political issues and the Corporate Social Responsibility agenda have an increasing focus. Unilever has operated in South Africa for 100 years and recently worked with INSEAD, a French business school, to evaluate its impact on the country, looking at training, medical care, pensions, skills transfer, black empowerment initiatives and environmental standards. For example, in addition to its 4000 employees, through its 3000 direct suppliers and extended supply chain, 100,000 jobs depend on the company, 0.8 percent of the country’s employment and 0.9 percent of GDP.
Proctor and Gamble
One of Unilever’s main global rivals is Procter and Gamble (P&G) makers of Pampers, Gillette razors, Duracell and Oral-B toothpaste who also see increasing growth opportunities in their emerging markets but although P&G’s global analysis is similar, the company has lagged behind Unilever in emerging markets development. Although P&G is the larger company only 32 percent of sales came from emerging markets in 2009. In Africa, for example, it has a weak web presence but things are changing fast as the company made progress in its ambition to add 1 billion new consumers, largely in emerging markets, by 2015. It added 200 million people to its reach in 2010 and expected almost all of its new production plants to be sited in emerging markets, such as the $176 million diaper factory in Cairo.
P&G’s entry strategy for Africa is based around its Egypt arm, which exports to North, East and West Africa. It strongest markets have included Lebanon and Jordan but demand is also picking up in Kenya and Ethiopia where demand is being driven by big populations and increasing wealth and also in Iraq, where the challenge is to ensure the safety of staff, particularly when they were doing ‘on the ground’ marketing in stores.
At the moment, P&G is avoiding direct competition with Unilever, for example, deciding not to enter South Africa with laundry detergents where Unilever’s Omo and Surf brands are very strong, but instead promoting products where it has a better chance of becoming number one. P&G is adapting its products and pricing to reflect local needs. For example, the company has adapted its product and priced Tide Naturals at 30 percent below the regular product, has a mid-price version of its Mach 3 razor for Asian and Latin American men and developed a new men’s skin care product in China.
A key challenge for P&G in its most attractive markets is to get all its products categories out into all its markets. For example, P&G has 36 product categories on sale in the US and only 16 in China.