international business strategy

International Business Strategy

Abstract

            Every multi-national has a business strategy that enables it to get ahead of its competitors.  Unilever is one such company and it deals in personal care products, foodstuffs and household commodities.  Unilever has operations in almost all countries in the world and contributes a lot towards economies of these countries.  The key strength of Unilever is focussing on the emerging markets, which are the largest consumers of Unilever’s products.  Unilever’s strategies are guided by its CEO, Mr Cescau, who introduced major changes in operations that have seen Unilever grow into a multi-billion company.  This paper aims at critically analysing the strategies that have propelled Unilever to success and the academic theories behind these strategies.  It also aims at giving recommendations that Mr Cescau should adopt in order to align the company with the transnational theory of trade.

Introduction

            Unilever came about as a result of a merger between Lever Brothers, which dealt in soaps, and Margarine Unie, which produced margarine.  The previous was British-owned while the latter was Dutch-owned.  The common interest that both companies possessed was palm oil, as an ingredient.  The managers saw an opportunity of partnership, in using overseas plantations to grow palm oil, and then importing it to their countries.  They saw this as a means of cutting costs through economies of scale.  Since then, the company has grown due to changes that Mr Cescau introduced that have led to the streamlining of the company.  The first step was the change in management structure at the top.  Previously, there were two chairmen, one from Netherlands and the other from Britain.  The chairman from Britain, Patrick Cescau, became the CEO.  This ensured guidance of growth of the company, came from one source and minimized conflicts between the top management, thus ensuring faster decision making.  This proved to be a good strategy, since under Cescau, the company has achieved higher growth, of 3.2% in 2006.  Growth is expected to continue, and some analysts say that, growth of as much as 5% in sales, in 2007. is the greatest in recent years.  Stiff competition by competitors made Unilever change its business strategies.

Strategic development and acquisition since its creation.

            Unilever development plan from 2000 can be summarised as acquisition of Bestfoods, Amora-Maille, Ben & Jerry’s and Slimfast foods in 2000.  Cholesterol lowering plants were also launched during the same year and they won EU and FDA approval.  Unilever then reduced its brands to 900 and sold some of its subsidiaries in 2001.  In 2002, the company acquired and sold 87 businesses generating 6.3 billion Euros.  Hair, skin and deodorant grew by almost 11% and sales were almost 2 billion Euros.  This was attributable to soaps such as Lux, Rexona and Dove.  In 2004, the new brand for Unilever was rolled out together with a logo which represented diversity of the people.  There were cost cutting activities and simplification during the same year.  In 2005, Unilever made changes to its leadership structure and management.  Patrick Cescau became the CEO, while Antony Burgmans took office as non executive chairman.

            Under the comparative advantage theory, Peng (2001: 34-42) says that, a country or firm will specialize in producing products that it can easily manufacture, due to an advantage that it has over its competitors.  Even if the firm has no absolute advantage, the theory states that the firm should specialise in manufacture of products with relative advantage.  Unilever Indonesia has a comparative advantage in that, there is hardworking labour.  The labour cost is also relatively cheap and Unilever takes full advantage of the situation.  It has used the manufacturing plant in Indonesia to not just produce goods for the local market, but to produce others for export to countries in Asia.  Such products include ‘Lux’ soap and ‘Close up’ toothpaste.  This clearly demonstrates the application of the comparative advantage theory.

            Under the absolute advantage theory, a country or firm produces what it is best at.  This means that the firm produces what it has absolute advantage in.  Casson (1999: 35-52), some people view this approach as not practical in real life.  Unilever company has produced household goods for many years.  Brands for detergent soaps, 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 upsetting competitors’ brands and dominating the market.  An example of such a brand is ‘clear’ shampoo.

            According to the globalisation theory, basic commodities have a global market and that products are differentiated due to differences in cultural and legal conditions.  The theory goes on to say that differences in cultural and economic institutions, are present in countries and lead to markets which are fragmented.  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 classes in society.  For example, when producing detergents, there are some for the well off people, for the middle class and for the poor.   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, since sea water demands its use, and does not market much of it in Jakarta, since demand is low there.  This is in line with the sophisticated globalisation thesis which says that fragmented markets are eventually realised.

            According to the international theory, the world economy consists of sets of interconnections between markets and countries and multi-nationals, serve to link the separate world economy parts.  Unilever recently re-launched a new product, ‘clear’ to compete with P&G’s products.  This is a shampoo and has done very well in the market, having been introduced to seven different markets, in the first six months of 2007.  This product is about to be taken to the Western markets.  It will be the first product sold in Western markets that has been launched in emerging markets.  When it hits the shelves and people love it, they will appreciate emerging markets and will not view them as inferior markets.  This is consistent with the international theory that says that multi-nationals link up the different parts of the world.

            The factor endowment theory states that a country or firm should export the products that extensively use factors in abundance and import products made using materials that are relatively scarce.  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, as and the managers saw an opportunity of partnership, in using overseas plantations to grow palm oil, and then importing to their countries.  This is consistent with the endowment theory since palm oil is a scarce resource in both of these countries.

            The globalisation theory says that there was unprecedented increase in trade and investment, after World War II that has led to a global economy.  Unilever has branches in almost all countries of the world.  It has managed to penetrate new markets in all continents.  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 just one among many multi-nationals and has contributed investments to many countries.  These trends point to truth about the globalisation theory and the massive increase in investment that has happened since World War II.

Overview of macro environment and extent to which markets are global..

            The growth of emerging markets has played a key role towards the growth of Unilever Company.  This is because emerging markets are growing so fast, that in the next two years, they are likely to constitute half of all consumer spending, in the world.  Unilever has focused its products to emerging markets such as China, Africa, Latin America and India.  Unilever has branches in many countries in the world.  It has branches in over 100 countries in all the continents of the world.  It employs close to 300,000 employees in those branches and has its headquarters in Rotterdam and London.  Unilever products are estimated to be used by more that 150 million people everyday.  Some countries have huge markets such that Unilever had more that one branch in those countries, for example China.  This was however reversed by the CEO, Mr Cescau, and all countries currently have one branch.  The market for ready meals is currently shared between four multi-nationals; Nestle, Heinz, Danone and Unilever.  Unilever, however, is arguably the market leader in terms of manufacture of deodorant and skin products and foodstuffs.

            There is a threat to future revenues that Unilever will receive due to the present performance of the US economy.  Due to the apparent recession that the US economy is facing, prices of commodities will most likely rise, while the US dollar is not expected to rise any further.  This will most likely make Unilever increase its prices, which is detrimental to its sales, particularly in emerging economies.

            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.

            Due to the fact that Unilever is a huge company, economies of scale work for it and it is able to face competitors through such measures as cutting prices.  The company tries to avoid direct face off with competitors, and relies on its grip of emerging markets to shield it in these times that the US economy is facing, what looks like recession.  Its brands are well known, for example ‘Life buoy’ which is one of the oldest soaps, and Unilever rides on this in its battle with the competition.

International structure and control mechanism.

            Previously, Unilever had two chairmen, one from Netherlands and the other from Britain.  The chairman from Britain, Patrick Cescau, became the CEO.  This ensured that instructions in the organisational structure came from one source and minimized the likelihood of conflict of instructions.  In branches such as China, there were three companies, all belonging to Unilever.  Each had a chairman who was reporting to the regional presidents.  This was changed, and currently, all divisions are headed by one person.

            When there is one head of a company, decisions are likely to be made faster.  This is because there is no wastage in time for unnecessary consultations, especially when the decision to be made is urgent.  Unilever China, increased its revenue soon after the changes, and in 2006, it reported sales of about 600 million Euro, 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 company 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 new markets.  This is an advantage that Unilever has over its competitors.  For example, about thirty years ago, Brazil had very few deodorants in the market, its current sales there, is 400 million Euro.  In Argentina, Unilever had 50% of the deodorant market in 1999, seven years later, the market share had increased to over 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 resource 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 1.5 billion Euro every year.

Global manufacturing and materials management

            Unilever has a distinct advantage in the nature of its operations in the manufacturing sector.  Its advantage lies in the fact that it manufactures and sells 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 generates most revenues.  It is the largest company 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 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 since sea water demands its use, and does not market much of it in Jakarta, since demand is low there.

            Unilever discovered that its competitor, P&G was ahead in the $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.

How Unilever can apply the 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.

The corporate structure tries to balance pressure for local responsiveness and global integration.

            In order for Patrick Cessau to effectively apply transnational strategy in this company, he needs to balance demand for local management of the company, with demand for foreign management.  Local responsiveness demands or pressure are brought about as a result of the differences that are there between preferences and tastes of the local market.  Other demands include the differences in distribution channels of Unilever products in different countries.   The CEO should be careful to balance the pressure present for local responsiveness and simultaneously transfer the core competencies.

            The CEO should reduce costs of these products so that they are 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 my arise in future.  The CEO should however be prepared to face difficulty in balancing the contradictory demands that the company is expected to fulfill.

Conclusion.

            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.

            Unilever should however view the years ahead as particularly difficult .  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 match the cost of production.  This has a likelihood of decreasing sales revenues particularly in emerging economies.

            Unilever  also faces challenges in manufacturing food that is healthy since most of its food products are laden with cholesterol.  Its big distribution network and large supply chain exposes them to possibility of pilferage.  However, Patrick Cescau has proved to be an effective CEO and will lead Unilever company through these challenges.

Bibliography

Casson, M. 1999.  Cooperative forms of transnational corporation activity. Journal of international studies. Routledge.

Peng, M. W. 2001. A theory of cooperation in international business. Journal of management. Retrieved on 4th October, 2008 from < jom.sagepub.com>

Steib, M. 2008. The legacy that got left on the shelf. Retrieved on 4th October, 2008 from The economist.

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