Financial Strategy of Unilever
Category : Business Strategies, Finance, Financial Risk Management
The formation of Unilever in 1929 marked the emergence of the first and largest M-form corporate structure in Britain. A policy of multiple acquisitions of other competing companies, culminating in the merger between Lever and the European Margarine Union in 1929 to form Unilever, resulted in an organization comprising 49 associated manufacturing companies. Decisions concerning products, production, and marketing were under the control of each of the companies which in some markets were often in competition with each other. During the last decades of the twentieth century, post-acquisition management inside many large multinationals moved from being an ad hoc process to being almost routinized (Church & Godley 2003). Unilever, which acquired 540 companies between 1965 and 1990, developed systematic procedures to absorb acquired firms which were known inside the firm as Unileverization. This involved the introduction of corporate accounting systems, and changes to salaries and pensions to conform to corporate practice. Unilever also strove to retain good managers, including former family owners, at least for a time. The pace of Unileverization speeded up overtime. During the 1970s it could take up to a decade (Church & Godley 2003).
Unilever recruited people from similar backgrounds, whose subsequent careers passed through common rituals and shared experiences. Managers from many countries and product areas met on courses at Unilever's in-house training center in Britain, where long-lasting contacts were forged. There were annual conferences of senior managers which were used as a means of policy making, and policy dissemination. Unilever's rotation of its high flying managers through various jobs in different product groups and countries built webs of personal contacts (Jones 2005). Unilever owned hundreds of brands by the 1930s, many with strong national identities built up over the years. P&G's famous development of brand management system was said to have derived from watching the chaos of Unilever brands competing with one another in Europe in the 1930s. In neither case was the parent company's name used as a brand. Within Unilever, expertise in margarine and edible fats was centered in the Netherlands, and in personal care and detergents in Britain. However, these patterns fluctuated over time. During the 1950s and 1960s the British side of Unilever appeared to carry the greatest weight in decision-making, but from the 1970s there was a steady growth of Dutch influence (Jones 2005). Unilever is a multinational company; it has 174,000 employees as of 2008. The competitors of Unilever include companies like Procter & Gamble, Nestlé, Kraft Foods, Mars, Reckitt Benckiser and Henkel. Unilever has a reputation of 10 year sectoral leadership in Dow Jones Sustainability Indexes. Unilever has markets in most parts of the world; its suppliers are established ones. Unilever has a business partner code and supplier audit program. These programs make sure that the suppliers provide the best kind of materials to the company. Together with some other companies, Unilever created a group named Program for Responsible Sourcing (PROGRESS). This group aims to develop common methods to evaluate the social and environmental performance of suppliers.
From the point of view of the process of growth, the significance of industrial empire-building is greatest for two problems: the role of acquisition and merger, and the nature of the administrative organization of the rapidly growing firm. The reason for this special significance is found in the speed with which growth by merger can proceed. It should be clear from the analysis of earlier chapters that neither extensive acquisition of existing firms, nor entrepreneurs bent on achieving monopoly and dominance are necessary for the explanation of the emergence of large and dominant firms. Even in the absence of much acquisition the more favorably endowed firms possessing the more able and enterprising managers and entrepreneurs can, in time, be expected to grow very large. Nevertheless, internal expansion takes more time than does external expansion, and any entrepreneur who is ambitious to create an extensive firm in his own lifetime will find his opportunity to do so in the acquisition of already existing firms. There is no need here to recapitulate the various methods by which the aggressive entrepreneur can, through extensive acquisition, establish a dominant firm or even a 'monopoly' in a short time (Penrose 1995). The details are limited only by the law or, more accurately perhaps, by the extent to which it is deemed practicable to evade the law, and by the scruples and imagination of the entrepreneur. Companies such as Unilever are strongly integrated into the societies in which they operate, and the contribution they make to wider society extends beyond the direct economic benefits of investment. For example, all around the world Unilever is working in partnership with others to address specific local needs, through programs to raise levels of education, improve health care, enhance the environment or support local economic development (Herman, Pietracci, & Sharma 2001). The next figure shows the financials of the company for the past years. The finances are from www.unilever.com.
The finances of Unilever shows that the operating margin for the company is doing well but had some problems in 2000, 2001and 2004. The highest operating margin for the firm is 17.7 in 2008. The lowest operating margin is 6.7 in 2000. Like the operating margin of Unilever, the other financial aspects of the firm show an inconsistent upward and downward trend. The firm’s finances does not have a consistent upward or downward trend, it goes up or goes down after a certain financial year. The decrease in the financial rates is not that huge and shows that the firm is able to maintain a commendable financial status. The financial statement of the firm shows that it has some consistency in delivering services and products that people need. A probable reason for the success of Unilever is its continued focus to provide the best service to clients. The financial highlight of Unilever tells that the company still has to exert more effort to improve its financial structure. The company’s financial strategy shows that for a company to achieve it goals it must create methods to maintain its stability.
Unilever's heritage of strong local autonomy meant that the degree to which products were adapted to suit local markets was the decision of its country managers throughout its global empire. In Asia, its hair products ranges such as shampoos were designed and crafted for each market in the region and tested before going on sale. In Southeast Asia, where markets had a high proportion of poor, rural customers, Unilever sold its hair care products in small quantities, one shot sachets which consumers could buy two or three times a week, rather than the big bottles of shampoo sold in the West. This was backed up by a highly efficient sales and logistics system, since the company was producing millions of these sachets, often selling three a week to the same consumer (Backman & Butler 2003). Where necessary, the company built up a distribution system from scratch, training local salesmen who traveled by whatever form of transport was best suited to the local Terrain in order to reach retailers in remote areas of the country. In these markets, Unilever rolled out its product range according to a well-tried and tested pattern which the company had identified as most appropriate for developing markets. It began with the cheapest products, and then slowly introduced more expensive ranges to develop consumer tastes, increase market share and forge brand loyalty (Backman & Butler 2003).
In India, it reinforced its presence by also providing a local film show for villages which would never otherwise have had such entertainment. Unilever's strategy might be described as the Jesuit approach to local markets wherein they get the customers while they are poor and grow with them; it was also a long-term approach, since it can take 10–15 years to get a return. Consequently it is only a strategy for companies with strong financial resources and shareholders prepared to wait for a return. The Unilever strategy proved highly successful in India and Southeast Asia and, more recently, Vietnam (Higgins 1996).There, Unilever put all its experience to work to steal a march on its rivals to build a strong position in soaps, detergents and personal products, virtually gaining a 100% share of the markets in the poor rural parts of the country. In these areas, where consumers typically bought just enough for their daily needs, Unilever expanded aggressively via its one-shot shampoos, toothpaste and detergent packets that could be found in every village. By 2000, Unilever brands dominated most categories in which they were offered; Pond's cold cream, a well-remembered favorite, was a runaway success; Lipton's black tea had over 80% of its market, and Wall's ice cream was again far ahead of the pack. It was also busy acquiring local Chinese brands, such as the number one toothpaste brand, Zonghua. But even Unilever was looking nervously over its shoulder at local rivals who were producing copycat items as quickly as possible and offering them to consumers who, as the glamour of Western brands wore off, were reluctant to pay premium prices (Higgins 1996). Unilever makes use of various strategies in its various markets. Unilever has a specific strategy for a certain market depending on the demand of the market and the strategies used by competitors. Unilever made sure that customer satisfaction and service would be their primary concern in all of their local and global markets.
Exchange rate risk
The financial markets detect an environment of unsound fundamentals; exchange rate inflexibility at an unsustainable level, or other financial and systemic limitations, the impact is generally pernicious. For market perceptions, perception is reality. A change in market sentiment can lead to the drying up of global financial flows, recession, exchange rate depreciation, and interest rate hikes (Das 1993).Speculative attacks are squarely based on market perceptions and the presence of imperfections in the global financial markets. The presence of institutional investors in the global financial markets exposed the emerging market economies to further vulnerability. Institutional investors and currency speculators could potentially take substantial short positions in a weak currency. It was observed during the recent emerging market crises that as soon as an inflexible exchange rate and other financial sector weaknesses became apparent in an economy, institutional investors and currency speculators were attracted toward it, making a currency crisis imminent (Das 1993). Exchange rates create a risk to a business like Unilever. A bad exchange rate creates the need for Unilever to increase the prices; a positive exchange rate gives a firm the chance to earn more income. Unilever always monitors the financial status of the country they operate in, it always checks for any changes in the exchange rate and other economic indicators. The company’s local strategy is based from the exchange rate. Since exchange rates are unpredictable, Unilever makes sure that it has contingency plans to ensure that any abrupt change in the exchange rates would not cost additional problems for the firm.
The country risk for Unilever depends on each country they operate in. In some countries the main risk is corruption. Corruption does not help the country improve its economy. Unilever tries to coordinate with authorities to prevent the spread of corruption in a country. Unilever engages in social activities that tend to guard against corruption. Another country risk for Unilever is the unchanging economic status for a country. If a country has a bad economy people would spend less on products thus Unilever cannot gain income. Unilever helps a country to have a better economic standing by reducing unemployment in the country. Moreover a country risk for Unilever is the cultural barriers against a product, there are some countries that have cultural standards; the cultural standards create a barrier to the company’s products. Unilever always try to respect the culture of a country, they make sure that the products will respect culture and tradition.
The political risk for Unilever is the complaints against the company on sudden retrenchment of employees, acts of sexism, racism issues, mismanagement of waste, and lack of care for the natural environment. The different complaints are being handled by Unilever and the concerned market in the different country they operate in. Unilever is continuously doing the best it can to reduce the different complains and find means to settle the grudge some people have against them.
Like other kinds of financial deals, some forms of risk trading have evolved from intermediated to market transactions. One reason for the evolution is that some deals, originally negotiated on an individual basis by intermediaries, become so popular that their terms are standardized, making the deals suitable for market transactions. A second reason for the migration of some deals from intermediaries to market is that contract guarantees make it cheaper for parties to trade without investigating each others’ creditworthiness (Neave 1998).Active financial and corporate derivatives users should measure market and credit risk in independent risk management divisions that support the goals of an organization. The risk management areas may or may not be separate from one another, but they should both be independent of risk-taking areas in the firm. Independent risk management functions serve several purposes. First, they are a catalyst for the development and continuous improvement of models, systems, and procedures used to quantify risks. Vesting risk management responsibilities in independent areas also ensures that risk management policies and principles are consistently applied across all products and risks in the corporation hence, the importance of integrating derivatives risk management into a risk management area with authority over all risk management activities (Culp 2001).
All corporations may not need an independent function with responsibilities only over market risk management. If the firm is relatively inactive in derivatives activity or holds derivatives only to directly offset the exposures of balance sheet liabilities or assets, market risk management generally can be done in an existing business area within the firm provided the risk management personnel are not also responsible for risk-taking (Cranston1997). Of growing interest and popularity in both corporate strategy and financial risk management is the study of and search for such real options or those opportunities viewed as options or assets viewed as options. The real options that a company owns are important contributors to the value of the firm, and the real assets that a company writes are significant components of the company's risk exposure profile (Cranston1997). In the financial risk of Unilever, the company focuses on derivatives. Derivatives are used by corporations such as Unilever for hedging because it helps in mitigating the risk of economic loss arising from changes in underlying or an asset, basket of assets, index, or even another derivative. Derivatives are used by Unilever in hedging through allowing the value of an underlying asset to have a risk and allow the value of an underlying to be transferred from one party to another. Derivatives are also used by Unilever in hedging through letting the company buy an asset then let them sell it using a futures contract. By doing this the company has access to the asset for a longer amount of time, and then can sell it in the future at a much higher price according to the future value of an asset. Derivatives are used to acquire risk and not to insure against risk. This purpose of derivative causes corporations to enter into a derivative contract so that they can speculate on the value of an asset. Those who make use of derivative believes that those who engaged in hedging will be wrong about the future value of an underlying asset.
The main market risk for Unilever is the blatant duplication of their products by some local competitors. Some local competitors copy the packaging of their products, others have similar brand names. This creates confusion to buyers and reduces the sources of income for the firm. Unilever has active participation in looking for products that copy their packaging or have similar brand names. The company sends letters to those companies who they believe are copying their packaging.
Unilever will be able to maintain its stronghold in the all of its markets through the use of the company’s brand name and identity. The company’s brand name and Identity would play a big factor in maintaining or increasing its popularity in the different markets. Unilever will need to make use of updated technologies in creating, delivering and selling products. Technologies will play a vital role in the creation of Unilever’s products; it will play a vital role in making sure that the products will be delivered to clients. Unilever needs to make sure that it continues to interrelate with non competitors so that they can create the best strategies or programs for their industry. Unilever needs to maintain and continually improve its policies on personnel so that they will be motivated to create products that people will buy. It will help in reducing the complaints against the company. Lastly Unilever needs to make sure that the future products will be compatible to changing demands of the environment.
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