Analyses a manufacturing

1 Introduction

1.1 Purpose

The purpose of this document is to analyses a manufacturing or a service company/industry. Define the main driver(s) either outsourcing and/or off-shoring for the case selected. Then provide sufficient information to shed light on the growth and significance of these developments in the selected firm or industry. Finally, analyse our case, firm under study, with economic theories.

1.2 History

Difficulty in getting resources and rising cost saw the world go in to war, World War I. Some people leant the hard ways of being successful. During those days two companies decided to come together and secure the availability of analogous raw materials. The operations of British soap maker Lever Brothers and Dutch margarine producer Margarine Unie were commixed to form Unilever (in 1930). Prior to this merger, British company had huge operations in soap production which were later diversified to food retailing (consisted of fish, ice-cream and canned food). On the other hand, Dutch company had huge operations in margarine production and it expanded through mergers with other margarine companies (BBC News 2000).

1.2.1 Merchandise

Today, Unilever has a blend of products which are categorized under Food brands, Home care brands, Personal care brands. Most of these brands are result of many acquisitions made by Unilever since 1940s.

Soon after the merger, Unilever launched flakes and powder soap in mid 1930s. Later that year, they introduced vitamin added margarine which increase its sales. Expanding their stronghold in food business, Unilever entered market with deep freezing products and introduced frozen peas in UK, in 1940.

1950s was fruitful time for UK market. Unilever launched Sunsilk shampoo, Fish fingers and PG Tips tea bags. During that period, Unilever launches Dove soap in US and tub margarine in Germany. Later, they expanded their business in Netherlands with introduction of ice-cream and frozen food.

International operations were increased with expansion in to US market with ice-cream and packaging business in France. Cornetto ice-cream was launched in Europe. Extending its fleet in personal care, Unilever launched Impulse deodorant in South Africa, Axe body spray in France, Lynx in UK, Clearblue home pregnancy testing kit in Britain. During 1990s, the expansion drive led Unilever to increase market share in parts of Asia-Pacific rim and they launched Organic shampoo in Thailand and Annapurna salt in India.

In over 75 years history of Unilever, it has produced many big brands like Knorr, Flora, Bertolli, Lipton under food brands. They produced Surf, Radiant, Domestos, etc under home care brand. Under personal care brand they had Axe, Pond's, Rexona, Sunsilk, Vaseline, etc. Most of these products are produced in different parts of the world.

Why Unilever can be classified as off-shoring company? Unilever has a huge empire with manufacturing and production offshore units all around the globe. Originally headquartered in Britain and Netherlands, it has huge manufacturing and packaging in Africa and Europe. The tea is produced in Africa and India. Ice-cream is produced in major countries like Spain, Brazil, US. The food brands, the home care products and the personal care brands form the driving force behind Unilever's off-shoring business structure.

Note: The above data is compiled from Unilever (2009).

1.2.2 Corporate Growth

Before merging, Lever Brothers has business units for pears soap, ice-creams, canned food and fish. By this time they had market in Africa, America and UK. During mid 1930s Unilever started producing flakes rather than hard soap to compete with Procter & Gamble, the largest competitor at that time. Later, they also started a campaign to educated people of their new product. This increased their market share.

With the progression of World War II major business activities were affected. However, focusing on local needs became prime motive for Unilever. They further diversified their business in food retailing (canned and frozen food) by investing in Frosted Foods and acquiring Bachelor's. This was an addition to food unit which was started by Lever Brothers prior to the merger.

Post-war, living standards started improving in Europe and other surrounding parts of the world. This resulted in improved knowledge and advancements in technology sector. Unilever was quick to embrace this advancement and reorganised its research division. A new era of advertisement was introduced in 1955 when Unilever aired it first TV commercial for toothpaste.

Market demand was increasing and so was Unilever's innovation and acquisition drive. In mid 1960s, Unilever restructured its business towards to attain more control over units. Packaged food sales were improving and Unilever formed its own packaging business. This move created a packaging business unit which could earn external income too. Focus was increased in advertising and marketing segments.

In order to increase global market presence, Unilever acquired Zwanenberg (meat business), Lipton International (tea business), Spain' Frigo (ice-cream business) and US' National Starch (adhesives and organic chemical).

The acquisition spree continued in 1980s as well. Brooke Bond was the first to come under Unilever, in this decade. Sales almost doubled with acquisition of Naarden, specialized in fragrance and food flavours. Unilever increased its US market share when it took control of Chesebrough-Pond's (adding Pond's and Vaseline to its fleet).

Starting 1990s, Unilever managed to expand further in Czech Republic, Hungary and Russia. It acquired Breyers ice cream in US and Kibon ice cream in Brazil. However, a major restructuring move forced Unilever to dispose United Africa Company in 1994 and sell National Starch and Quest International in 1997.

The drive to reduce non profitable entities and concentrate on core business further reduced Unilever's business units, in 2000s. Unilever sold much of its fragrance business. It started putting more research effort in health care products and built Unilever Health Institute and Nutrition and Health Academy.

Note: The above data is compiled from Unilever (2009).

1.3 Strengths & Weakness

Based on our understanding, we shall now use SWOT tool to analyse some main characters of Unilever, which will give us an insight on how the company is fairing.

Strengths - Unilever is a very renowned global company with a strong brand portfolio. It has large workforce and global market presence. It can work its way out with huge retail network and economies of scale. It also has a diversified product range.

Weaknesses - A dual management approach (Unilever Plc and Unilever NV) reduces the effectiveness in decision making. Difference of opinion might lead to conflict or delayed responsiveness. Even though Unilever has wide range of products, but those and not managed efficiently. As compared to its competitor, less commitment is shown towards product research. There is a missing link with consumers which reduces the demand. Even the marketing and advertising approaches are not attracting consumers.

Opportunities - Unilever has always tried to come up with new products and attract customers, but they should focus more on improving the quality of product. Spending more on research would give them competitive edge. Diversified product line reduces risk and increases market share only if it suits to local needs. To manoeuvre through responsive decisions, a strong organisational structure is required. This could be attained by re-organising the company and reducing redundant roles to avoid conflicts.

Threats - Competing with other stronger brands is one of the threats to company. Dipping sales and increasing operating cost. The revenue generated from international business market is a lot dependent on currency exchange rate and political stability in that country.

2 Analyzing Unilever

2.1 Economic Analysis

Many of the multinational firms or enterprises (MNEs) existed or started becoming one, before the name “MNE” came to existence. The transition from a TNC (Transnational Corporation) to a MNE has a long history. This history not only includes the expansion of companies from a couple of countries to many countries, but also the numerous economic theories which tells us why a firm exists or expands.

In our case, the company under investigation became a multinational firm before many of these theories came to existence. Our aim here is to understand some of the basic economic theories and analyse how well these theories embrace or reject our case.

We begin our analysis by understanding why a firm expands. For this purpose we start with Dunning (1977) OLI (ownership, location, and internalisation) advantages approach. According to him,

1. Ownership advantages are internal to the firm which bring investment opportunities and gives a competitive advantage to the firm over rivals/competitors.
2. Location advantages were specific to countries (having better infrastructure or desired raw materials) which could serve as potential market for the firm.
3. Internalisation advantages were derived from having production units within the firm to avoid the transaction costs associated with external market.

Firms which posses net ownership advantage, achieve benefits from internalising the use of resource and the firms which has special location advantage can make direct investment abroad (Dunning 1980). However, FDI is different from a portfolio investment in terms of control over the firm (Hymer 1960). FDI (Foreign Direct Investment) in form of Mergers and Acquisitions (M&A) bring along social, economical and political benefits of host country which leads to production at international location.

It is clearly evident that Unilever wanted to exercise more control over foreign subsidies and increase its production capacity, potential economies of scale and/or scope. The world was still recovering from the aftermaths of World War I when the great depression of late 20s hit the business all around. Sudden increase in competition and soaring cost of raw materials lead to setup of many associations to defend themselves against the supplier monopolies. Unilever was formed since the raw material for both the original firms was palm oil. This merger gave them specific advantage to exploit the market abroad and helped them to overcome the cost and secure the availability of raw materials. This, to some extent helped them remove the conflict with potential competitor, since both these firms required same raw material. The two factors above are main determinants of direct investment abroad (Hymer 1960).

This merger brought together the experience of each firm in their host country. Along with it came other associated firms which were linked to them, thus increasing the market presence in the UK as well as Netherlands. The acquisition drive which Unilever started during 1940s was aimed at reaching out to bigger market (in Britain and in Dutch initially, along with its existing market) and diversify the product line using the expertise of the acquired company. The clubbing of technologies and product line helped Unilever to diversify in to other market segments like soap, flakes, margarine, spreads. This increased operation in turn reduced the risk as the focus was shifted to larger market. The risks could be a result of economic condition of the market where the firm exists or the government policies of the host country Caves (1996). This diversification and increased market helped them to offset the profit and loss across national frontier and gave them competitive advantages over rivals.

Furthermore, a firm will tend to expand till the cost of organising an extra transaction within the firm becomes equal to the cost of carrying out the same transaction in the open market or through another firm (Coase 1937). Unilever, with its expansions (acquiring number of companies) tried to reduce the transaction cost by internalising and expanding to cost effective places like Africa. In fact, United Africa Company was the biggest manufacturing, packaging and transporting unit for Unilever in West Africa. The internalisation of different activities also increases the knowledge within the firm which could be utilised in training people or performing activities related to R&D.

Although, the cost incurred by the company in research or on training its employees will come back many fold if utilised effectively, there has to be constant improvisation of products and organisation structure. Good firms with diversified products can still lose its profitability if the organisation is not structured properly. Williamson (1981), in an extension to Coase's work, suggested that modern corporations are nothing but a result of many innovations done at organisation level to bring down the transaction cost within the firm. Noticeably, these restructuring eliminates redundancy of resources, which can cause decision lags due to difference of ideologies, and can increase productivity by multi tasking the available resources. The experience or the working know-how gained over time would be useful in optimising the business strategies.

Unilever, in order to achieve better control and expertise in the business units, chose to include the transaction cost within the company rather than using the market forces. The idea was to benefit from the internal transactions but instead they opted for an opportunistic behaviour (Williamson 1981) by acquiring many firms during 1940-1990, which did not prove to be advantageous in the long run as the level of information differed within the firm and outside the firm. Unilever only tried to foresee the benefits in acquiring companies and expanding business. However, they failed to manage its subsidies in a way which could reap better benefits. Williamson (1981) suggested this behaviour in terms of bounded rationality where a firm's decisions are bounded by the information available only within the firm. Unilever had widely scattered business in many parts of the world but had no specific organisation structure which resulted in slow growth. During mid 60s, they tried to restructure the organisation to a more centralised form but it was not easy to allocate units, with the existence of dual management at that time. There were a lot of transactions in terms of money and Unilever hoped they would be able to expand its market with existing business just by restructuring management, but the planning required at organisation level to drive such a huge business spread around the globe was missing. The firms and its processes are organised via planning and direction rather than price mechanism (Coase 1937).

In spite of having such a diversified blend of products, Unilever failed to achieve its target of major market share and market power, which are structural imperfections which deals with structure of the market and the industry in which the firm operates (Hymer 1960). For Unilever these imperfections were not in terms of government policies but more in terms of stronger competition from companies like Proctor & Gamble having better product quality.

According to Buckley and Casson (1976), a firm may be called an MNE if it internalises the markets across national boundaries. Also, it may maximise its profits by organising its internal market and efficiently using the government policies. They further suggest that the market for knowledge or the knowledge deriving from R&D can be easily transmitted within a firm (across countries) at no extra cost. Unilever, with its presence in different market across the globe, failed to maximise its profit by not organising the firm more efficiently. However, the short term investment on R&D of products and marketing ideas could easily determine why Unilever had huge success in 1930s when is stared producing flakes and powder soap or margarine with added vitamins. The airing of first TV commercial in 1950s boosted the sales of PG Tips tea bags. These creative ideas have brought a lot of success but stagnated after a while since not much effort was put by Unilever in such processes.

Unilever's growth has been like a sine wave, a successful period followed with rough times and the cycle continues. In recent years, it has gone through many changes at product as well as organisation level. Though these changes could have helped Unilever achieve its mission of bringing vitality to people's life, if these changes were made earlier. Unilever was decentralised for most years and followed a dual management until recently when it moved to a more organised structure and started following a single leadership model. Unilever started getting rid of much of its business towards the last decade of 20th century. It all started with disposal of United Africa Company, which was the biggest manufacturing and packaging business unit. Later, they let go of their perfume business and started grouping business units for better control and coordination. This gave them much required attention, resources and investment needed on improving their core business units.

Since the technology boom has hit the market, Unilever started to embrace the technology making IT outsourcing its driving force behind its business units which deal with inventory control, finance, payroll etc. In 2005, Unilever outsourced its purchase-to-pay, general accounting and bill-to-cash functions to IBM. BT bagged the telecom outsourcing contract and HP bagged Unilever's enterprise computing system. Apart from these, companies like Microsoft and SAP are also outsourced by Unilever. IT outsourcing is frequently accompanied by a more extensive transformation in the client firm's production technologies (Miozzo2005).

2.2 Conclusion

The diversification from a soap and margarine to whole range of consumer products, from off-shore units to outsourcing units, from Britain and Netherlands to major cities of the world and finally from a dual management to a more structured single leadership form, Unilever has seen it all. The company who is trying to correct its basics, to organise internally with careful planning and remove internal/market imperfections to maximise profits, has started doing well. Recent financial results show the company is back on growth. Nonetheless, Unilever serves as a nice example to analyse a blend of economic theories, as was analysed in the case report presented above.

Brand recognition and product differentiation are firm specific assets which could be generated by investing money on advertising and marketing.

Unilever has always used the Brand name which is famous in host country where it acquired a subsidiary but never promoted Unilever as a brand. They realised that the knowledge which the firm posses in tacit. The knowledge is not shared between its subsidiaries. To enhance the knowledge sharing, they started coming up with universities and research units. The connection with people is made in term of starting ventures in economically weak places like India, Africa (Unilever > Cases, website).

3 References

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