Unilever - Porter's 5 Forces Analysis

Porter’s 5 Forces Model

Being a global company, Unilever has very strong competition not only from other strong multinational companies like P&G, Kraft and Nestle but also from other regional retailers. Porter’s 5 forces model is one of the most recognized frameworks for the analysis of competetive environment of an organisation. Porter’s five forces model which determine the competitive intensity and therefore attractiveness of the market where Unilever is operating . This model describes the attributes of an attractive industry and thus suggests when opportunities will be greater, and threats less, in these of industries.

Attractiveness in this context refers to the overall industry profitability and also reflects upon the profitability of Unilever. An “unattractive” industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching “pure competition”, from the perspective of pure industrial economics theory.

This model is based on five important elements of an organisation and uses both internal as well as external competences and threats faced by a business organisation. These five elements including;

Buyer Power

Unilever’s buyers are scattered all around the world and they are in billions. In true sense they are not so powerful to pull prices down. But on the other hand it is easier for the customers to switch to a competitor. So Unilever has to be very precautious in deciding about prices and keep the customers satisfied.

Competitive Rivalry

In consumer products business Unilever has a large number of competitors and these competitors are in reality very strong. They range from small local corner shop retailer to big giants like P&G, Kraft and Nestle. These competitors almost provide equally attractive products and services and sometimes better. These competitors have the power to attract and influence the customers by more attractive substitute, prices and marketing techniques.

  

Threat of Substitution

Continuous research and development in the consumer and household products has brought about a revolution in the consumer market and today customers like to try something new and better. This trend has reduced the customer loyalty and product lifecycle. Unilever is under continuous threat of substitute products and its competitors are already spending huge sums on R&D and new product development. Unilever has to be very adoptive and closer to its customers so as to get what exactly its customers want.

Threat of New Entry

As Unilever operates in different geographical markets so threat of new entrants varies in different markets. In well developed countries where big players like Unilever have a very strong hold and brand image, it is very hard for a new entrant to enter the market because of higher cost to set up a business. On the other hand in less developed markets, it is easier to enter as legal requirements and capital needed is not as much as in a developed market. Unilever has its presence almost in every market either through its subsidiaries, branches or franchises. But its brand image is a strong barrier in the way of new entrants.

Supplier’s Power

 Unilever has a policy of local buying and local manufacturing. Which provides itself an edge to brake power of its suppliers and make them weaker to negotiate at its own terms. Most of time Unilever has blanket agreements with its suppliers to provide for a certain period of time at a certain rate. This strategy help to prevent supplier’s from switching to other competitors and charge higher rates. Also Unilever treat its supplier’s fairly so as to create more loyalty among them like customers.

Conclusions and Recommendations

Unilever is operating in a highly competitive and volatile environment and especially current economic crisis have made it difficult for many businesses to operate profitability. Legal requirements, technical changes and change in the habits of the customers have created problems for the businesses. Because of that companies like Unilever have to be updated and cotinuos R&D is solution to many of the problems. An attractive business is one with higher margins and low competitions. So the environment where Unilever operates is with higher level of competition and low level of profit margins. In this situation best strategy is to keep customers satisfied and loyal, continuos R&D, cost control and be responsive to the competitors.

PESTEL ANALYSIS - UNILEVER GLOBAL

PESTEL analysis - UNILEVER

A scan of the external macro environment in which the firm operates can be expressed in terms of following factors:

§  Political

§  Economical

§  Social

§  Technological

PESTEL analysis is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The headings of PESTEL are a framework for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be applied by companies to review a strategic directions, including marketing proposition. The use of PESTEL analysis can be seen effective for business and strategic planning, marketing planning, business and product development and research reports. PESTEL also ensures that company’s performance is aligned positively with the powerful forces of change that are affecting business environment (Porter, 1985). PESTEL is useful when a company decides to enter its business operations into new markets and new countries. The use of PESTEL, in this case, helps to break free of unconscious assumptions, and help to effectively adapt to the realities of the new environment.

Limitations of PEST analysis 

Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. Social factors include the demographic and cultural aspects of the external macro environment. These factors affect customer’s needs and size of potential markets. Technological factors can lower barriers to entry reduce minimum efficient production levels and influencing outsourcing decisions.

It may be difficult to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to scenario planning techniques to deal with high levels of uncertainty in important macro-environmental variables.

                                                    http://www.quickmba.com/strategy/pest/

UNILEVER PESTEL

Political and legal analysis

Unilever is subject to local, regional and global rules, laws and regulations. These rules and regulations cover diverse areas such as product safety, product claims, trademarks, copyright, patents, employee health and safety, the environment, corporate governance, listing and disclosure, employment and taxes. Important regulatory bodies in respect of business include the European Commission and the US Food and Drug Administration. Failure to comply with laws and regulations could leave Unilever open to civil and criminal legal challenge and may result in fines or imprisonment of personnel. Further, reputation could be significantly damaged by adverse publicity relating to such a breach of laws or regulations.

During 2009-2010 almost 49% of Unilever revenue came from D&E markets including Brazil, India, Indonesia, Turkey, South Africa, China, Mexico and Russia. These markets typically proved more volatile than developed markets. Any government response to reduce the impact such as fiscal stimulus, changes to taxation and measures to minimise unemployment have also affected Unilever’s economic performance.

In some regions Govt. has imposed heavy duties on imports and raw materials and it has a negative impact on production capacity. However, Unilever is quite good in managing relations with Governnments.

                                                                  source: http://www.hbs.edu/research/pdf/06-061.pdf

                                                                   Unilever Financial Statement

Economic analysis

Unilever market environment is becoming highly competitive especially in the Western Europe. Macro economic environment is highly uncertain whcih has affected micro economic environment as well by creating a fear among ordinary consumers. Consumers  would not want to buy expensive product or brands due to current economic tide. Competition in EU has grown so strong that Unilever is facing difficulties in places like France, Netherlands.

Economic Decline in business during an economic downturn has resulted in customer and supplier default. Unilever’s business is dependent on continuing consumer demand for its brands. Reduced consumer wealth driven by adverse economic conditions has resulted in consumers becoming unwilling or unable to purchase Unilever products, which has adversely affected cash flow, turnover, profits and profit margins. Adverse economic conditions have resulted in the impairment of some of intangible assets which are in the form of brand names. Adverse economic conditions have affected in two ways i.e. one or more countries within a region or extended globally. However, recession has increased the demand for some of the home care products. Unilever is operating in different market, which have reacted to recession in different ways. In D&E markets volume led growth has been improved upto 7% in the first quarter of 2010.

                                         Source: www.unilever.com

                                                      Executives Director’s Report

Societal and Ecological Analysis

Unilever has developed a strong corporate reputation over many years for its focus on social and environmental issues, including promoting sustainable development and utilisation of renewable resources. It is very conscious about safety and health of its employees and accident rate decreased by 9% during 2009.

Unilever’s vision is to help people feel good, look good and get more out of life with brands and services that are good for them and good for others.

It has successfully maintained high social and environmental standards by designing and producing products that are safe for consumers. Unilever is working on so many social welfare projects like World food programme and safe drinking water. Unilever is using environment friendly materials and packing stuff.The Unilever brand logo now displayed on all products and advertising, increases its external exposure. Unilever has built its image as an environment friendly and socially responsible company.

                              Unilever Financial Statements – Operational Highlights

                                   http://www.unilever.com/sustainability/?WT.GNAV=Sustainability

                                 http://www.unilever.com/sustainability/?WT.GNAV=Sustainability

Technological Analysis

Unilever has been spending on IT to improve its business especially in the area of e-business so as to improve brands image and quality of its products.

Unilever know that failure to provide sufficient funding to develop new products, lack of technical capability in the R&D function and quickly roll out the products may adversely impact its cash flow, turnover, profit and profit margins and affect reputation.

High level of automation is one of the critical success factors of Unilever that differentiates then from their competitors and serves as a source of competitive advantage. Today, Unilever is trying to minimize cost through IT efficiencies at global level. In addition, Unilever Technology Venture works in collaboration with Unilever R&D group to help Unilever meet consumers’ needs. Area of concern is genomics, advanced bioscience, advanced materials science and nano technology.

Islamic Financing

Islamic finance, one of the hottest topics in European and Middle Eastern financial training, is now being adopted in accountancy training too.
Cima, the Chartered Institute of Management Accountants, has launched an Advanced Diploma in Islamic Finance, intended for those working in accounting and financial services who want to move into Islamic finance, as well as those already working in the sector who want to broaden their knowledge.
“We see the Islamic finance market as particularly important, with its current global value estimated at more than $1.1 trillion,” says Cima’s John Willsdon. “Islamic finance is becoming much more prominent throughout the financial institutions of the world, rapidly growing from a niche industry to a mainstay of finance.”
Growth in the industry is daunting. According to Mohd Daud Bakar, president and chief executive of the International Institute of Islamic Finance, “Thousands of professionals will need to join the industry globally over the next five to seven years if its impressive growth is to be sustained.”
The Cima Advanced Diploma has been launched in addition to the Institute’s diploma in Islamic finance launched four years ago (and formerly know as Cima Certificate in Islamic Finance).

UNILEVER: AN ANALYSIS OF STRENGTHS, WEAKNESSES AND OPPORTUNITIES AND THREATS

     

             

Unilever SWOT Analysis

Strengths

n  Recognise as a Global Company

Unilever is a well known global company with presence almost in more than 170 countries and it is registered at various stock exchanges around the globe which makes it a really global company with all the privileges of a global company like economies of scale, access to global resources and above all synergy of resources and operations.


n  Strong brand portfolio


Unilever has established a very strong relationship with retailers by offering them good margins and incentives, which are very important for a company in the consumer brand market. This provides Unilever strength to reach the ultimate consumers.

             Source: Unilever financial statement

n   Strong relationship with retailers

Unilever has established a very strong relationship with retailers by offering them good margins and incentives, which are very important for a company in the consumer brand market. This provides Unilever strength to reach the ultimate consumers.

                                                         Source: Unilever Director’s report

n   Economies of scale

Economies of scale occur when increased output leads to lower long run average costs. As a global company Unilever has reach to universal cheap resources. Because of its mass scale production it has ability to overcome the bargaining power of suppliers which results in lower cost of production.     

                                           Source: http://www.economicshelp.org/blog/concepts/economics-of-scale/

l  Research and development

Unilever is an innovative company and investing a huge sum on research and development of new products and brands. Because of this ability Unilever has created high entry barriers to the global consumer market. It has more than 61 innovation centres and 4000 academic researches.

                                         Source: Unilever financial statement

l  Excellent management and human element

Unilever has a pool of very skilled managerial capabilities in the form of its human resource capital from around the world in each geographic region. Its top management belongs to 21 different countries. This also helps Unilever to understand and manage local needs of customers, employees and stakeholder

                                Source:http://www.unilever.com/images/ir_Unilever_factsheet_2010_tcm13-70889.pdf.

l  Merger and acquisitions

Unilever has a long history of mergers and acquisitions. This has enabled Unilever to break entry barriers into some very competitive markets and knock out strong competitors. This ability of Unilever has made it a local multinational company. Unilever has more than 44 companies in the Unilever group, 2 joint ventures and one UK associate. Other than that Unilever has its operation and agency relations in a huge number of countries. At present Unilever has more than 350 production facilities.

                                         Source: Director’s Report

                                         http://www.unilever.com/investorrelations/understanding_unilever/factsheet/index.aspx

Weaknesses

n  No direct connecting with customers

Because of nature of business, Unilever has no direct connection to its ultimate consumers. It has to rely on its wholesalers and retailers. In western counties retails giants i.e. Tesco, Asda and Sainsbury are very strong and have the ability to dictate big multinational retail companies. 

               Source: http://www.unilever.co.uk/sustainability/people/customers/

n   Inefficient management of brands

Unilever has almost 400 different brands which is very difficult to manage to reap ultimate benefit. This huge portfolio of brands has created inefficiency on part of Unilever to differentiate between stars, cash cows and dog brands according to Mandelows’ matrix. Top 25 brands of Unilever account for 73% of global turnover, which means rest of 375 brands account for only 27%.

Source: Unilever’s financial statements

n   Reduced spending for R & D

Unilever is trying to improve its cash flow by cutting expenditure on R&D. During 2008 R&D spending were €927m which were reduced to €891m in 2009 and similar trend during 2010. This will lead to lack of innovations and introduction of new products

                                                             Source: Unilever’s financial statements

n   Fall in revenues

Decrease in revenue has revealed weak areas and put a psychological pressure on its management to make short term decisions to cope. This is oblivious from the strategy of maintaining short term cash flow by reducing spending on R&D and investment in long term assets and projects. Decrease in revenue has directly affected profit margins and market value of shares.  

                                                                  Source: Unilever’s financial statements

Opportunities

n  Economic Crisis

Where current economic crisis have made small companies with liquidity problems to find way for exit, there it has created opportunities for Unilever to acquire these demising companies at a very cheap price and enter into new markets.    

                  Source: (http://www.darkreading.com/security/management/showArticle.jhtml?articleID=212002170)

n   Increasing need for healthy products

Consumers are more aware today and prefer healthy products, so it is a good opportunity for Unilever to introduce healthy and safe products under its brand name to increase its market share and knock out its competitors.

n  Developing markets

More than 50% of Unilever’s market share is from developing and emerging countries where market is less saturated and less competitive. Growth rate is high in these markets, so Unilever can invest in these markets to increase its market share.

                                          Source: http://www.unilever.com/mediacentre/pressreleases/2002/trade.aspx

n  Personal Care segment

Unilever’s personal care segment is fastest growing business and a key to achieving sustainable profitable growth. In 2010 Unilever reported an increase in personal care sales by 4%. The personal care segment should be a priority area for creation of future sales growth and sustaining profits from increasing raw material costs.

                                                                                              Source: Unilever Director’s report

Threats

n  Strong Competition

Unilever is not only a big multinational company in the global market. It has very strong competitors like P&G, Nestle and Kraft. These competitors always try to give tough time to Unilever and try to create high entry barriers to new and emerging markets. In developing markets like India and Spain, small low cost retailers have a big market share and competition for Unilever.

                                                           Source: Unilever Director’s report

n   Increasing store brands

Big retail store like Tesco, ASDA, and Sainsbury has introduced a plenty of their own cheap brands which have led customers to switch for cheaper products.

                                                                                     Source: Customer’s Interviews

n   Tougher Business Climate

Overall business climate is tougher today because of economic crisis, tough Government regulations and competitive environment. It has led the companies to focus more their liquidity instead of profitability.

                                                                     Source: Unilever Director’s report

n  Complex Organisational Structure

Unilever has more than 42 group companies, Joint ventures and associates. It has hundreds of agency relationships. It has more than 300 production facilities are across the globe. All this has made Unilever structure very complex. A wrong corporate strategy can be a single point of failure of business.