Strategic Review: Unilever Group

Unilever Group was founded on September 2, 1929 when two large companies, Margarine Unie and Lever Brothers, signed a cooperation contract and joined their assets of a range of units operating in the public products sector in almost 10 countries of Europe (Unilever 2015a). Since then, the company has developed into an international corporation represented all over the world with more than 400 branded product lines, most of which (Knorr, Dove, Axe, Omo, and Lipton, among many others) can be easily recognized in any household (Unilever 2015b). The Group is legally represented by the two corporations with headquarters located in Europe: Unilever PLC, London and Unilever NV, Amsterdam. Each corporation owns the assets of other companies in different countries around the globe: Nigeria, India, Indonesia, China, France, Brazil, and others. Shares of the group are actively traded on the main world stock exchanges and recognized by investors of any type and size.

The Group is heavily devoted to conducting the policy of sustainable decrease of its environmental impact both in the production process (less water and electricity consumption) and final consumer goods (less environmentally-destructive elements in the finished output). Moreover, the corporation makes considerable effort in order to improve the life standards of the farmers and small enterprises, which supply raw products for the group. It has initiated a range of programs for the enhancement of livelihoods of the involved people.

Analysis of the Current Position of the Company

While defining the optimal strategy of a company, one should always start with the Present issue by questioning what the entity represents at the moment and what its current operating environment is (see Appendix: Elements of strategy).

As mentioned above, Unilever Group consists of two corporations: Unilever PLC and Unilever NV, acting as a single entity since they have signed the equalisation agreement (Elshof 2005). This agreement has largely shaped the future strategy and financial operating policies of the Group. It guarantees the same accounting, reporting, and dividend policies, thus, equalising the corporations for the investors. The next step in the international integration was made in 2007 when the Group critically changed its strategy of having more than 200 independent companies around the world and combined them into four main regional-based systems headed by the global platform (Murphy 2013).

In order to analyse the current position of Unilever Group, one need to review the recent financial and operating results published by the company closely (see Appendix: Financial issues). The consolidated financial statements of Unilever Group indicate positive trends in the profitability of the corporation. They provide that the operating profit of the group has increased in the past three years from 6,420 million Euro in 2011 to 7,517 million Euro in 2013 (by 17.08 %) while the net profit for the same period increased from 4,491 million Euro to 5,263 million Euro, or by 17.19 % (Unilever Annual Report and Accounts 2013). These data provided the investors with the growth in earnings per share from 1.46 Euro in 2011 to 1.71 Euro in 2013, as well as with the adequate growth in dividends per share during the period.

At the same time, financial ratios of the Group indicate a slightly risky position of the company to invest in. For example, the current liquidity ratio in 2013 was 0.70; it means that not all of the group’s liabilities due within one year after the balance-sheet date can be covered by its current assets. Besides, the corporation has high debt-to-equity ratio (equal to 2.07 in 2013) showing that the company finances a large portion of its operations with the debt sources. The recent news on the Group have revealed that the corporation issued additional long-term debt (outstanding till February 2022) in the form of corporate bonds at the fixed rate of 0.5% for the total nominal value of 750 million Euro (Unilever 2015f).

This situation comes out of the growth strategy declared by the group’s management in 2009. Generally, it is quite expectable for the growth-oriented company to have a large portion of debt financing. Moreover, the increasing profits and profitability ratios (return on equity constituted as high as 35% in 2013) indicate success of the corporation’s strategic plans and operational effectiveness.

Declared Strategy

The published strategy of Unilever Group provides a detailed description of What (goals and objectives), Future (mission and vision), and How (plans for achievement) issues of the company (see Appendix: Elements of the strategy; Terms and definitions). The published strategy (“Compass strategy”) of Unilever Group was first declared in 2009 and further amended in 2012 (Unilever 2015c). The mission of the corporation is defined by the Compass global purpose “to make sustainable living commonplace” while the vision declares a more precise goal “to double the size of the business, whilst reducing our environmental footprint and increasing our positive social impact” (Unilever 2015d).

In order to achieve the stated mission and vision, Unilever Group has also published three strategic objectives as follows (Unilever 2013):

• Enhance the well-being of more than one billion people by 2020;
• Decrease the environmental impact of the company’s production and use of its goods at least by twice by 2020;
• Improve financial position of 5.5 million people by 2020.

For the realization of these objectives, the company also elaborated a comprehensive strategic plan. The plan stipulates that the group should maintain sustainable and profitable level of growth while leveraging its costs efficiently and investing in the marketing and innovations (Unilever 2013). This plan provides response to the competition driving forces faced by the Group. Today, the most important driving forces for Unilever are “rivalry among existing competitors” (other large corporations in the industry such and Johnson & Johnson), “threat of substitute products” (which is also related to the existing main competitors), “bargaining power of suppliers” (large farming companies might change the terms of deals), and “bargaining power of customers” (who are the key factor for the profitability and growth intentions of the group). At the same time, such driving force as the threat of new entrants is not relevant in the case of Unilever Group due to its size while it is almost impossible to enter the market at that high competition level (adapted from Porter 2008).

The guiding principles of the group are incorporated in its published Standard of Conduct. The corporation summarizes its policy as “conducting operations with honesty, integrity and openness, and with respect for the human rights and interests of employees” (Unilever 2015e). The company also publishes the annual reports on its sustainability plan and lifecycle assessments with the aim to announce its progress regarding the reduction of environmental impact and improvement of the people’s standard of living.

Pitfalls in the Strategy

The declared strategic plan of Unilever Group does not contain one of the important parts – the performance measurement criteria. This oversight might lead to misunderstanding of the intermediate results required to attain the final objectives in 2020. Stating the intermediate and final performance measurement steps is important for the successful monitoring of Group’s strategy implementation.

Moreover, there is no defined goal for the final growth size and relevant measure of the growth itself. This term can be understood differently by the managers of subdivisions and affiliates, e.g. as the growth in the profits, growth in the sales volume, growth in the number of customers, growth in the number of new markets, or growth in the number of product lines. Consequently, the unit-level and decision-level factors might act in the opposite directions, and they will not provide the desired growth and sustainability (see Appendix: Critical success factors).

Besides, the strategy and objectives lack financial aspect. Investors and other interested parties usually expect certain financial results to be achieved as the outcome of the company’s strategy. Absence of the measurable and realistic financial goal spoils the attractiveness of the growth and sustainability strategy declared by the Group for its main stakeholders.

Recommendations for Improvement

As it was mentioned in the Declared Strategy section, the sustainable strategic plan of the corporation was already once critically revised and improved in 2012. Nevertheless, there is still room left for the further enhancement actions. It is obvious that Unilever Group should elaborate and publish the performance measurement criteria of its growth strategy. These criteria might include, among others, predicted annual level of sustainable growth, projected profitability level, expected number of improved livelihoods of farmers and small entrepreneurs due to the assistance of Unilever, and certain figures on reducing the environmental impact at the end of the strategic plan on the annual basis (year 2020). 

It is also important to define more precisely the term of growth as meant by the Compass strategy of Unilever group and add some financial aspect to the strategic objectives. This step will help both the managers and investors to understand the final point better and agree with it. Moreover, the group needs to arrange periodical meetings of different-level and location managers and employees in order to discuss the strategy and ensure a similar understanding of the stated goals.

Conducting periodical strategic audits would also be helpful in defining the occurring pitfalls and shortcomings of the strategic plan. Such instances can sometimes be identified only by a third independent party with specific knowledge and experience in the strategy. Periodical use of external strategic audits will provide the group’s management with a timely and effective identification of problems in the implementation process of the strategy, which could appear both due to certain drawbacks in the plan itself and as a result of the changing economic, political, and environmental impacts on the company’s business.

Another way of improving the strategy of Unilever Group can be suggested by the IT specialists. Nowadays, there is a range of useful programs, which do not allow omitting any aspect of successful strategic planning and provide the planners with a quick way to the projected outcomes. The corporation could make use of some of such programs, adopt it for own specifics and size and, probably, improve the final expectations of the management or enhance the strategy itself.

Conclusions

The strategic review of Unilever Group revealed certain strengths and weaknesses of the declared Compass plan of the corporation. The analysis of the company’s present situation indicates successful growth results with the increasing profits along with a rather risky debt position of the Group. New debt issued in February 2015 seriously exaggerated the solvency position and leverage level of the group. It might signal of the potential inability of the corporation to preserve its declared objectives in the future due to insufficient funds and over-estimated profitability.

The strategy of the entity includes precisely formulated vision and key purposes, which meet all SMART criteria (see Appendix: Terms and definitions). Nevertheless, there are still several pitfalls, which could be improved in the strategy. It is critically important for the corporation to define its understanding of the growth, elaborate the performance measurement standards, and add a financial aspect to the plan to be attractive for the stakeholders. The implementation of IT tools for the strategic planning will also be very helpful for the group as they provide the better forecasting opportunities and prevent omitting some of the important steps in the planning process.