UnileverA Case Study
As one of the oldest and largest foreign multinationals doing business in the U.S., the history of Unilever's investment in the United States offers a unique opportunity to understand the significant problems encountered by foreign firms. Harvard Business School professor Geoffrey Jones has done extensive research on Unilever, based on full access to restricted corporate records. This recent article from Business History Review is the first publication resulting from that research.
This article considers key issues relating to the organization and performance of large multinational firms in the post-Second World War period. Although foreign direct investment is defined by ownership and control, in practice the nature of that "control" is far from straightforward. The issue of control is examined, as is the related question of the "stickiness" of knowledge within large international firms. The discussion draws on a case study of the Anglo-Dutch consumer goods manufacturer Unilever, which has been one of the largest direct investors in the United States in the twentieth century. After 1945 Unilever's once successful business in the United States began to decline, yet the parent company maintained an arms-length relationship with its U.S. affiliates, refusing to intervene in their management. Although Unilever "owned" large U.S. businesses, the question of whether it "controlled" them was more debatable.
Some of the central issues related to the organization and performance of multinationals after the Second World War can be illustrated by studying the case of Unilever in the United States. Since Unilever's creation in 1929 by a merger of British and Dutch soap and margarine companies, 1 it has ranked as one of Europe's, and the world's, largest consumer-goods companies. Its sales of $45,679 million in 2000 ranked it fifty-fourth by revenues in the Fortune 500 list of largest companies for that year.
A complex organization
Unilever was an organizational curiosity in that, since 1929, it has been headed by two separate British and Dutch companies—Unilever Ltd. (PLC after 1981), and Unilever N.V.—with different sets of shareholders but identical boards of directors. An "Equalization Agreement" provided that the two companies should at all times pay dividends of equivalent value in sterling and guilders. There were two head offices—in London and Rotterdam—and two chairmen. Until 1996 the "chief executive" role was performed by a three-person Special Committee consisting of the two chairmen and one other director.
Beneath the two parent companies a large number of operating companies were active in individual countries. They had many names, often reflecting predecessor firms or companies that had been acquired. Among them were Lever; Van den Bergh & Jurgens; Gibbs; Batchelors; Langnese; and Sunlicht. The name "Unilever" was not used in operating companies or in brand names. Lever Brothers and T. J. Lipton were the two postwar U.S. affiliates. These national operating companies were allocated to either Ltd./PLC or N.V. for historical or other reasons. Lever Brothers was transferred to N.V. in 1937, and until 1987 (when PLC was given a 25 percent shareholding) Unilever's business in the United States was wholly owned by N.V. Unilever's business, and, as a result, counted as part of Dutch foreign direct investment (FDI) in the country. Unilever and its Anglo-Dutch twin Royal Dutch Shell formed major elements in the historically large Dutch FDI in the United States. 2 However, the fact that all dividends were remitted to N.V. in the Netherlands did not mean that the head office in Rotterdam exclusively managed the U.S. affiliates. The Special Committee had both Dutch and British members, and directors and functional departments were based in both countries and had managerial responsibilities without regard for the formality of N.V. or Ltd./PLC ownership. Thus, while ownership lay in the Netherlands, managerial control was Anglo-Dutch.
The organizational complexity was compounded by Unilever's wide portfolio of products and by the changes in these products over time. Edible fats, such as margarine, and soap and detergents were the historical origins of Unilever's business, but decades of diversification resulted in other activities. By the 1950s, Unilever manufactured convenience foods, such as frozen foods and soup, ice cream, meat products, and tea and other drinks. It manufactured personal care products, including toothpaste, shampoo, hairsprays, and deodorants. The oils and fats business also led Unilever into specialty chemicals and animal feeds. In Europe, its food business spanned all stages of the industry, from fishing fleets to retail shops. Among its range of ancillary services were shipping, paper, packaging, plastics, and advertising and market research. Unilever also owned a trading company, called the United Africa Company, which began by importing and exporting into West Africa but, beginning in the 1950s, turned to investing heavily in local manufacturing, especially brewing and textiles. The United Africa Company employed around 70,000 people in the 1970s and was the largest modern business enterprise in West Africa. 3 Unilever's total employment was over 350,000 in the mid-1970s, or around seven times larger than that of Procter & Gamble (hereafter P&G), its main rival in the U.S. detergent and toothpaste markets.
A world-wide investor
An early multinational investor, by the postwar decades Unilever possessed extensive manufacturing and trading businesses throughout Europe, North and South America, Africa, Asia, and Australia. Unilever was one of the oldest and largest foreign multinationals in the United States. William Lever, founder of the British predecessor of Unilever, first visited the United States in 1888 and by the turn of the century had three manufacturing plants in Cambridge, Massachusetts, Philadelphia, and Vicksburg, Mississippi. 4 The subsequent growth of the business, which was by no means linear, will be reviewed below, but it was always one of the largest foreign investors in the United States. In 1981, a ranking by sales revenues in Forbes put it in twelfth place. 5
Unilever's longevity as an inward investor provides an opportunity to explore in depth a puzzle about inward FDI in the United States. For a number of reasons, including its size, resources, free-market economy, and proclivity toward trade protectionism, the United States has always been a major host economy for foreign firms. It has certainly been the world's largest host since the 1970s, and probably was before 1914 also. 6 Given that most theories of the multinational enterprise suggest that foreign firms possess an "advantage" when they invest in a foreign market, it might be expected that they would earn higher returns than their domestic competitors. 7 This seems to be the general case, but perhaps not for the United States. Considerable anecdotal evidence exists that many foreign firms have experienced significant and sustained problems in the United States, though it is also possible to counter such reports with case studies of sustained success. 8
During the 1990s a series of aggregate studies using tax and other data pointed toward foreign firms earning lower financial returns than their domestic equivalents in the United States. 9 One explanation for this phenomenon might be transfer pricing, but this has proved hard to verify empirically. The industry mix is another possibility, but recent studies have suggested this is not a major factor. More significant influences appear to be market share position—in general, as a foreign owned firm's market share rose, the gap between its return on assets and those for United States—owned companies decreased—and age of the affiliate, with the return on assets of foreign firms rising with their degree of newness. 10 Related to the age effect, there is also the strong, but difficult to quantify, possibility that foreign firms experienced management problems because of idiosyncratic features of the U.S. economy, including not only its size but also the regulatory system and "business culture." The case of Unilever is instructive in investigating these matters, including the issue of whether managing in the United States was particularly hard, even for a company with experience in managing large-scale businesses in some of the world's more challenging political, economic, and financial locations, like Brazil, India, Nigeria, and Turkey.
The story of Unilever in the United States provides rich new empirical evidence on critical issues relating to the functioning of multinationals and their impact.
— Geoffrey Jones
Finally, the story of Unilever in the United States provides rich new empirical evidence on critical issues relating to the functioning of multinationals and their impact. It raises the issue of what is meant by "control" within multinationals. Management and control are at the heart of definitions of multinationals and foreign direct investment (as opposed to portfolio investment), yet these are by no means straightforward concepts. A great deal of the theory of multinationals relates to the benefits—or otherwise—of controlling transactions within a firm rather than using market arrangements. In turn, transaction-cost theory postulates that intangibles like knowledge and information can often be transferred more efficiently and effectively within a firm than between independent firms. There are several reasons for this, including the fact that much knowledge is tacit. Indeed, it is well established that sharing technology and communicating knowledge within a firm are neither easy nor costless, though there have not been many empirical studies of such intrafirm transfers. 11 Orjan Sövell and Udo Zander have recently gone so far as to claim that multinationals are "not particularly well equipped to continuously transfer technological knowledge across national borders" and that their "contribution to the international diffusion of knowledge transfers has been overestimated. 12 This study of Unilever in the United States provides compelling new evidence on this issue.
Lever Brothers in the United States: Building and losing competitive advantage
Lever Brothers, Unilever's first and major affiliate, was remarkably successful in interwar America. After a slow start, especially because of "the obstinate refusal of the American housewife to appreciate Sunlight Soap," Lever's main soap brand in the United Kingdom, the Lever Brothers business in the United States began to grow rapidly under a new president, Francis A. Countway, an American appointed in 1912. 13 Sales rose from $843,466 in 1913, to $12.5 million in 1920, to $18.9 million in 1925. Lever was the first to alert American consumers to the menace of "BO," "Undie Odor," and "Dishpan Hands," and to market the cures in the form of Lifebuoy and Lux Flakes. By the end of the 1930s sales exceeded $90 million, and in 1946 they reached $150 million.
By the interwar years soap had a firmly oligopolistic market structure in the United States. It formed part of the consumer chemicals industry, which sold branded and packaged goods supported by heavy advertising expenditure. In soap, there were also substantial throughput economies, which encouraged concentration. P&G was, to apply Alfred D. Chandler's terminology, "the first mover"; among the main followers were Colgate and Palmolive-Peet, which merged in 1928. Neither P&G nor Colgate Palmolive diversified greatly beyond soap, though P&G's research took it into cooking oils before 1914 and into shampoos in the 1930s. Lever made up the third member of the oligopoly. The three firms together controlled about 80 percent of the U.S. soap market in the 1930s. 14 By the interwar years, this oligopolistic rivalry was extended overseas. Colgate was an active foreign investor, while in 1930 P&G—previously confined to the United States and Canada—acquired a British soap business, which it proceeded to expand, seriously eroding Unilever's market share. 15
The soap and related markets in the United States had a number of characteristics. Although P&G had established a preponderant market share, shares were strongly contested. Entry, other than by acquisition, was already not really an option by the interwar years, so competition took the form of fierce rivalry between incumbent firms with a long experience of one another. During the 1920s and the first half of the 1930s, Lever made substantial progress against P&G. Lever's sales in the United States as a percentage of P&G's sales rose from 14.8 percent between 1924 and 1926 to reach almost 50 percent in 1933. In 1930 P&G suggested purchasing Lever in the United States as part of a world division of markets, but the offer was declined. 16 Lever's success peaked in the early 1930s. Using published figures, Lever estimated its profit as a percentage of capital employed at 26 percent between 1930 and 1932, compared with P&G's 12 percent.
Countway's greatest contribution was in marketing. During the war, Countway put Lever's resources behind Lux soapflakes, promoted as a fine soap that would not damage delicate fabrics just at a time when women's wear was shifting from cotton and lisle to silk and fine fabrics. The campaign featured a variety of tactics, including washing demonstrations at department stores. In 1919 Countway launched Rinso soap powder, coinciding with the advent of the washing machine. In the same year, Lever's agreement with a New York agent to sell its soap everywhere beyond New England was abandoned and a new sales organization was established. Finally, in the mid-1920s, Countway launched, against the advice of the British parent company, a white soap, called "Lux Toilet Soap." J. Walter Thompson was hired to develop a marketing and advertising campaign stressing the glamour of the new product, with very successful results. 17 Lever's share of the U.S. soap market rose from around 2 percent in the early 1920s to 8.5 percent in 1932. 18 Brands were built up by spending heavily on advertising. As a percentage of sales, advertising averaged 25 percent between 1921 and 1933, thereby funding a series of noteworthy campaigns conceived by J. Walter Thompson. This rate of spending was made possible by the low price of oils and fats in the decade and by plowing back profits rather than remitting great dividends. By 1929 Unilever had received $12.2 million from its U.S. business since the time of its start, but thereafter the company reaped benefits, for between 1930 and 1950 cumulative dividends were $50 million. 19
Many foreign firms have experienced significant and sustained problems in the United States.
— Geoffrey Jones
After 1933 Lever encountered tougher competition in soap from P&G, though Lever's share of the total U.S. soap market grew to 11 percent in 1938. P&G launched a line of synthetic detergents, including Dreft, in 1933, and came out with Drene, a liquid shampoo, in 1934 both were more effective than solid soap in areas of hard water. However, such products had "teething problems," and their impact on the U.S. market was limited until the war. Countway challenged P&G in another area by entering branded shortening in 1936 with Spry. This also was launched with a massive marketing campaign to attack P&G's Crisco shortening, which had been on sale since 1912. 20 The attack began with a nationwide giveaway of one-pound cans, and the result was "impressive." 21 By 1939 Spry's sales had reached 75 percent of Crisco's, but the resulting price war meant that Lever made no profit on the product until 1941. Lever's sales in general reached as high as 43 percent of P&G's during the early 1940s, and the company further diversified with the purchase of the toothpaste company Pepsodent in 1944. Expansion into margarine followed with the purchase of a Chicago firm in 1948.
The postwar years proved very disappointing for Lever Brothers, for a number of partly related reasons. Countway, on his retirement in 1946, was replaced by the president of Pepsodent, the thirty-four-year-old Charles Luckman, who was credited with the "discovery" of Bob Hope in 1937 when the comedian was used for an advertisement. Countway was a classic "one man band," whose skills in marketing were not matched by much interest in organization building. He never gave much thought to succession, but he liked Luckman. 22 This proved a misjudgment. With his appointment by President Truman to head a food program in Europe at the same time, Luckman became preoccupied with matters outside Lever for a significant portion of his term, though perhaps not to a sufficient degree. Convinced that Lever's management was too old and inbred, he dismissed about 15 percent of the work force soon after taking office, and he completed the transformation by moving the head office from Boston to New York, taking only around one-tenth of the existing executives with him. 23 The head office, constructed in Cambridge by Lever in 1938, was subsequently acquired by MIT and became the Sloan Building.
Luckman's move, which was supported by a firm of management consultants, the Fry Organization of Business Management Experts, was justified on the grounds that the building in Cambridge was not large enough, that it would be easier to find the right personnel in New York, and that Lever would benefit by being closer to the large advertising agencies in the city. 24 There were also rumors that Luckman, who was Jewish, was uncomfortable with what he perceived as widespread anti-Semitism in Boston at that time. The cost of building the New York Park Avenue headquarters, which became established as a "classic" of the new postwar skyscraper, rose steadily from $3.5 million to $6 million. Luckman had trained as an architect at the University of Illinois, and he was very involved in the design of the pioneering New York office.
7. The concept of "advantage" originated with the pioneering contribution of Stephen Hymer and is a basic component of the eclectic paradigm developed by John H. Dunning. See Dunning, Multinational Enterprises and the Global Economy (Wokingham, U.K., 1992).
9. H. Grubert, T. Goodspeed, and D. Swenson, "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," in A. Giovannini, R. Glenn Hubbard, and J. Slemrod, eds., Studies in International Taxation (Chicago, 1993); R. J. Mataloni, "An Examination of the Low Rates of Return of Foreign-Owned U.S.Companies," Survey of Current Business (2000): 55-73.
11. S. Ghoshal and C. A. Bartlett, "Creation, Adoption, and Diffusion of Innovation by Subsidiaries of Multinational Corporations," Journal of International Business Studies 19 (Fall 1988): 365-88; U. Zander and B. Kogut, "Knowledge and the Speed of the Transfer and Imitation of Organizational Capabilities," Organizational Science 6 (Jan.-Feb. 1995): 76-92; A. K Gupta and V. Govindarajan, "Knowledge Flows within Multinational Corporations," Strategic Management Journal 21 (April 2000): 473-96.
15. Wilson, The History of Unilever, vol. 2, 344; Chandler, Scale and Scope, 385-8; Geoffrey Jones, "Foreign Multinationals and British Industry before 1945," Economic History Review 41, no. 3 (1988): 429-53.
16. "History of Lever Brothers USA, 1912-1952," Unilever Economics and Statistics Department, 18 Dec. 1953, Unilever Historical Archives London (UAL). The archives contain two unpublished draft chapters on the history of Unilever in the United States (dated January 1990). The author would like to thank Unilever PLC and N.V. for permission to read this draft, which draws heavily on confidential interviews with former executives.
Excerpted with permission from "Control, Performance, and Knowledge Transfers in Large Multinationals: Unilever in the United States, 1945-1980," in Business History Review, Vol. 76, No. 3, Fall 2002.
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