28 Nov 2005  Research & Ideas

Unilever: Transformation and Tradition

In a new book, professor Geoffrey Jones looks at Unilever's decades-old transformation from fragmented underperformer to focused consumer products giant. This epilogue summarizes the years 1960 to 1990.

 

Currently a Unilever brand can be found in one out of every two households in the world. This book has related how these brands came to form part of the everyday life of so many people as the world "globalized" from the 1960s. It has shown how Becel originated, how Impulse began life in South Africa and spread worldwide, how Lipton tea became the world's biggest tea brand, the origins of the sensual Magnum ice cream, and how Pond's Cream became a Unilever brand.

The story behind the brands has been presented also. Dove and Sunsilk, Omo and Surf, Rama and Flora were great consumer products, but they became worldwide brands because of the capabilities of Unilever. Their success rested on the choices made on strategy and organization, on the recruitment and development of managers, on the allocation of spending between capital investment, acquisitions, and innovation, and on the negotiation of safe paths through the complexities of official regulations and government. The easiest way to understand the Unilever organization, observed an article in the U.S. business magazine Fortune in 1947, was "to think of it as the world's most difficult corporate-management job."1

It was remarkable that the corporate image of a company whose brands were so well known, and whose operations were so widespread, was so indistinct. There were times between the 1960s and 1990 when Unilever appeared amorphous. It was not merely that the corporate name was not found on any brands or local companies. It was also the sheer spread of businesses it owned beyond packaged consumer products, including African trading, plantations, specialty chemicals, paper and packaging, transport, advertising, and market research companies. It was not surprising that the financial markets had problems valuing the business, which seemed at times to resemble more of a holding company or conglomerate than anything else, nor that most consumers barely knew that Unilever as such existed.

There was, in fact, coherence to Unilever that rested on at least five corporate strengths. Unilever possessed, first, strong capabilities in branding and marketing. It understood local markets, and it knew how to market to them. It was at the frontier of market segmentation strategies in packaged consumer products. It opened up new product categories in deodorants and household cleaners. Unilever's brands were not strong enough to prevent the growth of private labels in Europe, but they were sufficient to maintain Unilever's strong position in higher margin products. It was able to leverage knowledge of brands and products between countries throughout the world, matching them to income levels and changing aspirations.

Secondly, Unilever developed strengths in the acquisition of other firms, and their subsequent "Unileverization." After the failed merger attempts of the late 1960s, Unilever professionalized its capabilities in this respect. It was conservative, missing opportunities as a result, but also avoiding disasters. The ice cream and other foods businesses were built patiently by the acquisition of one local firm after another, and their melding into the Unilever model. Following the National Starch acquisition, larger targets were pursued. The acquisition of Brooke Bond demonstrated that Unilever could make a hostile acquisition, while the acquisition of Chesebrough-Pond's two years later showed that Unilever could move quickly and decisively if it wished. Effective procedures were put in place to absorb acquired firms, which were flexible enough to take into account individual circumstances. From the 1980s Unilever also honed skills in divesting businesses. Unilever's ability to identify acquisition targets, and to absorb the capabilities of acquired companies, became one of its principal competitive advantages.

Unilever's research base was a third strength and source of coherence. The research laboratories in Britain, the Netherlands, the United States, and India were major sources of innovation. From gum health toothpaste to household cleaners, and from insect pollination of oil palms cloning to pregnancy tests, Unilever researchers were responsible for major innovations. The science base was high quality and deep. Research on animal feeds could lead over time into a successful pregnancy test. Unilever's knowledge about edible fats and detergents was second to none in the world. This research base not only provided the foundation for the development of new products, but was also indispensable for the constant upgrading and renewal of brands. Unilever's main problem was the time it took to turn scientific knowledge into successful branded products.

It entered the 1960s with an organization that was so decentralized as to be fragmented.

Fourthly, although a low-profile corporation, Unilever was embedded in business systems and official decision-making worldwide. This was derived from the company's long-established position as a large firm in many countries, from its role as a manufacturer of everyday products for eating and cleaning, and from its employment of nationals at senior levels. The upshot, seen in the case of the EU, was that Unilever had a "voice" in issues that concerned it, even if it was exercised discreetly through industry and other associations. In emerging markets too, Unilever was able to some extent to influence how policies were interpreted, in part because of the respect in which the company was held. The corporate reputation for integrity and competence was a major competitive advantage in this respect. A part of the reason why Unilever seemed less confident in the United States before the 1980s was that it lacked familiarity and networks within that country.

Finally, and most important, Unilever had distinctive strengths in management. Unilever invested heavily in its management. It recruited some of the best available graduates in each generation, not only from its home economies, but in many other countries also. Its early "localization" policies opened up the most senior positions within operating companies to nationals, enabling Unilever to tap high-quality staff all over the world. Unilever managers were given extensive training, and their career development was watched over carefully. A strong corporate culture, which coexisted with numerous subcultures, helped turn Unilever's management into the central binding force of the company, preventing it from becoming a "conglomerate" even at its most diversified. There were few "weird" people in the higher ranks of Unilever, yet compared to most companies, Unilever was distinguished worldwide by competent and professional management.

The challenge was to translate these strengths into a competitive performance that matched its peers, and delivered appropriate levels of return to shareholders. Unilever's historical legacy provided organizational and cultural constraints on the options available. It entered the 1960s with an organization that was so decentralized as to be fragmented. The British and Dutch components coexisted only loosely with one another. There was limited central direction, resulting in an excessive number of brands and factories organized nationally in a Europe undergoing economic integration, and a virtually autonomous business in the United States. There were barriers to flows of knowledge, especially across the Atlantic, but even between European countries. Unilever managers determined to see the differences between markets, when competitors saw the similarities. It was regarded as legitimate for all components of Unilever to pursue diversification opportunities with limited consideration for overall corporate priorities or capabilities. Research projects were pursued with little dialogue with the marketing function. Although Unilever had a strongly networked senior management, the tradition of decentralized authority created in some respects one of the world's least cohesive large businesses, and one in which establishing priorities in the allocation of resources was difficult.

There was also the past legacy of vertical and horizontal integration, which left Unilever owning considerable parts of the value chain. Its trawlers caught the fish that was eventually sold in its restaurant chains. Thousands of people were engaged to slaughter the animals some of whose parts ended up in Unilever's pies and sausages. Unilever made its own packaging, and transported its products on its own trucks and barges. It owned the distribution chain that delivered its frozen products to retailers. It ran its own advertising agency and market research company. These businesses were the product of past rational calculations, and some remained profitable and successful operations, but by the 1970s times had changed. Unilever found itself burdened, especially in Europe, with a high cost structure, and the task of managing businesses far removed from the manufacturing and branding of packaged consumer goods.

Much of Unilever's history from the 1960s revolved around the tension between retaining the benefits of local market knowledge and decision making, and containing the disadvantages of excessive decentralization and fragmentation. It proved difficult to change ingrained routines and practices. Shared values and strong networks kept Unilever together, but the need for agreement and discussion before taking action meant that it was hard to move quickly on major issues. It took twenty years to implement coordination in Europe. It took longer to rationalize production and brands on a Europe-wide basis. Unilever's "hands-off" approach to the U.S. affiliates persisted even after the decline of the detergents and margarine businesses, and the failure to grow an ice cream business, became widely discussed public knowledge. Decades of efforts went into turning scientific research into marketable products.

The managerial costs of too much decentralization, and diversification into businesses as diverse as ferries and floor coverings, became evident as the oil crisis in 1973 transformed Unilever's home market in Europe from a fast-growing "miracle" economy into one afflicted by recession and inflation. Unilever found itself burdened by low-margin businesses. The growing strength of European retailers and private labels undermined the profitability of branded food products. International competitors eroded Unilever's market positions in detergents. The attempts to find more profitable growth opportunities through innovation, in products as diverse as fresh dairy and feminine hygiene, largely came to naught, as did attempts to buy into the fast-growing personal care business.

By the mid-1970s Unilever's sales and profits performance were flat, and it was underperforming its major competitors. Unilever was sustained by strong positions in the detergents and personal care markets of Asia, Latin America, and Africa. The advantages of decentralization were especially seen in these overseas markets. Unilever proved flexible enough to retain them, fostered by its belief that ultimately consumers worldwide would want its products. Moreover the oil price rises resulted in an extraordinary growth of profitability of the UAC [United Africa Company] stemming from the booming economies of Nigeria and the Arab Gulf.

The Special Committee of each generation sought to minimize the gap between capabilities and performance. However, no Special Committee began with a clean sheet of paper. Indeed, they inherited such a formidable package of organizational and cultural norms, and of asset distribution, that their options for radical change appeared highly constrained.

During the years of Cole and Tempel, the key to improving performance was believed to lie in diversification. The Unilever "fleet" sailed in a variety of directions, motivated by the underlying belief that edible fats and detergents did not provide sufficient future growth prospects. The decisions to pursue the "third leg" in foods, to build a worldwide ice cream business, and to segment the margarine market proved critical to Unilever's future. Cole was inclined to believe that Unilever could make a success of any business that it wished. This proved to be an illusion, but it was one widely shared within the business world at the time. Diversification was the fashion of the moment, which managers were constantly under pressure to follow from consultants and opinion makers in the financial press and business schools. It was only later that the managerial diseconomies of widely diversified businesses became evident.

Hartog and Woodroofe were organizational modernizers who addressed the consequences of diversification. They drove through the concept of executive coordinations against internal opposition, and encouraged a more systematic approach to cash management, acquisitions, and research strategy. Woodroofe had a remarkable perception, decades before it became the subject of numerous management books, that the basis of Unilever's unique competitive advantage lay in its knowledge base. These years saw a major search for the organizational forms that would enable this knowledge to be exploited fully.

Among the principal achievements of Klijnstra, Orr, and Van den Hoven was the correction of the Anglo-Dutch imbalance within Unilever. The British preeminence within the Special Committee and the Board was anachronistic, and contributed to the fragmentation of Unilever's post-war organization between Britain and the Continent. By securing that Board, and ultimately Special Committee, meetings were held in both Rotterdam and London, Unilever began to become a more balanced Anglo-Dutch enterprise which, in turn, could start to reach out towards other nationalities. During these years also Unilever's strategic thinking became more focused, with an emphasis on reconfiguring the geographical basis of its business. This was not, as yet, matched by a dear product strategy. The UAC was permitted to seek diversification opportunities beyond West Africa by buying all manner of businesses in Europe.

There had been major progress at cutting costs, but less in creating an atmosphere for more dynamic risk-taking.

Van den Hoven and Orr ultimately took the decision to reassert Unilever's authority over its businesses in the United States. Unilever's weak performance in the United States market was an unsustainable position for a firm that aspired to be a global consumer goods player. The acquisition of National Starch demonstrated to its own management, as much as to outsiders, that Unilever was sufficiently self-assured to acquire a large firm in the world's largest market. However, it did not solve the issue of Lever's underperformance, nor did the guarantee of autonomy to National Starch's management help the case of those seeking greater influence in the affairs of Lever and Lipton. The real turning point for the American business came with the subsequent appointment of Angus as director responsible for North America, and the radical moves to integrate the U.S. subsidiaries in Unilever in strategic and operational matters, and to rebuild the detergents and margarine business. In Europe, Unilever's organizational legacy, as well as social legislation in most of Europe, imposed constraints on what could be achieved in the rationalization of production facilities and brands. In some respects the most notable achievement of the 1970s was to retain Unilever's business in emerging markets, despite the growing political risks and low remittances from major markets such as India.

The Special Committee of Durham, Maljers, and Angus launched a major corporate turnaround. This was a visible demonstration of the impact strong leadership could have on a firm's performance, although the circumstances were also propitious for radical change at Unilever. In the wake of a second major European recession, and with the collapse of UAC's profitability in Nigeria, Unilever could not carry on as before. Nor could Unilever's underperformance compared to its major competitors be hidden any longer from institutional investors. The strategy confirmed at the Marlow meeting in the spring of 1984 amounted, in Unilever terms, to a revolution, which over the following six years narrowed the gap between Unilever's cap-abilities and its performance.

The key achievement was the identification of Unilever as being in the fast-moving consumer goods business. By 1990 Unilever no longer fitted Cole's description of thirty years previously of being "several different fleets . . . doing all kinds of different things, all over the place." Major achievements included the disposal of a swathe of low-margin businesses and major acquisitions. The acquisition of Chesebrough-Pond's enabled Unilever to become a world leader in personal care just as the industry was globalizing and consolidating, as well as contributing substantially to the further renewal of Unilever's business in the United States. There was also a culture change as Unilever shifted from a company that tolerated underperformance to one that did not. The implementation of this culture change and of the core business strategy was no easy matter. Entire management groups were sold, and managers unaccustomed to radical change had to be convinced to accept the new strategic approach. By 1990 Unilever may have retained characteristics of a "club," but being a Unilever manager could not be fairly characterized as a "gentlemanly occupation."

The Special Committee system itself had both advantages and disadvantages. It was the antithesis of the charismatic chief executive increasingly favored by large corporations.2 It hardly contributed to a dynamic corporate image that Unilever was led by a Special Committee, and it did little to foster an entrepreneurial culture within the business. On the other hand, the system guarded against risky strategic moves, albeit not completely, as Cole's failed attempts to acquire Allied Breweries demonstrated. At its best, the Special Committee provided a mechanism for major decisions to be reached in a balanced fashion, as well as providing a basis for the British and Dutch components of Unilever to coexist with one another. Undoubtedly some Special Committees worked better than others, depending on the relationships between the individuals involved. The arrangement worked best when the two chairmen worked well together, and it was less effective when their relationship was more distant. The large and executive Board provided little check on the actions of the Special Committee. Directors executed policy rather than making it. The absence of non-executive directors, before the role of Advisory Directors was greatly strengthened in the 1990s, compounded the problem of a governance structure which provided no outside perspectives or checks on decision making.

By 1990 Unilever was no longer an underperforming firm. Its share price still seemed low compared to its competitors, but it was not a realistic takeover target. It was also evident that the legacy of the past had not suddenly disappeared either. There were still too many brands. Innovation was still too slow. There had been major progress at cutting costs, but less in creating an atmosphere for more dynamic risk-taking. Unilever was still edging towards a thorough rationalization of its European business. The foods business was still heavily reliant on edible fats and ice cream in Europe. There was still work to be done to extract value from Unilever's capabilities.

Footnotes:

1. "Unilever: The Heritage," Fortune, December 1947.

2. Rakesh Khurana, Searching for a Corporate Saviour (Princeton: Princeton University Press, 2002.)

About the author

Geoffrey Jones is a professor at Harvard Business School.

Excerpted with permission from Renewing Unilever: Transformation and Tradition, by Geoffrey Jones, Oxford University Press. Copyright Oxford University Press, 2005. All Rights Reserved.

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