Global Strategy Advisors. . . Challenging boundaries and beyondFebruary 19, 2006UnileverUnilever House, BlackfriarsLondon EC4P 4BQ, United KingdomSent Via Electronic MailRE: Strategy AnalysisLadies and Gentlemen:At the request of the Board of Directors of Unilever, we provide herein our analysis of thePersonal Products Industry and a strategy analysis of both Unilever and its biggest competitor,Procter & Gamble. The enclosed analysis also provides recommendations for Unilever toimprove its competitive advantage.Respectfully submitted,GSA
Procter & Gamble, Unilever and the Personal Products Industry Global Strategy AdvisorsLee Ann Graul, Sherry Henricks, Steve Olp and Charlene Strohecker University of Maryland, University College AMBA 607 February 19, 2006
Table of Contents1. Executive Summary i2. Industry Analysis-Personal Products Industry 1 a. Introduction 1 b. Industry Defined 1 c. Historical Data Analysis 2 d. Major Competitors 3 e. Trends and Industry Outlook 3 f. Strategic Challenges and Opportunities 5 g. Industry Conclusions 53. Procter & Gamble and Unilever 6 a. Competitor Analysis: P&G 6 b. Competitor Analysis: Unilever 8 c. Strategy P&G 10 i. Business Level 10 ii. Global 11 iii. E-Business 13 iv. Corporate 14 d. Strategy: Unilever 15 i. Business Level 15 ii. Global 16 iii. E-business 17 iv. Corporate 19 e. Conclusions and Recommendations 204. Appendices 22 A. SIC Code 2844 and Industry Description 22 B. Global Personal Products Industry, Market Segmentation 24 C. Personal Products Industry, Five Force Analysis 25 D. Global Personal Products Industry, Market Share 30 E. Market Growth 31 F. Producer Price Index (PPI) for SIC 2844 32 G. Industry Growth Rate-Sales 33 H. Average Revenue Growth: Industry 34
I. Historical Data-Personal and Household Products 36 J. Household and Personal Prod. Industry, Ranking by Revenues, Profits 38 K. Company Ranking by Personal Care Revenues 39 L. Trend Line, Exports, SIC 2844 40 M. Trend Line, Imports, SIC 2844 41 N. Fastest Growing Markets 42 O. Value Chain Analysis, P&G and Unilever 43 P. P&G, RBV Analysis 51 Q. Unilever, RBV Analysis 53 R. P&G Financial Analysis 55 S. Unilever Financial Analysis 61 T. P&G SWOT Summary 66 U. Unilever SWOT Summary 67 V. History of P&G Global Expansion 68 W. History of Unilever’s Global Expansion 69 X. Dynamic Resource-Based Model of Competitive Advantage 71 Y. Unilever’s Early Use of the Internet, 2000 72 Z. Global Data Synchronization Network 73 AA. Safeway, Unilever Complete Global Data Synchronization Project 74 BB. Unilever Initiatives in Information Technology 75 CC. P&G Portfolio: Product Groups & Businesses 76 DD. Unilever Portfolio: Product Groups & Businesses 79 EE. P&G e-Business Network 845. Endnotes 85
P&G and Unilever i Executive Summary This paper provides an examination of the personal products industry as a whole, including a review ofthe historical market share, financial performance, competition, and industry trends. Additionally, adiscussion of industry opportunities and challenges is conducted, presenting issues such as increases inthe cost of raw materials and operations, a slow recovery of growth due to the economy, changes ingovernment regulations, and the ever changing wants and needs of the consumer. These conditions createthe need for companies to respond quickly, develop innovative new products, and find ways to becomemore efficient while reducing costs. The industry itself is an attractive one, having steady growth,emerging global markets, and repeat purchases (consumables products), but also requires achievingeconomies of scale, significant investing in R&D, and developing brand loyalty. An examination of two major competitors in this industry, Procter & Gamble (P&G) and Unileverreveals a very competitive industry that is not yet highly consolidated. P&G is an industry leader focusedon innovation, knowledge sharing, improved efficiencies, cost reduction, and first mover advantage – i.e.quickly getting new ideas from conception to the shelf. Unilever is primarily focused on strong brandrecognition, expansion of its product lines through R&D, and development of alliances. Both P&G andUnilever take advantage of economies of scale and global expansion into emerging markets. P&G’s strategy is flexibility for quick response to market demands and opportunities, development ofstrong product branding, and new product innovation. To achieve speed and flexibility, P&G has been aleader in e-business implementation, obtaining real-time information and utilizing global knowledgesharing externally from its users, suppliers and buyers, and internally for management and productdevelopment. P&G also maximizes its value by investing in global markets through acquisition, jointventures, alliances, direct investment and direct marketing. P&G understands the importance of localmarket insights and successful management of people in foreign markets and subsidiaries and hasachieved competence in these key aspects of globalization. From a portfolio perspective, P&G’sinvestments and business developments have remained in or related to the consumer products industry,maintaining its focus. P&G Chemicals and Health Sciences lab reflect the vertical integration of itscurrent product line. While Unilever trails slightly behind P&G in most product segments, its similar focus on branding,product development and quality advertising has helped it hold its position. Unilever’s biggest challengesare in improving efficiencies to reduce costs, especially in its use of people and its time to market.Unilever’s costs and number of employees is much higher than P&G’s. As P&G takes a proactive roll ine-business and innovation, Unilever’s stance is a reactive one. Although Unilever seems to haveexpanded globally with some success, it seems to be lacking an overall global strategy. Learning andsharing information on a global scale is one of P&G’s strengths, but a weakness for Unilever. Unilever has improved its focus and resource allocations, as it divested itself of non-performers,allowing it to concentrate on performing products. Unilever needs to establish a focused strategy, andensure activities drive toward strategy achievement. The recent corporate restructuring should continue,with ongoing efforts to achieve a corporate structure, which will maximize strategy achievement. Theimprovements in overall communications, processes, and market introductions and management willenable Unilever to remain competitive and grow as an industry leader. Additionally, recommendationsprovided herein include an alignment of strategies, a strengthening of brand differentiation, and continuedinvestments in R&D, global expansion, advertising, and strategic alliances.
P&G and Unilever 1 INDUSTRY ANALYSIS – PERSONAL PRODUCTS INDUSTRYIntroduction The objective of this report is to provide an overview and examination of the Personal ProductsIndustry – covering industry structure, competitors, past and future performance trends, and conclusionsabout attractiveness for incumbents. Additional objectives include a competitor analysis, comparingProcter & Gamble and Unilever, an examination of their strategies, and recommendations for futuregrowth and sustainability. Our analysis includes global operations, financial results, market share andcurrent initiatives. Information for these analyses was derived from library databases, internet searchesand company websites.Industry Defined The industry segment chosen for this analysis has been assigned the SIC code 2844 entitled Perfumes,Cosmetics and other Toilet Preparations. Companies within this industry have referred to this marketsegment as the Personal Products Industry. A complete list of the products included in this industry hasbeen provided in Appendix A. The SIC 2844 category, when converted to the new North AmericanIndustry Classification System (NAICS) was further divided into 2 categories, 325620 (Toilet PreparationManufacturing) and 325611 (Soap and Other Detergent Manufacturing). The global personal products market encompasses fragrances, hair care, make-up, oral hygiene,personal hygiene, and skincare products. This highly competitive industry will “derive its futureperformance relative to global consumer spending patterns and raw material prices.”1 In 2005, theleading revenue source in this market was hair care, accounting for 25.5 percent of the global value (SeeAppendix B).2 This industry has recently been affected by rising commodity costs which, coupled withincreased marketing spending, put significant pressure on operating margins and earnings in 2005.Earnings per share (EPS) were expected to improve by 2006, as commodity costs began to stabilize.3 For an analysis of the Industry Structure, Porters 5 Forces Model4 has been used and provided inAppendix C. The result of this analysis reveals strong barriers to entry, moderate bargaining power of
P&G and Unilever 2buyers and suppliers, considerable threat of substitutes, and substantial rivalry among existing companies.This industry favors incumbents.Historical Data Analysis The CR4 analysis provided in Appendix D shows a total of only 28.7 percent of the market beingsatisfied by the top four producers in the industry. Therefore this industry as a whole is not consideredhighly consolidated. The market volume has shown an average growth of 2.2 percent for the four yearperiod, 2000 – 2004. (Actual rates are provided in Appendix E.) This reflects a slow recovery from thedownturn in the economy in the early 2000s, which followed an average 5 percent per year growthbetween 1996 and 2000.5 Market growth is expected to continue to grow steadily over the next fiveyears, with a projected average of 2.7% between 2006 and 2009.6 The Producer Price Index also shows aslow but steady growth over the past ten years (see Appendix F). The total value of industry shipments has steadily increased from $19.7 billion in 1994, $22.8 billionin 1997 to $28.8 billion in 2001.7 The market’s weighted average growth in sales for the past 5 years was9.95% and for the past three years increased to 11.29%8 (See Appendix G for details). Over the past 3years, the industry average EPS grew by 19.1% 9 (See Appendix H). The industry has seen slight increases in gross margin, operating margin, and sales when comparingthe five-year industry average to the most recent one-year average. In most cases, these figures haveexceeded the S&P 500’s averages (See Appendix I). The industry average Return on Assets (ROA),Return on Equity (ROE) and Return on Investment (ROI) have decreased when comparing the same timeperiods, however they still exceeded the S&P 500 Average. The Global Strategy Advisors believe thesedecreases were caused by higher operating costs (raw materials and fuel) in the past year and/or requiredlarger investment in assets or R&D since the Liquidity and Solvency Ratios were below average for thesame time periods. Such factors, however, will vary by company and a more in depth analysis of theindustry leaders would need to be made.
P&G and Unilever 3Major Competitors Fortune Magazine and Reuters group “personal products” together with “household products” whenanalyzing industries. As of April 2005, Procter & Gamble (P&G) was the leading company in terms ofrevenues and profits in the Household and Personal Products Industry, followed by Kimberly-Clark,Colgate-Palmolive, Gillette and Avon Products (See Appendix J). The October 2005 acquisition ofGillette by P&G10 solidifies P&G’s number one position on this list. Competitor ranking of the personalproducts industry (not combined with household products) as measured by market share is led by L’Oreal(8.8%), followed by Procter & Gamble (8.5%)11 (See Appendix D for an industry market share overview).When competitors in the Personal Care Industry are ranked by revenues however, the top three were (1)P&G, (2) L’Oreal and (3) Unilever (See Appendix K for rankings by revenue). Competitive advantage in mature industries often manifests itself in cost advantage from economies ofscale or experience and differentiation advantage through brand loyalty12 – all of which are characteristicof the personal products industry. Companies have instituted cost reduction programs (including thecreation of manufacturing efficiencies, renegotiated supply contracts, and employee and plant layoffs) toimprove margins during the last few years. Facing stiff competition from private labels, personalproducts companies rely on a high turnover of products in order to improve performance, thus requiringthe investment of significant resources into R&D. Additionally, many firms view emerging markets(such as China and India, where consumption of household products is low) as an opportunity to expandrevenues13 (For fastest growing markets in cosmetics and toiletries, see Appendix L).Trends and Industry Outlook The household products and personal care segments are expected to be the stronger within the USconsumer products industry – entering 2006 with a strong financial profile. These segments arecharacterized as having well-supported, strong brands and superior product development, commandingpremium pricing in sectors that are less cyclical.14 Two events that dominated the landscape in 2005 for consumer product companies will also have animpact on future performance – the continuation of raw material cost escalations, which in turn prompted
P&G and Unilever 4price increase announcements, and significant mergers or pending mergers - among them, P&G’sacquisition of Gillette. Many companies instituted cost reduction programs, but in the end, fewcompanies were able to fully offset raw materials cost escalation. In addition, industry competition in theform of advertising has ratcheted upward, largely due to the strong influence of P&G in 2005.15 Changes affecting the demographics and demands of the consumer, such as the aging baby boomerscausing an increase in the demand for age-defying skin care and hair color, or animal rights activistsprotesting animal testing, directly affect the industry. The growing need for compliance with morestringent environmental regulations, and the consumer demand for natural and organic products, have alsochanged how products are produced, requiring additional investment and expanded product lines. Keeping up with changing wants and needs of the consumer in order to remain competitive in thisindustry increases the need for investment in research and development. Globalization and the growingethnic population in the US will also continue to broaden the industry and create new market segments.Not only the US economy, but also the global economy, will affect sales for items not considered anecessity, such as some cosmetics, perfumes, and household items. The consumer will continue to beinfluenced by price and convenience for most products. “There is a close correlation between a country’sconsumption of soaps and detergents and its standard of living.”16 Trends in how consumers shop also affect the industry. Beginning in the 1990s into the 2000s,consumers began purchasing these types of products at mass discount centers, such as Costco and Sam’sClub, rather than at upscale department stores.17 These macro-level factors – environmental regulations(government), the global economy, the cost of raw materials, global competition, innovations in research,consumer demographics, and the ever changing wants and needs of the consumer – will continue toimpact the performance of companies in this industry. Companies expected to fare well in the future arethose with strong momentum from earlier and successful restructuring actions whose cost savings areramping up quickly, with less exposure to specific raw materials, and with balance sheet flexibility.18
P&G and Unilever 5Strategic Challenges and Opportunities As mergers and acquisitions continue, this industry will likely become more consolidated, which,along with strong entry barriers and substantial rivalry among existing members, will favor sustainabilityfor incumbents. Cost and availability of raw materials may continue to pose a threat to smaller firmslacking adequate capital reserves to compensate for additional costs. Future performance in this industrywill be tied to global consumer spending patterns and raw material prices. Expansion into global marketswill be important for future growth. As is seen by the trends in imports and exports provided inAppendices L and M, expansion into the global market is not new to this industry. “Low consumption ofhousehold products in emerging markets – such as China and India – represents an opportunity forcompanies to expand their revenues and escape from the stale performance of their home markets.”19The fastest growing and emerging markets include the Pacific Rim20, Latin America, and EasternEurope21 (see Appendix N). While the Asia-Pacific area is noted to be a key emerging market for this industry, one of the mainhindrances in this area has been low income.22 Products designed for areas with higher incomes may notbe suitable for emerging markets; thus companies desiring to expand into this region will need to invest indevelopment of products that can be priced more affordably. A global expansion study would berecommended to determine which countries would provide the best opportunity. The expanding US Market for natural and organic personal care products is an opportunity forindustry to provide products for a growing consumer want and need. Most US Consumers are willing topay, and are used to paying, a higher price for natural and organic products. If the personal productsindustry can find ways to produce natural and organic products at reasonable costs, the profit margins onsuch products are expected to be greater than their non-organic counterparts.Industry Conclusions The attractiveness of the Personal Products industry includes such elements as steady growth inconsumer demand and repeat purchase of the products, since most are consumables. Some larger currentproducers are achieving economies of scale, brand loyalty, and first mover advantage. Other smaller
P&G and Unilever 6producers have developed a market niche for a specific consumer need and have been successful. Thechallenges in this industry include taking advantage of economies of scale in order to compete on pricewith current companies, keeping up with changes in customer preferences and government regulations(e.g., labeling, chemical handling, and environmental impact), and the investment in R&D required tostay ahead of the competition with new product innovation. PROCTER & GAMBLE AND UNILEVERCompetitor Analysis: P&G William Procter (a candle maker from England) and James Gamble (a soap maker from Ireland)founded Procter & Gamble Company when, through a series of events, the two strangers traveled to theUnited States, met and married sisters. At their father-in-law’s urging, Procter and Gamble pledged$3,596.47 each, and formed the Procter and Gamble Company in 1837.23 The Company, headquartered inCincinnati, Ohio, has reported revenues of $56.8 billion for the fiscal year ended June 2005.24 Thisrevenue comes from sales in over 160 countries, balanced worldwide with one half from the domesticmarket and one half from the international market.25 Today, P&G markets more than 300 brands, of which 22 are $1B sales producers, 26 and has MarketDevelopment Organizations in 80 countries, leading teams to build brands organized in sevengeographies: "North America, Western Europe, Northeast Asia, Latin America, Central and EasternEurope/Middle East/Africa, Greater China and ASEAN/Australasia/India".27 Their products are soldprimarily in grocery stores, discount stores, through mass merchandisers, membership club stores, andhigh frequency stores (neighborhood stores in developing countries).28 The Company and its 110,000employees are organized into three global business units, P&G Household Care (33% net earnings), P&GFamily Health (30% net earnings), and P&G Beauty (37% net earnings).29 These global business units aredistributed into five segments, Health Care, Baby and Family Care, Snacks and Coffee, Fabric Care,Home Care, and P&G Beauty30 (See Appendix O, Value Chain Analysis, for an overview of P&Gstructure and primary activities). The business segment being examined in this report, P&G Beauty;encompasses personal cleansing, antiperspirants or deodorants, cosmetics, colognes, hair care, feminine
P&G and Unilever 7protection, hair color, and skin care, includes five $1Billion brands, and achieved double digit growth for2005, with a net profit margin of 13%, ROI of 12%, and ROE of 42% on 7.257M Sales31,32 (SeeAppendix Q, Financial Analysis, for a P&G company overview). P&G’s competitive advantages arise from several key factors, one of which is innovation. Spending$2B annually on R&D and deploying approximately 7,500 researchers in technical centers around theworld, P&G is a leader in innovation.33 They have 29,000 patents, and over the past eight years, haveintroduced the #1 or #2 new non-food products in the US.34 Key to their success is knowledge sharingand cross-borders replication of innovations, reducing costs and quickly expanding the companyknowledge and line offerings.35 Another factor contributing to their competitive advantage is their large-scale operations and go-to-market capabilities that provide first mover advantage and limit the ability ofcompetitor’s to copy ideas and replicate them.36 Additionally, economies of scale and scope inpurchasing, distribution, business services and merchandising provide financial and trade advantages.Lastly, P&G is well known for its brand management and brand leadership capabilities, which aresignificant advantages for customer loyalty and market penetration (See Appendix O for P&Gs RBVAnalysis). Supplementing their innovations, facilitating their rapid go-to-market capabilities, as well astheir customer and partner management is P&Gs significant use of IT and tracking systems, includingCRM, EDI, and RFID, that improve R&D speed and capabilities, communications, information trackingand sharing, and inventory management37 (See Appendix O, Value Chain Analysis, for an overview ofP&G supporting technologies and awards for excellence). In order to sustain their competitive advantage, P&G must continue to utilize their acknowledgedstrengths, as well as continue to exploit international growth, especially in emerging markets, as P&G iscurrently overexposed in the US and Western Europe.38 Additionally, the company is moving away fromthe commoditized household products and food businesses and should continue its focus on personal carehealth and strong household businesses that provide for more profitable growth.39 P&G has also beensuccessful with its mergers and acquisitions strategy, such as the recent acquisitions of Clairol in 2001,Wella in 2003, and Gillette in 2005, and should continue this strategy.40 Active portfolio management,
P&G and Unilever 8using divestiture and acquisition strategies, has been shown to increase stakeholder value;41 P&G needs toreview longer held businesses and lower earners for their continued value to the organization, divesting ifneeded. P&G has been diligently participating in activities that should ensure a good future of sustainability.Their R&D has enabled ongoing introduction of new lines, as well as expansions and adaptations ofcurrent lines to meet local needs. Their Corporate Standards System application provides for innovativeR&D methods to reduce costs while increasing quality and enhancing go-to-market capabilities.42 Theyneed to successfully fold in Gillette, and have recognized $1B in cost synergies as this integrationoccurs.43 Additionally, a strong focus on expansion in developing countries is being undertaken andshould provide significant growth opportunities, in conjunction with their maintenance of market shareand line extensions in developed countries. P&G needs to look at their businesses, however, and ensuregood fit and value-added, and continue activities that have been driving organic growth and increasingEPS (2.831 basic normalized EPS; 2.662 diluted normalized EPS 2005), as well as increase free cashflow, ROI, and profits, which their activities are focused on to accomplish (See Appendix R for financialson P&G and Appendix T: P&G SWOT Analysis).Competitor Analysis: Unilever Unilever was officially formed in 1930, through the merger of Lever Brothers, a British soapmanufacturer and Margarine Unie, a Dutch margarine manufacturer.44 It has since become one of thelargest direct investors in the United States.45 Unilever is unique in that it has maintained a dualownership structure since its inception, governed by an equalization agreement.46 Although the companyhas two legal entities as its parents, one Dutch (Unilever NV), and one British (Unilever plc), it has onlyone board of directors47 and reports one set of financial statements.48 Today Unilever is present in 150 countries, employs over 223,000 people, and has numerous well-known brands, 12 of which each have worldwide sales exceeding €1 billion.49 Unilever has products forthree markets, home, food, and personal care,50 which fall into 6 primary categories: home care (17%),
P&G and Unilever 9spreads (12%), savory & dressings (21%), beverages (8%), ice cream & frozen foods (16%), and personalcare (26%)51 (See Appendix Q for Unilevers structure and primary activities). In the area of personal care, one of the segments where Unilever competes directly with P&G,Womens Wear Daily ranked Unilever ($9.3 billion) the third largest cosmetics company behind LOreal($17.7 billion) and P&G ($16.5 billion).52 Company-wide, P&Gs sales are around $70 billion andUnilevers are around $50 billion.53 P&Gs sales are nearly 40% greater than Unilevers, withapproximately 40% of Unilevers employee headcount.54 Clearly there are fundamental operationaldifferences between Unilever and P&G. Unilevers competitive advantages arise from strong brand recognition, such as Dove and Birds Eye,strong R&D initiatives for line expansion, and leading brands in personal care, deodorant and personalwash.55 Their renewed focus on strong line expansion (especially after reducing their number of brandsfrom 1600 products to approximately 400 in 2003),56 and alliances with strong corporate partners such asPepsi are also advantages. In order to sustain their competitive advantage, Unilever has several issues toresolve (See Appendix Q for RBV Analysis). First, it has been a complex company, with two CEOs,separate organizational structures (PLC and NV), and earnings reported in two venues, Euro andDollars.57 This complexity increased costs, and impacted opportunities for efficiency economies of scaleand scope, not to mention the potential concern in transparency in reporting.58 The 2004 figures reflecteda net profit of 5%, ROI of 6%, ROE of 37%, sales of 48,204M and net income of 2468.5M (SeeAppendix S, Unilever Financial Analysis). Sales were flat in 2004, and Unilever began a major push forelimination of non-productive lines, cost elimination, share buybacks, focus on core products and regionalactivities with increased spending on R&D, marketing, and advertising, resulting in increased salesgrowth in many regions.59 In 2005, Unilever initiated consolidation efforts (One Unilever) including development of oneexecutive group (from three), a decrease in the number of executive managers by one-third, a flattening ofthe organization, and a restructuring that created global groups, such as a global brand strategy group.60One such effort at consolidation is the 2005 sale of Unilever Cosmetics International unit to Coty for
P&G and Unilever 10approximately $800 million.61 For future sustainability, Unilever needs to continue their operationalenhancements, including additional outsourcing when needed (as was done in business support services),add line extensions with core brands while guarding against negative impacts should an extension fail,look to mergers and acquisitions to support their growth and development, protect against exchange ratefluctuations, and continue to expand globally, especially in India and China, the identified locations forsubstantial growth.Strategy: P&GBusiness-level Strategy P&G, with the largest product portfolio in the consumer products industry, faces significantchallenges maintaining cost efficiency and scale economies while creating innovation anddifferentiation.62,63 With their recent acquisition of Gillette, P&G now has 22 brands that each exceed $1Bin annual sales, with a balance of ten- $1B brands in Beauty and Health, and twelve-$1B brands in Baby,Family and Household lines.64 The company is divided into four pillars: Global Business Units, MarketDevelopment Organizations, Global Business Services and Corporate Functions, each working separatelyand together to bring competitive advantage to P&G.65 As competition from other major global and smalllocal companies are vying for market share, a sound business strategy, with a focus on flexibility andresponsiveness, is required to maintain and grow their leadership position.66 P&Gs business strategy focuses on large-scale operations, strong product branding, and productinnovation to develop competitive advantage.67 P&G is the global leader in its four core categories, BabyCare, Feminine Care (35%), Fabric Care (approximately 30%), and Hair Care (greater than 20%).68 Toachieve sustainability and continued growth, P&Gs strategy is to continue to innovate and sell productsthat appeal to retail trade customers and consumers, providing pricing and product that adds value for thecustomer, while improving efficiencies in sales and operations with their ongoing restructuring andtechnology enhancements, and quickly responding to competitive advancements.69 Their comprehensiveresearch network and $2B of research spending annually support their innovative focus, and they havereceived awards for supply chain management (#1 in 2004), are leaders in inbound logistics, and are
P&G and Unilever 11technology innovators for improving efficiencies and reducing costs, such as with bar coding and wirelesstechnologies.70 With their market knowledge and focus on efficiencies, they excel at "demand chainplanning," identifying their "target markets requirements and designing the supply chaining backwardfrom that point. 71 Additionally, P&G uses business development structures combining sales, logistics,finance, marketing, and IT to work with trade customers for ways to add value to the consumer, includingMarket Development Organizations in 80 countries, to provide focus and management for increasingcustomer concentration at the retailer and country levels, growing volume in developed and developingmarkets, and focusing on higher profitability lines for growth; Beauty and Health Care.72 P&G has been awarded #1 best category management and consumer marketing, another competitiveadvantage, and continues to concentrate on relationship management with customers and suppliers.73 Useof the Siebel CRM solutions has improved efficiencies and reduced costs, and needs to be furtherimplemented beyond the US and Western Europe.74 With ongoing improvements in resourcemanagement, planned divesture and ongoing acquisition strategies, and continued maximization of theirproduct innovations, marketing, and rapid go-to-market strategies, P&G should continue to meet (andexceed) its business goals.75Global Strategy P&G has made substantial investments globally, and used acquisitions, joint ventures, and alliances toexpand their market understanding and reach. Key to expansion are three competencies P&G hasdeveloped: 1) understanding of the foreign marketplace, 2) ability to manage people in foreign markets,and 3) skills at managing foreign subsidiaries.76 Their global strategy includes innovation, increasingmarket share on base business while focusing on each business as well as on each industry, and investingin the developing marketplace.77 P&G has gained substantial market knowledge, has innovative databases including over 100 millionconsumers across 30 countries, utilizes a blend of local and expatriate managers, and provides training,global resource centers, and partnerships and alliances for managing foreign subsidiaries, all successfulactivities that promote local acceptance and a climate enabling knowledge transfer.78 Their flattened
P&G and Unilever 12structure and focus on relationship management with stakeholders provides for efficient and rapidcommunications throughout the value chain.79 These capabilities have afforded P&G the opportunity toleverage insights from the local shopper, consumer, and retailer to generate cross-business unit plans andcreate efficiencies across the breadth of P&G lines. 80 With their marketplace knowledge and researchcenters strategically located throughout nine countries, P&G focuses on 360-degree innovation,identifying significant opportunities and acting on them quickly.81 For example, P&G modified productsin their upper tier and launched middle tier level products in Russia, driven by their identification of thebeauty-conscious orientation of women in that marketplace.82 Other examples of their approach tolearning, knowledge transfer, and rollout based on market understanding is the learning from SK-11 storecounters in Asia. Knowledge from that rollout was then integrated into the Olay launch in Spain,83demonstrating a reduced risk method of global expansion, where launches are first piloted on a limitedbasis, then expanded upon.84 Overall, P&G has a well-developed knowledge base and global mindset, and with innovation a keycomponent of their global strategy, they have created the ability to implement distribution systems thatcan move innovations across borders.85 P&G has been an early adopter and substantial user ofinformation technologies, and has been recognized by CIO Magazine for its “Corporate Standards Systemapplication” that revolutionizes the way their employees and partners collaborate, reducing costs,improving product quality, and getting products quickly to the marketplace.86 P&G has had success expanding globally with its strategies of acquisition, strategic partnering,innovation, and rapid go-to-market strategy (See Appendix V for the History of Global ExpansionP&G).87 P&G has coordinated activities to provide a global network with all activities, structure andcoordination driving for a global competitive advantage. However, P&G is at risk due to overexposure inthe US and Western Europe, and needs to continue growing globally.88 It is estimated that 90% of theworlds population will be in developing countries by 2010.89 P&G has been working to expand rapidlyin these markets, and in fact, their presence in high frequency stores has grown 50% in 4 years, and inChina alone, P&G serves 2000 cities and 11,000 towns.90
P&G and Unilever 13E-Business Strategy P&G’s CEO wants P&G “to be known as the company that collaborates – inside and out – better thanany other company in the world”91 P&G’s strategy and e-business focus is three-fold: “one-to-onecommunications, real-time and predictive business intelligence, and ‘virtualization’ of businessprocesses.”92 Sales and distribution is through retail partners – drug stores, grocery stores, and wholesaleclubs (such as Costco). P&G does not have direct selling of its products through the internet, however,P&G does utilize the internet as a valuable resource tool for its domestic and global operations to improvethe efficiency and effectiveness of managing its supply chain, internally share R&D information, logisticsfor retail partners, transportation, billing and payment, and for video conferencing and customerinformation and feedback. These resources all interact electronically to provide real-time access toinformation to those who need it, creating a competitive advantage. Such a system can provide real-timeinformation regarding costs and other metrics in order to more quickly identify problems or issues andimplement a resolution (See Appendix X For network details). P&G has also created such centralized e-business sites for the business-to-business (B2B) side.P&G’s website PGEDI.com provides an electronic exchange of information between P&G and its tradingpartners, suppliers, current and prospective retail partners, financial institutions, and transportationcarriers. P&G fully utilized its Electronic Data Interchange (EDI) as a hub of doing business. The WebOrder Management System and Customer Portal assist partners in purchasing, managing and promotingproducts by providing critical data, product information, order status and invoices 24 hours a day, everyday. There are also links to track shipments, make payments, receive invoices, and share data.P&G has invested in Yet2.com Inc., an Internet company that has launched a web site that allowscompanies to post their technologies for license or sale.93 P&G has taken a “use it or lose it” approachsince many of its patents are not being used. P&G has also invested in a marketing collaborative softwaredevelopment company called Emmperative, formed in February 2001, which provides a way of sharingsignificant information share data; working simultaneously on the same files; even pulling up researchcollected by colleagues in other countries for various brands and re-applying it to other product
P&G and Unilever 14developments.”94 Creating this central library for accessing information allows for faster turnover andmore efficient use of time and information. P&G also sells basic marketing and management techniqueson the web site. Initiatives and investments such as these, in accordance with the Dynamic Resource-based Model of Competitive Advantage,95 are valuable resources that enable P&G to increase itsefficiency and effectiveness, and if complex enough, are difficult for the competition to easily imitate.Such early involvement and sizable investment in e-business as a tool reinforces P&Gs position as aleader in the industry. From an end-user standpoint, customers can visit PG.com and sign up for P&G’s monthly emailedpublication, Everyday Solutions, which offers tips, promotions, and free samples, or seek expert adviceabout personal care, household, health & wellness, baby & family, or pet care. P&G also has numerousinternet sites for specific brands and products where customers can obtain information, coupons, andsamples, as well as provide feedback, such as pampers.com, charmin.com, iams.com, tide.com and manyothers.96Corporate Strategy P&G markets over 300 products in 160 different countries. P&G groups its business into twocategories, foundation business and higher growth business. Foundation Business includes Fabric, Home,Baby, Family care, and snacks and coffee. P&G also has a Market Development Organization organizedin seven97 geographical areas, and among others, a commercial product segment, P&G Chemicals, HealthSciences, and P&G Europe98 (See Appendix CC for list of businesses and product group descriptions).P&G’s portfolio includes other ventures related to its core products, i.e., P&G Chemicals, Inc. whichvertically integrates ingredients for some of its products and P&G Health Science which is a research labfor product development. P&G divested its juice business in August 2004, acquired Wella in 2003, and most recently, acquiredGillette.99 Internationally, in 2005 P&G acquired a Pharmaceuticals business in Spain, a Fabric carebusiness in Europe and Latin America, and increased ownership in its Glad venture with the CloroxCompany. P&G continues to both look for acquisition opportunities that are related to its core business
P&G and Unilever 15and develop new products, and they do it well. “In a rapidly globalizing world, focusing on core expertiseand collaborating with partners in innovative ways are the keys to growth”100 which is exactly what P&Gis doing. P&G is aware of their core products and business foundation, but also understands that thedevelopment of new products through innovation, research and development is the key to maintaining itscompetitive advantage. P&G should continue its current successful strategy.Strategy: UnileverBusiness-level Strategy Most companies that hold a market leadership position do so by achieving the right balance betweendifferentiation and low cost.101 In the consumer products industry, consumers have many choicesregarding which brand they select. With twelve brands that each exceeds €1 billion in annual sales,102Unilevers market leadership cannot be sustained if costs are significantly higher than a competitorsproducts. Similarly, without adequate differentiation, brand loyalty could be difficult to maintain. For Unilever, the current business-level strategy would be characterized as a differentiation strategy,where the emphasis is on branding, advertising quality and new product development. Unilever holds theworld number one position in five of six food segments, and two of six segments in Home & PersonalCare (skin and deodorants).103 Unilever holds the (world) number two position in two of the six Homeand Personal Care segments (Laundry and Daily Hair Care) and is number three or less in HouseholdCare and Oral Care.104 Company resources have been divided into two primary functions, oneresponsible for brand development, innovation, and brand strategy ("Categories"), and the other formanaging the business, effective deployment of brands and innovations, and winning with customers("Regions").105 Their commitment to R&D and innovation is clearly stated through their missionstatement ("Add vitality to life") and their corporate purpose ("Vitality Innovation").106 The alignment ofcompany resources with its strategy is an important component for sustaining a competitive advantage.107With its resources aligned and a commitment to funding its significant R&D spending, Unilever shouldbe well positioned to sustain and improve their current standings. Perhaps the greatest risk to sustainingtheir competitive advantage is the high SG&A costs of Unilevers current organizational structure.
P&G and Unilever 16Global Strategy Unilever’s global presence has deep roots, beginning with the founding companies (See Appendix Wfor a history of Unilever’s global expansion). At various stages throughout the course of Unilever’shistory, there is evidence that the firm was driven by nearly all five global expansion imperatives -- thegrowth imperative, the efficiency imperative, the knowledge imperative, the globalization of customers,and the globalization of competitors108 -- in its efforts to globalize. However, Unilever’s progress inexploiting global presence may in fact be hampered by the lack of an overarching global strategy. With 223,000 employees in over 150 countries,109 Unilever is proud of its deep roots in local culturesand markets worldwide, which enables it to bring its wealth of knowledge and international expertise tolocal consumers. In doing so, Unilever labels itself as a “multi-local multinational”110 and truly believesthat it is creating value through global expansion by adapting to local market differences and tapping themost optimal locations for activities, resources and product launches. In an effort to “win Latin America,” Unilever embarked on a number of transformational initiatives,with the goal of “One ULA” (Unilever Latin America) and a regional approach based on fourcornerstones -- strategic leadership; innovation, market share and brand health; excellence in reachingconsumers and customers; and implementing common processes, systems and shared services. In threecountries in this region, Unilever is the market leader for four out of six primary HPC categories.111 With 44 operating companies in the Asia/Africa region, and brands sold in 98 countries, Unilever isthe market leader in most priority categories in countries where it has a presence (key markets includeIndia, South Africa, Indonesia, Thailand, Vietnam and the Philippines). In this region, Unilever placesemphasis on: serving and delighting consumers; deepening partnership with customers; and buildingrelationships with local communities.112 Unilever’s current expansion plans call for a focus on the developing and emerging markets, where thecompany enjoys a long-established presence, has established consumer intimacy, and prides itself onaffordability. Thirty-five percent of Unilever’s turnover is in developing and emerging markets, productsare tailored to different income levels, and Unilever’s distributions systems reach deep into these areas.113
P&G and Unilever 17 Unilever is aiming for “seamless global development,”114 with system-wide automation and datasynchronization, among other things, to make this possible. Further, in at least one of its brands, it hasopted to consolidate its advertising accounts into one global agency network -- an example of centralizingkey business functions -- which, though cost effective, runs counter to being sensitive to local markets,and “global box-ticking can’t match intuitive knowledge of local markets.”115 However, despite all thereferences that Unilever has made to global strategy and its acknowledged global presence, the companyhas not articulated an overarching global strategy that clearly outlines the alignment of all functions in thevalue chain to that strategy. While it has taken steps to adapt to local markets, and capture economies ofglobal scale and global scope, as Trevor Gorin, press officer for Unilever has stated, Unilever needs to“counter threats in specific markets” and transplant learnings from one place to another.116 Unileverneeds to take the next steps in ensuring global competitive advantage, by evaluating the “optimality of itsglobal network for each activity in its value chain,”117 along each of three dimensions: activityarchitecture, locational competencies and global coordination. 118E-Business Strategy Unilever’s e-business strategy continues to evolve, from its early membership in a B2B marketplace,to participation in the GDSN, the implementation of RFID technologies,119 and the creation of an onlinebuying system for making certain types of purchases from suppliers.120 The firm’s e-business strategyfocuses primarily on the use of the internet and information technologies (IT) to achieve operationalefficiencies in dealing with suppliers and in utilizing its distribution network. The firm’s e-businessstrategy is progressing, but its IT initiatives are not unique or rare within this industry, nor are theyinimitable. Unilever has made significant advances – most notably its alliance with Safeway, however,according to the Dynamic Resource-based Model of Competitive Advantage (DRMCA) (See AppendixX), Unilever will need to continue to add new and industry-leading IT resources to build and sustain aresource-based advantage. 121 Many of the products in the personal products industry fall under the category of “experience goods”– that is, the qualities and characteristics of those products are only recognized after consumption.122 As
P&G and Unilever 18such, those products by and large do not lend themselves well to e-commerce – purchases by consumersvia the internet. However, as early as February 2000, Unilever was making plans to invest heavily inelectronic commerce, in an effort to slash costs, radically change its supply chain, and reach out toconsumers. The company recognized that it could achieve significant savings by using the internet to“buy everything from raw materials to cardboard.”123 Unilever also began using the internet to targetconsumers of its products by advertising selected products on websites catering to specific consumermarkets (See Appendix Y for Unilevers early use of the Internet).124 Unilever and P&G are members of Transora,125 a B2B marketplace consisting of 49 companies.126Transora merged with UCCnet to form 1SYNC, which offers a cost-effective data pool with solutions andservices that support user needs, and helps the industry maximize the value of data synchronization.127Unilever, as a member of Transora, was part of an enterprise-wide effort in 2004 to test the GDSN – aninternet-based supply chain initiative launched to streamline communication of product information128(See Appendix Z). Furthermore, in June 2004, Safeway and Unilever heralded the success of their jointGlobal Data Synchronization initiative; the first time that product information had been “synchronizedbetween the leading supply side and demand side data pools” (See Appendix AA). 129 Other examples ofUnilever’s forays into e-commerce and information technologies include: the implementation of radiofrequency identification (RFID) tags,130 the Unilever Private Exchange (which provides secure linksbetween operating companies and suppliers’ and customers’ systems and to external electronicmarketplaces),131 Ariba, Unilever’s online buying system (which “enables purchases of non-productionitems to be made at volume-negotiated prices from selected suppliers”)132 and ISIS, Unilever’s supplymanagement information system (which helps local, regional and global supply managers to gather andanalyze information quickly, and make appropriate sourcing decisions)133 (For additional informationabout Unilever’s utilization of information technology, see Appendix BB).
P&G and Unilever 19Corporate Strategy Corporate strategy addresses the scope of the firms activities, including the portfolio of businesses thata firm chooses to engage in, the locations or geography it will cover, and the amount of verticalintegration it employs.134 Unilevers strategy is to have strong customer relationships at the local level,everywhere they do business, and to be seen as "a truly multi-local multinational".135 Unilevers activitiesare spread across six primary business categories, including home care, spreads, savory & dressings,beverages, ice cream & frozen foods, and personal care,136 and are sold in 150 different countries.137 Aspreviously mentioned, Unilever is number one or two in all but three segments in which they compete. Inthe segments where they are not number one or two, they face intense competition and weak consumerspending, particularly in Europe.138 Further, the business is in an area that is relatively mature andsegmented.139 It is in cases like this where companies might benefit from a divestiture of low-growth,under-performing business units in order to free up resources to focus on higher growth, higher profitopportunities.140 (For additional details see Appendix U: Unilever SWOT Summary). A decision to divest the brands that are under-performing would not be foreign to Unilever; over thelast several years the brand count has been reduced from over 1,200 to around 400 as part of an overallrestructuring campaign.141 With a stated focus on developing and emerging markets, particularly in thearea of personal care,142 divesting the European frozen foods units would free up resources, provide cashfor additional debt reduction, and help reduce their high SG&A costs. Such a move would better positionUnilever for sustained profitability, however, should Unilever wait too long before executing thisdivestiture, they risk a reduction in the value of the business due to further brand depreciation.143Another option for the cash that would be generated through the divestiture of low-growth businesseswould be to seek out potential acquisitions that offer growth or complimentary products, and would helpconsolidate a market. Consolidating markets can help provide sustained competitive advantage byreducing the overall level of competition.144
P&G and Unilever 20 Conclusions and Recommendations This comparison clearly shows why P&G is a leader in the industry. Unilever can learn from P&Gand further develop itself as a leader. Taking into consideration the analysis provided, Global StrategyAdvisors believe that there is considerable opportunity for Unilever to strengthen its profitability andsustainability; however it will require strong discipline and careful analysis in terms of pursingappropriate acquisitions and divestitures, cost reduction programs, product and brand differentiationinitiatives, and alignment of strategies. Unilever must remember to base its strategies and activities onthree fundamental questions: Who are our target customers? What value do we want to deliver to thesecustomers? How will we create this value? Based on the results of our analysis presented in this report,we recommend the following plan of action for the next 5 years (with annual reviews of progress to date): • Align Unilever resources to strategies; align strategies to optimize all value chain components. Regional Unilever strategies are individually strong; develop an overarching global strategy that provides consistent direction and ensures global synchronization and pooling of knowledge and best practices. E-Business strategy progressing; continue to invest in IT and internet solutions to achieve global efficiencies in negotiations, electronic transactions, and communications related to suppliers, distribution networks, and retailers/customers. Look for opportunities for vertical integration: cost savings and increased efficiencies can be created with this modification in the Unilever portfolio. • Strengthen consumer research and brand differentiation. Continue consumer research efforts to ensure an understanding of the global marketplace. Continue consumer research to ensure that products and brands are meeting target customer needs, while identifying new opportunities. Utilize partnerships and alliances for market understanding and product development. • Continue investments in R&D initiatives for increasing line extensions and new products; develop fallback plans should line extension efforts fail, and pursue increased efficiencies and cost reduction strategies.
P&G and Unilever 21• Balance differentiation with low costs and continue reducing SG&A costs. Market leadership cannot be sustained if your costs continue to exceed that of your competitors’ products. Seek opportunities to out-source, where economically feasible and ROI is highly probable.• Aggressively pursue acquisitions and divestitures. Sell off under performing businesses or slower performing brands (European frozen foods businesses, for example). Identify potential acquisitions that would help consolidate markets and thereby enhance Unilever’s market leadership. Use proceeds from divestitures to acquire businesses. Identification of optimal acquisitions is beyond the scope of this paper; a market analysis is required to identify best acquisition options that would complement existing brands and product lines, and promote market consolidation.• Exploit and expand global presence. Conduct (or contract for the development of) in-depth global expansion study to identify risks/benefits of potential regions and focus on markets with growth opportunities. Exploit markets where consumption of household products is low; identify locations where first mover advantage is possible, and where that competitive advantage can be sustained. Explore increasing global research centers, but only when alliances/investments are aligned with Unilever strategies and where projected ROI will enhance pursuit of goals of profitability and sustainability. Seek alliances that may produce ways to increase speed-to-market and leverage global opportunities while increasing protection against exchange rate fluctuations.• Continue to pursue strategic corporate alliances for R&D, when such alliances fit with and add value to Unilever’s strategies and where ROI justifies cost.• Increase focused advertising, especially for higher profit line and expansion in emerging countries.
P&G and Unilever 22APPENDIX A: SIC CODE 2844 AND INDUSTRY DESCRIPTION2844 Perfumes, Cosmetics, and Other Toilet PreparationsEstablishments primarily engaged in manufacturing perfumes (natural and synthetic), cosmetics, andother toilet preparations. This industry also includes establishments primarily engaged in blendingand compounding perfume bases; and those manufacturing shampoos and shaving products, whetherfrom soap or synthetic detergents. Establishments primarily engaged in manufacturing syntheticperfume and flavoring materials are classified in Industry 2869, and those manufacturing essentialoils are classified in Industry 2899. • Bath salts • Bay rum • Body powder • Colognes • Concentrates, perfume • Cosmetic creams • Cosmetic lotions and oils • Cosmetics • Dentifrices • Denture cleaners • Deodorants, personal • Depilatories, cosmetic • Dressings, cosmetic • Face creams and lotions • Face powders • Hair coloring preparations • Hair preparations: dressings, rinses, tonics, and scalp conditioners • Home permanent kits • Lipsticks • Manicure preparations • Mouthwashes • Perfume bases, blending and compounding • Perfumes, natural and synthetic • Sachet • Shampoos, hair • Shaving preparations: e.g., cakes, creams, lotions, powders, tablets • Soap impregnated papers and paper washcloths • Suntan lotions and oils • Talcum powders • Toilet creams, powders, and waters • Toilet preparations • Toothpastes and powders • Towelettes, premoistened • Washes, cosmeticRetrieved February 7, 2006, fromhttp://www.osha.gov/pls/imis/sic_manual.display?id=614&tab=description
P&G and Unilever 23APPENDIX A, pg 2: GLOBAL INDUSTRY RANKING BY SICCurrent Industry: 2844 - Perfumes, Cosmetics and Other Toilet PreparationsSource: Business & CO Resource Center, Toiletries and Cosmetics." Encyclopedia of Global Industries. Online Edition.Thomson Gale, 2006. Elf Aquitaine Paris La Defense $124,532.10 M Sales Nestle S.A. (NSRGY) Vevey $63,563.20 M Sales Sunstar Inc. (4913) Osaka $59,038.00 M Sales Procter and Gamble Co. (PG) Cincinnati, Ohio $56,741.00 M Sales Unilever London $53,674.00 M Sales E. Merck Darmstadt $49,882.00 M Sales Johnson and Johnson (JNJ) New Brunswick, New Jersey $47,348.00 M Sales Abbott Laboratories (ABT) Abbott Park, Illinois $19,680.00 M Sales Pharmachim Holding Sofia $19,563.40 M Sales Sanofi-Aventis (SNY) Paris $19,024.70 M Sales LOreal SA (LORLY) Clichy $18,317.00 M Sales Wyeth (WYE) Madison, New Jersey $17,358.00 M Sales Christian Dior S.A. Paris $17,219.90 M Sales LVMH Moet Hennessy Louis Vuitton S.A. (LVMHF) Paris $17,108.00 M Sales CP and P Inc. Atlanta, Georgia $16,083.00 M Sales Hayel Saeed Anam Group of Cos. Taiz $12,157.90 M Sales IPP Ltd. Dar es Salaam $11,549.50 M Sales Colgate-Palmolive Co. (CL) New York, New York $10,584.20 M Sales Gillette Co. Boston, Massachusetts $10,477.00 M Sales Kao Corp. (KCRPY) Tokyo $8,723.80 M Sales Unilever United States Inc. New York, New York $8,000.00 M Sales
P&G and Unilever 24Appendix B: Global Personal Products Industry, Market Segmentation145 Global Personal Products Market Segmentation: % Share, by Value, 2004 Oral hygiene Haircare 12.30% Make-up 25.50% 13.30% Fragrances Skincare 13.70% 18.70% 16.50% Personal HygieneThe leading revenue source in the personal products market is hair care, which accounts for25.5% of the global value.
P&G and Unilever 25Appendix C: Personal Products Industry, Five Forces Analysis PERSONAL PRODUCTS INDUSTRY FIVE FORCES ANALYSIS (Industry Attractiveness Analysis from the Perspective of Major Incumbents )I. Barriers to Entry and/or MobilityFactor Yes Comment/Support No ( ) ( )Large firms do not have a cost or performance Large firms do indeed enjoy economiesadvantage in your segment of the industry. For of scale in this industry – andexample, costs do not decline significantly with advantages of size, scale and diversityvolume. (No economies of scale) of products.146There are no “experience curve” economies in this This industry encompasses a wideindustry. (This is different from economies of scale. variety of products and brands; industryThe existence of experience effects in an industry leaders have been masterminds inmeans that incumbents are able to have lower costs due developing innovative products147 –to past learning and experience, and that it would be which suggests that they benefit fromdifficult for less experienced firms to gain the same experience curve economies – in manylevel of performance without going through the same aspects of their businesses, to includelearning process.) product development, distribution networks and supply chain.There are no proprietary product differences in the Patents abound in this industry. 148industry. (For example, existing companies’ productsare not protected by patents)There are no established brand identities in the These segments are characterized asindustry. (Lack of brand equity for incumbents) having well-supported, strong brands, and superior product development, commanding premium pricing in sectors that are less cyclical. 149Not much capital is needed to enter the industry. (For Industry entry requires capital to eitherinstance, used equipment might be available, as in the acquire an existing company or toairline industry, to start operations) construct facilities and purchase all manufacturing (and R&D) equipment.Newcomers to the industry will be able to access Incumbent companies establishexisting distribution channels. contracts with firms in their distribution channels, and enjoy an advantage (particularly the industry leaders) due to size.Newcomers to the industry will have little difficulty in While human resources may beobtaining the necessary inputs and resources (e.g., available, establishing partnershipsskilled people, materials, or suppliers) to start business with suppliers and distributors will takeoperations. time. Incumbent firms have the advantage.The industry rate of growth is high. “Global personal products market grew by 3.4% in 2004 to reach a value of
P&G and Unilever 26 $152.4 billion.” 150 Market is forecasted to have a value of $182.9 billion in 2009 – an increase of 20.1% since 2004.151 Highest growth area expected in the Asia-Pacific region, due to current low penetration of personal products in large markets (China, India).152The industry has well-defined product standards or Product standards are fairly well-specifications, which newcomers can implement. defined; many FDA regulations govern this industry, to include prohibiting manufacturers from making therapeutic claims based on the vitamin content of skin care products. Some U.S. states have instituted regulations limiting the use of volatile organic chemicals (VOCs) as a result of pressure to reduce the use of VOCs for environmental reasons. 153 Government regulation, intervention, consumer concern over animal rights and environmental concerns have affected the industry for more than 100 years.154Newcomers to the industry will be able to obtain the Planning and establishing personalnecessary licenses and permissions to start operations. products manufacturing facilities involves permits and adhering to environmental and government regulations.The industry offers newcomers one or more potential There are many different marketpoint of entry. (Incumbents haven’t attempted all segments and niches where a newpossible viable strategies in the industry) entrant might specialize, however competition is fierce, with leaders regularly introducing new products.The industry has no history of retaliation by No evidence of retaliation byincumbents against new entrants. Industry economics incumbents against new entrants,(e.g., low fixed, high variable cost, low level of however industry leaders are goliaths!consolidation) is such that incumbents don’t typicallyreact to new entries. Note: The greater the number of NO checks, the more attractive the industry to incumbents.
P&G and Unilever 27II. Bargaining Power of BuyersFactor Yes Comment/Support No ( ) ( )The buyer industry is more consolidated than my Buyer industry will continue to grow,industry. as companies continue to expand globally. Many products in this industry are fundamental to health and cleanliness, and of use to people of all ages. Product lines target males and females.Buyers buy in large quantities. A draw here – consumers buy in small quantities; distributors (Wal-Mart, etc.) purchase in large quantities.My product is a small part of the buyers cost of inputs. Yes, for consumers as well as distributors.The buyer does not face any significant costs in No significant costs associated withswitching suppliers. (That is, my buyers can easily switching suppliers.purchase from my competitors.)Does the buyer need a lot of important (technical) While some products are becominginformation to inform its purchasing decision? (In such more sophisticated (anti-agingsituations, buyers tend to be more knowledgeable about products; products with vitamins;what they are buying.) natural products), technical information is not required in making purchasing decisions.The buyers can vertically integrate backwards into your Many firms are vertically integrated inbusiness. this industry – large multinational firms are engaged in every aspect of the production process.155 It is difficult for buyers to vertically integrate backwards into these businesses.III. Bargaining Power of SuppliersFactor Yes Comment/Support No ( ) ( )The supplier industry is more consolidated than my Supplier industry is not any moreindustry. consolidated than personal care industry.My business is not important to the suppliers. Business is important to suppliers.The quality of inputs is critical to my finished Many firms in industry are verticallyproduct. integrated156; quality is of prime concern in each step of production chain.
P&G and Unilever 28My inputs (materials, labor, supplies, services, etc) Each market has its own uniqueare unique or differentiated. That is, I cannot switch preferences and needs; one-size-fits-allsuppliers quickly and cheaply. approach will not work when supplying global markets. Therefore, supplies, services must be differentiated.157I dont have many supplier alternatives. There are many, many personal care contract manufacturing suppliers for this industry.158My suppliers can vertically integrate forward into my There are many different componentsbusiness. and ingredients, from raw materials (cultivation of plants and flora used in fragrances), through the final production stages159 and packaging and distribution. It would not be easy for suppliers to vertically integrate forward.IV. Threat of SubstitutesFactor Yes Comment/Support No ( ) ( )My customers have one or more substitutes available See appendix D – top four firms make upto them.(For example, high fructose corn syrup is a only 28% of market share; substitutes aresubstitute for sugar in many industrial applications.) readily available.At least one of the substitutes performs well and While brand loyalty exists for somecould pose a threat to my business. firms, substitute products perform well and can pose a threat.My customers will not incur much costs or critical Little costs incurred in switching foruncertainties in switching to a substitute. consumers; distributors/retail giants will need to renegotiate contracts (to possibly include transportation). Proximity of manufacturing plants to distributors/retail stores is an advantage (lower transportation costs).V. Rivalry Among Existing CompetitorsFactor Yes Comment/Support No ( ) ( )My industry is not growing rapidly or the industry is “Global personal products market grewin the decline stage of its life cycle. by 3.4% in 2004 to reach a value of $152.4 billion.” 160 Market is forecasted to have a value of $182.9 billion in 2009 – an increase of 20.1% since 2004.161 Highest growth area expected in the Asia-Pacific region, due to
P&G and Unilever 29 current low penetration of personal products in large markets (China, India).162The industry is fragmented and exhibits boom-and- This industry is not fragmented; leadingbust cycles. firms in this industry are not small, relative to the size of the industry.163The industry has excess capacity, or the industry is Excess capacity not evident; industry iscyclical with intermittent excess capacity. not markedly cyclical.The industry suffers competition from companies Not the case.based in low-cost locations.There are high exit barriers. Investment in facilities, R&D, distribution networks is substantial, making exit pricey.Major competitors in my industry are of comparable Leading firms (those with comparablesize. levels of differentiation) are similar in size.There are no significant product differences and brand Industry is characterized as havingidentities among the major competitors. well-supported, strong brands, and superior product development, commanding premium pricing in sectors that are less cyclical. 164My competitors are mostly specialized in my line of Some industry leaders specialize inbusiness and are not diversified. limited segments, however most provide a variety of brands and products, some of which span multiple industries.Overall Ratings of the Five Forces Yes Comment/Support No Force (# (# (Relative to the Power of Checks) Checks) Incumbents)Barriers to entry/mobility 4 8Bargaining power of buyers 3 4Bargaining power of suppliers 1 5Threat of substitutes 3 0Rivalry among incumbents 2 6 Total No. of Checks 13 23Note: The greater the number of NO checks, the more attractive the industry is to incumbents.
P&G and Unilever 30Appendix D: Global Personal Products Industry, Market Share - % Share by Value,2004165 Global Personal Products Market Share: % Share, by Value, 2004 LOreal, 8.80% Procter & Gamble, 8.50% Unilever, 7.80% Colgate- Palmolive, Other, 71.20% 3.60%The leading player in the personal products market is L’Oreal, which accounts for 8.8% of the globalvalue.The four-firm concentration ratio (CR4) is calculated by adding the market share of the four largest firmsin the industry. The top four companies in the Global Personal Products industry represent 28.8% of themarket share. A CR4 of 40% or higher represents a consolidated industry; industries that reach that ratiobegin to exhibit oligopolistic behavior.166 While this industry is becoming more consolidated, particularlyas industry leaders merge with or acquire other firms, it would not be characterized as an oligopoly.P&G’s acquisition of Gillette in 2005 will very likely change this picture in Datamonitor’s 2006 reports.The following CR4 table shows the total of less than 80% and is therefore not considered highlyconsolidated. Company %shareLOreal 8.8P&G 8.5Unilever 7.8Colgate-Palmolive 3.6TOTAL 28.7 Source: Datamonitor, 2005, May.
P&G and Unilever 32APPENDIX F: Producer Price Index (PPI) For SIC 2844The following was obtained from the US Bureau of Labor website. A family of indexes that measure the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures that measure price change from the purchasers perspective, such as the Consumer Price Index (CPI). Sellers and purchasers prices may differ due to government subsidies, sales and excise taxes, and distribution costs.Series Id: PDU2844#Industry: Perfumes, cosmetics, and other toilet preparationsProduct: Perfumes, cosmetics, and other toilet preparationsBase Date: 8003Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual1993 165.3 165.9 166.7 167.2 167.2 166.9 166.7 166.7 167.0 166.9 166.9 166.8 166.71994 167.2 167.0 166.1 165.9 167.7 166.0 164.6 168.4 166.2 167.4 165.1 166.8 166.51995 168.5 165.2 167.9 167.2 168.2 167.3 167.4 165.1 166.6 166.1 167.4 168.0 167.11996 169.2 170.0 167.6 167.8 168.6 168.4 168.7 168.2 167.9 168.3 168.4 168.5 168.51997 168.9 169.1 168.8 168.8 169.1 169.1 168.8 168.5 168.7 168.8 168.9 169.1 168.91998 169.4 170.0 170.6 170.9 172.3 172.4 172.4 172.1 171.8 172.1 172.4 172.5 171.61999 172.5 172.6 173.8 172.9 172.8 176.0 176.0 175.4 175.6 176.2 176.7 176.6 174.82000 176.5 176.5 176.4 176.7 177.6 177.5 177.3 178.2 178.9 179.1 179.1 179.0 177.72001 179.6 179.4 179.2 179.4 179.4 179.4 179.1 179.0 178.9 179.3 179.0 178.8 179.22002 179.3 180.3 180.2 180.4 180.1 180.8 180.8 180.7 180.7 180.7 180.6 180.7 180.42003 181.0 181.0 181.9 181.9 181.9 181.8 181.7 181.7 181.8 181.9 181.9 181.9 181.7
P&G and Unilever 33Appendix G: Industry Growth Rate - SalesNote: this source did not include Unilever in its categorization of Personal & Household Prods. Industry.source: http://www.investor.reuters.com/ Data as of 2/9/200672 companies 3 Yr. Sales Growth 5 Yr. SalesName TTM Sales $ Rate% Growth Rate%MktCap Weighted Average 44,319.94 11.29 9.95McKesson Corporation 85,876.80 17.22 17.01The Procter & Gamble Company 61,675.00 12.14 7.27Mitsui & Co., Ltd. (ADR) 32,205.62 12.27 45.65Colgate-Palmolive Company 11,396.90 7.03 4.83
P&G and Unilever 34Appendix H: Average Revenue Growth: INDUSTRY Name Revenue M Revenue Growth Rev Growth, 3 yrs Industry Average $44,319.9 11.0% 11.3% 1. McKesson Corporation $85,876.8 15.8% 17.2% 2. The Procter & Gamble Company $61,675.0 10.4% 12.1% 3. Mitsui & Co., Ltd. (ADR) $32,205.6 18.2% 12.3% 4. Colgate-Palmolive Company $11,396.9 7.7% 7.0% 5. Avon Products, Inc. $8,149.6 5.2% 9.5% 6. Newell Rubbermaid Inc. $6,479.8 -2.1% -0.5% 7. The Estee Lauder Co. $6,362.9 9.4% 10.4% 8. Shiseido Co. LTD. (ADR) $5,396.2 2.5% 2.7% 9. The Clorox Company $4,508.0 5.4% 2.9% 10. Ecolab Inc. $4,465.9 11.2% 21.7% EPS Name EPS EPS Change (1yr) EPS Growth (3yr) Industry Average 3.5 14.0% 19.1% 1. Mitsui & Co., Ltd. (ADR) 19.6 61.3% 26.4% 2. Pillowtex Corporation 15.6 203.9% NA 3. The Clorox Company 3.0 26.2% 23.8% 4. The Procter & Gamble Company 2.6 14.7% 19.9% 5. McKesson Corporation 2.5 -124.4% NA 6. Grupo Casa Saba, S.A. (ADR) 2.5 6.8% 12.5% 7. Colgate-Palmolive Company 2.4 4.2% 3.6% 8. Alberto-Culver Company 2.3 47.2% 13.6% 9. USANA Health Sciences, Inc. 1.9 54.4% 137.2% 10. Blyth, Inc. 1.8 18.1% 15.4 Name Gross Margin Operating Margin Net Profit Margin Industry Average 47.8% 15.4% 9.7% 1. China Techfaith Wireless Comm. Tech. Ltd 61.8% 47.6% 48.5% 2. Pillowtex Corporation 4.6% 35.3% 33.0% 3. The Yankee Candle Company, Inc. 57.8% 24.1% 14.2%