Global Strategy Advisors. Challenging boundaries and beyond February 19, 2006 Unilever Unilever House, Blackfriars London EC4P 4BQ, United Kingdom Sent Via Electronic Mail RE: Strategy Analysis Ladies and Gentlemen: At the request of the Board of Directors of Unilever, we provide herein our analysis of the Personal Products Industry and a strategy analysis of both Unilever and its biggest competitor, Procter & Gamble. The enclosed analysis also provides recommendations for Unilever to improve its competitive advantage. Respectfully submitted, GSA Procter & Gamble, Unilever and the Personal Products Industry Global Strategy Advisors Lee Ann Graul, Sherry Henricks, Steve Olp and Charlene Strohecker University of Maryland, University College AMBA 607 February 19, 2006 Table of Contents 1. Executive Summary i 2. 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 5 3. 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 20 4. 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 84 5. 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 of the historical market share, financial performance, competition, and industry trends. Additionally, a discussion of industry opportunities and challenges is conducted, presenting issues such as increases in the cost of raw materials and operations, a slow recovery of growth due to the economy, changes in government regulations, and the ever changing wants and needs of the consumer. These conditions create the need for companies to respond quickly, develop innovative new products, and find ways to become more 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 achieving economies 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 Unilever reveals a very competitive industry that is not yet highly consolidated. P&G is an industry leader focused on 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 brand recognition, expansion of its product lines through R&D, and development of alliances. Both P&G and Unilever 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 of strong product branding, and new product innovation. To achieve speed and flexibility, P&G has been a leader in e-business implementation, obtaining real-time information and utilizing global knowledge sharing externally from its users, suppliers and buyers, and internally for management and product development. P&G also maximizes its value by investing in global markets through acquisition, joint ventures, alliances, direct investment and direct marketing. P&G understands the importance of local market insights and successful management of people in foreign markets and subsidiaries and has achieved competence in these key aspects of globalization. From a portfolio perspective, P&G’s investments 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 its current 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 challenges are 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 in e-business and innovation, Unilever’s stance is a reactive one. Although Unilever seems to have expanded globally with some success, it seems to be lacking an overall global strategy. Learning and sharing 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, and ensure activities drive toward strategy achievement. The recent corporate restructuring should continue, with ongoing efforts to achieve a corporate structure, which will maximize strategy achievement. The improvements in overall communications, processes, and market introductions and management will enable Unilever to remain competitive and grow as an industry leader. Additionally, recommendations provided herein include an alignment of strategies, a strengthening of brand differentiation, and continued investments in R&D, global expansion, advertising, and strategic alliances. P&G and Unilever 1 INDUSTRY ANALYSIS – PERSONAL PRODUCTS INDUSTRY Introduction The objective of this report is to provide an overview and examination of the Personal Products Industry – covering industry structure, competitors, past and future performance trends, and conclusions about attractiveness for incumbents. Additional objectives include a competitor analysis, comparing Procter & Gamble and Unilever, an examination of their strategies, and recommendations for future growth and sustainability. Our analysis includes global operations, financial results, market share and current initiatives. Information for these analyses was derived from library databases, internet searches and 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 market segment as the Personal Products Industry. A complete list of the products included in this industry has been provided in Appendix A. The SIC 2844 category, when converted to the new North American Industry Classification System (NAICS) was further divided into 2 categories, 325620 (Toilet Preparation Manufacturing) 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 future performance relative to global consumer spending patterns and raw material prices.”1 In 2005, the leading revenue source in this market was hair care, accounting for 25.5 percent of the global value (See Appendix B).2 This industry has recently been affected by rising commodity costs which, coupled with increased 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, Porter's 5 Forces Model4 has been used and provided in Appendix C. The result of this analysis reveals strong barriers to entry, moderate bargaining power of P&G and Unilever 2 buyers 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 being satisfied by the top four producers in the industry. Therefore this industry as a whole is not considered highly consolidated. The market volume has shown an average growth of 2.2 percent for the four year period, 2000 – 2004. (Actual rates are provided in Appendix E.) This reflects a slow recovery from the downturn in the economy in the early 2000s, which followed an average 5 percent per year growth between 1996 and 2000.5 Market growth is expected to continue to grow steadily over the next five years, with a projected average of 2.7% between 2006 and 2009.6 The Producer Price Index also shows a slow 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 billion in 1997 to $28.8 billion in 2001.7 The market’s weighted average growth in sales for the past 5 years was 9.95% and for the past three years increased to 11.29%8 (See Appendix G for details). Over the past 3 years, the industry average EPS grew by 19.1% 9 (See Appendix H).