Unilever Analysis - Case Study Example

Name: XXXXXXXXXXXXXXXXXXXXX Course: XXXXXXXXXXXXXXXXXXXXXX Institution: XXXXXXXXXXXXXXXXXXXXXX Tutor: XXXXXXXXXXXXXXXXXXXXXXX @2014 Introduction Unilever is a multinational company operating in different countries. It deals in consumers products and it is considered a giant in this industry (Unilever, 2013). The company therefore has to contend with the demands of different markets and societies which it has managed to do so, so far. Although capitalism has served the business world effectively for a long time, Unilever’s hierarchy believes that capitalism has achieved its successes at the expense of sustainable living (Polman, 2014). This has been characterized by unsustainable levels of private and public debt, excessive consumerism, and a continually increasing gap between the rich and the poor. For this reason, Unilever recently launched a new business model with focus of sustainable living. The reason for this business model is that the company realizes that these changes will affect the company too as the costs of commodities fluctuate, markets become less stable and raw materials become difficult to source (Polman, 2014). According the company’s CEO, Unilever has a role to play in looking for a solution and this means that business for the company will have to change with sustainable and equitable growth being the only acceptable business model. How Unilever’s model seeks to be responsible to society and environment Unilever’s sustainable living business model therefore seeks to enrich people’s lives by improving their health and well-being. To achieve this, the company has in place educational programmes featuring its products such as Dove, Lifebuoy, and Pureit in-home water purifier. These programmes are meant to change people’s hygiene behavior as well as their self-esteem (Polman, 2014). Additionally, the company rates nutrition high in every person’s life and has therefore made it its responsibility to make sure that it leads the pack in ensuring consumers make sound nutrition decisions. As a result, the company long term goal is to reduce, sugar, salt, empty calories and saturated fats from all its products. A good example of this is when the company removed Trans fats from all products in September 2012. This business model doesn’t stop here because the company believes that the planet’s environment has been affected massively and this is evident from the climatic changes taking place at the moment. Unilever, through its business model, therefore advocates for reduced environmental impact by reducing greenhouse gases. One of the ways this can be achieved is by concentrating its liquids and compacting its powders. The positive of doing this is that less energy is needed during the production of these products and consequently this leads to reduced greenhouse gases (Unilever, 2015). Secondly, through its research carried out by it open innovation team in 2012, Unilever found out that cold water washing laundry products also reduced greenhouse emissions. This avoids the use of hot water and hence reduces carbon dioxide emissions by about 550 pounds annually for a single household. Since Unilever transports its products to different regions around the world, the realization that truck mileage plays a role in greenhouse emissions cannot go unnoticed. The company therefore wants to reduce its truck mileage by using alternative transportation means such as rail and shipping. This promises a 40% improvement in carbon dioxide emissions. Unilever’s CEO Paul Polman is aware that there are countries that do not have enough water for their daily use. Most cleaning products produced by most companies require that consumers use a lot of water to rinse these products off. This is not sustainable as it only means that the little water consumers in such regions have, most is spent in cleaning. Unilever therefore seeks to have products that are easy to rinse thus saving communities a lot of water to be used for more important issues such as cooking (Fletcher, 2011). In addition to this, seven of its factories will strive to use less than half the amount of water the same factories used to use in 2008. Halving the footprint of its products is also the company’s goal and it seeks to achieve this by reducing waste. The company has achieved this by reducing its packing through investing in Material Capability Group who are specialists suppliers. It has also incorporated technology in the packaging of its skincare ‘Citra’ product whose bottles use bi-model resin and this has reduced packing materials by approximately 70 tonnes. Apart from reduced packing, the company is at the forefront of recycling programmes. The company’s ice-cream and margarine tubs use materials that are easy to recycle. The sustainable living business model is generally aimed at enhancing livelihoods. It is therefore no surprise that Unilever has placed great emphasis on sustainable sourcing of its raw materials. By 2014, the company had ensured that its soy beans were sourced sustainably from farmers all around the world. The company’s next goal is to ensure total sustainable sourcing of all its soy oils by 2020 (Unilever, 2013). The tea found in Unilever’s Lipton tea bags is sourced solely from the Rainforest Alliance Certified estates. This ensures that the company follows its code of ethics to the latter by making sure that the producers of the coffee beans are well remunerated and are working under good conditions. The company has gone further to ensure that it supports small scale distributors and smallholder farmers thus improving the livelihoods of these farmers and distributors. Unilever’s business model is desirable to the shareholders. Investors are interested in company growth as this is the only way that they can get their return on investment (Unilever, 2015). This is rightly so, because any investor investing in company expects to get a good return on his investment. While others believe that there is bound to be a conflict between sustainable consumption and business growth, Mr. Polman is of the opposite opinion. In fact, he believes that sustainable growth is demanded by retailers and consumers and that it also saves money for the company. There are investors who are skeptical about Unilever’s business model but what should be put into focus is that the sustainable living and growth business model is about long term value creation (Anderson, 2010). There is therefore a strong relationship between doing business sustainably and making profits. According to Mr. Polman, the issues of smallholding farming, food security and deforestation are very critical and affect the way the company does business. If the company doesn’t tackle these issues given the industry it operates in and its position in the industry, the possibility of going out of business becomes high. Shareholders must therefore understand that by Unilever taking a back sit in looking for a solution, they will not get a return on their investment. In fact, they risk losing all their investment if Unilever does nothing. Desirability of Unilever’s model to its shareholders As stated earlier, Unilever’s business model is a long term model and this means that the company must look for investors with a longer-term focus. With the sustainable growth business model in place, the company has seen consistency in its top and bottom line progress as well as consistent dividend increases. This is proof that the company’s business model is achieving results and that the future will only get better (Harvard Business Review, 2012). Since its shareholder base is shifting from short term focused to longer term focused shareholders, these shareholders should be comfortable with the company’s longer term goals. Unilever is therefore going beyond corporate social responsibility and philanthropy by making a positive contribution to the society (Polman, 2014). Companies that want to exist in the future must do this and therefore Unilever’s shareholders must embrace sustainable growth if they want enjoy the fruits of the company’s business model. Major problem Unilever faces with regards to shareholders’ goals Given that Unilever’s business model is more long term than short term, the company faces a dilemma regarding the demands of its shareholders. The company has millions of shareholders and like any other company the size of Unilever, these shareholders have different objectives. While some will want the company to spin off businesses and get a quick return, others will want share buybacks. While others will want increase in dividends other will demand faster growth for the company (Polman, 2014). With these many demands leveled to the company, it becomes very difficult for Unilever to meet the demands of each and every shareholder, both short term and long term. The different between short term and long term shareholders therefore is that the short term shareholders want returns on their investment within five years of their investing. The longer term shareholders on the other hand will wait up to ten years to start enjoying the benefits of their investment. Carrying out social and environmental responsibilities will affect short term investors because focus will be on the long term goals. While the short term goals will lead to the achievement of long term goals, short term investors will be affected by the volatility of the company’s share price. After the launch of the company’s business model, every time it announced its quarterly financial reports, its share price would become very volatile. This is not good news for the short term investor (Polman, 2014). At one point in time, Unilever’s share price fell 8% due to this volatility. For the short term investor, the urge to sell shares when prices are high and buy when prices are low is increased greatly and this leads to mistakes which can affect their investment. On the flip side, this volatility attracted other short term speculators who wanted to get a quick return. Additionally, the company’s performance becomes less clear to the short term investor and this may lead to making uninformed decisions (Confino, 2015). However, for the long term investors, the situation is different as they understand that consistency over the years is enough proof that the company is doing well. The long term investors also understand that Unilever doesn’t have to compromise on the short term goals as it strives to achieve its long term objectives. Social and environmental responsibilities of Unilever thus give long term investors the opportunity to participate in the company’s sustainable growth. Such participation gives long term investors the assurance of a return of investment in the long term. Given these two classes of investors, I believe that Unilever should not sacrifice its social and environmental commitments in order to be responsible to “short-term” investors. Long term profitability for Unilever is dependent on the company’s fulfillment of its social and environmental responsibilities. This is because the society and the environment give life to the company in the first place and therefore ignoring these responsibilities will lead to the death of the company in the long term. Social and environmental issues will affect the profitability of businesses if not tackled effectively. The only way to ensure that Unilever survives and becomes profitable is by adopting a longer term model, in this case the sustainable living and growth model (Corporate Social Responsibility Newswire, 2013). This will promise consistent growth in the short term and profitability in the long term. Whether or not to invest in a company making low profits in the short term Personally, I would invest in a company even if I knew that its short term profit would be lower because of its social and environmental responsibilities. As an investor, the most important thing I look for in a company is the consistency in its performance and not whether its profits are low in the three years. If the profits are lower within the first three years but consistent within the same period, the company is communicating a message that in the long term and with the same consistency, its profits will get better. Furthermore, short term targets are the drivers to the achievement of long term objectives. Company growth and performance goes beyond just profitability because today, there are far more important issues that need addressing than a company’s profitability (Forbes., 2013). While profits will benefit just the shareholders, companies should rise to the occasion in enhancing people’s livelihoods. This can only be achieved by fulfilling social and environmental responsibilities with the promise of generating reasonable returns in the long term. In my opinion, I believe that the society would be a better place if more companies were as committed to social and environmental issues as is Unilever. The steps and programs initiated by Unilever will have a great effect on the society and the environment. If more companies follow suit, then the positives will be more than doubled thereby improving the society and the environment. The climate will be better, the gap between the rich and the poor will reduce, public and private debts will reduce, and consumerism will be lowered. This however can only be achieved if more companies become as socially and environmentally responsible as Unilever. While the government can help achieve this, I do not believe that they should require companies to be as socially and environmentally responsible as Unilever. This should be a business’ undertaking and not a requirement. Socially and environmentally committed companies like Unilever will make the society a better place If however, we all allow companies to focus on solely on returns to shareholders, a lot of negatives will affect the society. First and foremost, businesses will not be serving the society as it is supposed to do and will only be serving its shareholders. As a result, business will resort to doing everything within their power to ensure that their shareholders get a return on their investments, however unethical. The environment will suffer a great deal as environmental sustainability will take a back seat. Environmental pollution will then lead to an unhealthy society and hence reduce productivity. With a nation’s productivity reduced, the possibility and an increased private and public debt will be imminent and this will in turn lead increased disparity within the rich and the poor (Polman, 2014). Conclusion Gone are the days when businesses did business for the sake of making profits. Businesses cannot afford to sit on the fence and watch as the society and the environment face challenges that are the making of man himself. Society and environment responsibility should form the basis of every company’s business strategy. If nothing is done, everyone stands to lose and this is a decision that companies cannot afford to make. Unilever has set the pace and it has shown that social and environmental responsibilities need not affect a company’s bottom line. All that is required is leadership that is willing to make a long term strategy the company’s goal. If more companies followed Unilever’s business model, the society will be a better place. References Unilever, 2015. Our strategy for sustainable business. [online] Available at http://www.unilever.com/sustainable-living/the-sustainable-living-plan/our-strategy/. [Accessed on 30 May 2015] Polman, P., 2014. Business, society, and the future of capitalism. [online] McKinsey Quarterly. Available at http://www.mckinsey.com/insights/sustainability/business_society_and_the_future_of_capitalism. [Accessed on 30 May 2015] Unilever, 2015. Annual Report and Accounts Overview. [online] Available at http://www.unilever.com/investor-relations/annual-reports-and-accounts/. [Accessed on 30 May 2015] Anderson, R., 2010. Unilever says sustainability key to new business model. [online] Available at http://www.bbc.com/news/business-11755672. [Accessed on 30 May 30, 2015] Fletcher, C., 2011. Unilever Says ‘New Business Model’ Necessary for Food Security. [online] Available at http://www.bloomberg.com/news/articles/2011-01-18/unilever-says-new-business-model-necessary-for-food-security. [Accessed on 30 May 2015] Unilever, 2013. About Unilever: Introducing Unilever. [pdf] Unilever. Available at www.unilever.com.sg/.../About_Unilever_presentation. [Accessed on 30 May 2015] Harvard Business Review., 2012. Unilever’s CEO on Making Responsible Business Work. [online] Available at https://hbr.org/2012/05/unilevers-ceo-on-making-responsible-business-work/. [Accessed on 30 May 2015] Corporate Social Responsibility Newswire., 2013. Unilever Sustainable Living Plan Helping to Drive Growth. [online] Available at http://www.csrwire.com/press_releases/35499-Unilever-Sustainable-Living-Plan-Helping-to-Drive-Growth. [Accessed on 30 May 2015] Forbes., 2013. We Need Business Models that Blend Profit and Sustainability. [online] Available at http://www.forbes.com/sites/skollworldforum/2013/04/08/we-need-business-models-that-blend-profit-and-sustainability/. [Accessed on 30 May 2015] Confino, J., 2015. “Will Unilever become the world's largest publicly traded B Corp?” The Guardian, [online] 23 January. Available at http://www.theguardian.com/sustainable-business/2015/jan/23/benefit-corporations-bcorps-business-social-responsibility. [Accessed 30 May 2015] Read More