Managerial Economics: Unilever Corporation

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Introduction

The competitive nature of many markets and the likely future prospect of continued economic turbulence as national and global economic fortunes vary requires that business managers continue to look for opportunities to improve performance. This will primarily be achieved by improving effectiveness in the areas of winning/retaining customers, developing organizational competence, and financial control. Unilever is a multinational company founded in 1911 by William Lever. Today, Unilever is the largest producer of branded consumer goods, including food and beverages, personal care products, and cleaning products. Unilever is a global company that operates in 100 countries with 227,000 employees (Unilever Home Page 2008).

Objectives of Unilever

The company’s objectives are to deliver the best possible quality and gain customer’s loyalty. Making marketing decisions is a subjective process. Unilever exercises judgment in specifying problems and their dimensions, in associating probabilities and payoffs with various courses, and in assessing outcomes. The process is one of narrowing the field of possible actions until the choice of the best one is achieved. Various tools and techniques that formalize these processes are useful, but insight and creative abilities are still among the greatest decision-making assets of executives (Kotler & Keller 2005). Following Unilever’s values statements: “Our corporate purpose states that to succeed requires “the highest standards of corporate behavior towards everyone we work with, the communities we touch, and the environment on which we have an impact “(Unilever Home Page 2008). Unilever pays special attention to communication with stakeholders and social responsibility issues. “Listening to others and learning from our stakeholders informs our decision-making, strengthens our relationships, and helps us succeed as a business” (Unilever Home Page 2008). For Unilever, marketing is also concerned with social well-being and competition. But, in addition, marketing is rooted in profitable business action. Striking a balance between profitable marketing practice and the national interest presents a difficult challenge (Bearden et al. 2004).

Market Conditions

The retail market is very fragmented in terms of demand and supply. Unilever operates in changing economic conditions and is faced with fierce market competition. The main competitor is P&G. Competitive markets have proven to be the most progressive economically and the most just socially. A market system responds to the wishes and standards of society. Competition and keen business rivalry assure customers of those items that best satisfy their wants and needs while rewarding the most efficient firms (Kotler & Keller 2005). By so doing, the marketing system serves as both a regulated and a regulating mechanism. Yet keen competition is not a natural occurrence. Legal guides and constraints are necessary to guard against restraint of trade, entry barriers, and deceptive business practices. For manufacturers and middlemen can restrain trade through such devices as price-fixing, sharing markets, or restricting entry (Company Profile of Unilever 2008, see appendix 1).

Government regulation of the retail industry is the result of a long evolution of acts, court decisions, and interpretations. It aims to protect our competitive system by seeking to prevent unfair and unreasonable competition and by assuring entry and growth of competitors. Although it is relatively easy to state desirable goals for government regulations, the design and enforcement of such goals in specific instances, through legal actions and court decisions, is difficult at best. Marketing opportunities, innovations, research and development, and other progressive activities stem from imperfections in the marketplace (Kotler & Keller 2005). Perfect knowledge does not exist, nonprice competition is important, and there are fewer and bigger buyers and sellers, contrary to the assumptions of the economist’s hypothetical competitive matrix. Despite lack of correspondence with perfect competition, the accomplishments of the American market economy are notable (Company Profile of Unilever 2008). The imperfectly competitive American market economy is a dynamic economy. Its parameters are those of product differentiation, branding, advertising, and selective distribution channels that introduce both competitive and monopoly elements. It is not so much a matter of making markets perfect or purer, but rather of making them workable (Bearden et al. 2004).

Demand

Various concepts of economic analysis are used by Unilever in attempting to evaluate the market opportunity. Demand refers to the volume of sales that would occur under various conditions for a product during a period of time. It has several dimensions, such as the demand for a product, the demand for a brand, or the demand of a specific market segment. Market demand, which refers to the demand for a group of products that represent industry, is distinguishable from company demand and the demand of a control unit (Kotler & Keller 2005). Company demand refers to the demand for a company’s products and relates to market opportunity. Although it is affected by the industry demand level, it is also affected by the use of marketing tools and techniques by a firm to gain a market share. Let us note that corporate effort may also shape the industry demand. Control-unit demand refers to demand at the level of the particular unit utilized for control purposes. The unit may be a product line, specific product, brand, group of consumers or wholesale, or retail outlet. Here, demand refers to purchasing actions of a significant unit (McDonald 2002).

Break-even analysis, planning, and control tool are used by Unilever to analyze and estimate demand. It furnishes an estimate of the number of units that have to be sold to break even. Management is then able to assess whether an adequate market opportunity exists to cover costs and produce a profit. Break-even charts focus on cost-revenue relationships (Kotler & Keller 2005). The break-even point is the point at which total revenue and total cost are equal (Company Profile of Unilever 2008). The firm has neither a loss nor a net income. The sales volume necessary to achieve this state is the break-even volume. These are but a few of the concepts relevant to the assessment of opportunities. Regardless of the techniques used, marketing management must recognize the pivotal position of this function in shaping and guiding the direction of the total company (Bearden et al., 2004).

Pricing

Optimal prices cannot be established, and pricing remains an art with a host of factors to be evaluated for which there are no precise measures and weights. Although theoretical models exist for establishing optimal prices, in practice, the theory does not enable managers to determine the correct price. Marketing management is guided by personal assessments of market conditions, costs, and competitive situations (Fill, 1999). The actual price established is usually the result of executive value judgments. Yet, various theoretical ideas, concepts, and models are useful in determining price. Unilever is faced with the problem of establishing the best price under assumed cost-and-demand conditions (McDonald 2002). The lack of information, the dynamics of the market, and the problems of measuring both costs and demand make it a difficult task. Yet, estimates must be made of what management expects demand, cost, and competition to be under various conditions. Then it can develop pricing programs that affect survival, profits, growth, volume, market share, R & D, and image. A distinction is often made between price determination and price administration. The activities and focus of each are different. Price determination refers to the processes and activities employed to arrive at a price for a product. It includes consideration of relative prices of products within the same line and differences in price for similar products of differing grades and qualities (Fill, 1999). Price administration refers to the activities involved in fitting basic prices to particular sales situations. For example, prices may be administered to bring them into line with such factors as geographic locale, functions performed by customers, the position of distribution channel members, or special sales situations (McDonald 2002).

Cost Structure

Organizational structures are not valuable per se — they are valuable only when they facilitate the achievement of corporate goals. Charts portraying such structures impede progress, for organizations tend to divide rather than delineate tasks, to build fences rather than separate logically. “Most organizations would probably contribute enormously to their own progress if they burned their existing charts and manuals” (McDonald 2002, p. 98). An organization should be the outgrowth of conscious decisions and continuous adaptation. Although no optimal method of organization exists, good arrangements are possible through continuous adjustment and monitoring of effectiveness. A distinction may be drawn between the basic organization under the marketing philosophy and under the more traditional approach (McDonald 2002). The latter emphasizes sales-force management in a functionally organized company. For example, Unilever is responsible for product development and finance for distribution cost accounting ‘and credit. Organizing a broad spectrum of marketing activities is a complex task (Company Profile of Unilever 2008).

Among marketing conditions that tend to lead to decentralization are the dynamic nature and heterogeneity of markets, the power of consumers in the marketplace, and the rapid communications possible among corporate units. Decentralization of decision-making varies among organizations, and some companies now want it close to the marketplace (Unilever Home Page 2008). This affords greater autonomy for brand or product managers and an advisory position for central marketing staff. In general, line organizations lend themselves to decentralization and staff units to centralization. As greater authority passes down the line closer to markets, decentralization brings a need for marketing specialists at the branch level, thereby creating problems of coordination. This trend may be referred to as “centralized decentralization” — that is, decentralization of organizational units that are actively guided and controlled from above. Although the structure, or formal part, of an organization, can be easily portrayed, the informal organization, the part that greatly affects behavior and performance, cannot. A business is a social system whose efficiency is influenced greatly by interpersonal relationships. Thus, to understand a marketing organization is to understand more than its formal structure. No one organizational scheme can be developed or a set of principles established that can specify the best organization for a company (Unilever Home Page 2008). Knowledge of factors influencing organizational behavior, of the impact of market forces, of organization concepts, and of alternative tools for coordinating and integrating human effort can furnish a basis for approaching the problems of the marketing organization. For example, conflicting directives may be given from one source to increase sales, from another to reduce advertising, and from a third to limit style changes (Fill, 1999).

Risk Management

Marketing intelligence helps to indicate what changes in present situations may mean for the future and how a company can influence its market destiny. It induces innovative and risk-taking possibilities. By anticipating future situations, it guides present actions, which in turn shape the future. Marketing intelligence must not only concern itself with problems of the immediate future, such as the advertising campaign for next year’s sales; it must deal with long-range problems as well. Intermediate and long-range marketing intelligence is a basic requisite for planning and decision-making. Increasing risks usually open opportunities for greater returns. Confronted with the problem of balancing the acceptance of estimated risk with estimated payoffs, marketing executives must decide whether to take additional risks and to what extent the risks will enhance profits. Extreme decision situations are relatively easy to handle (Hollensen, 2007). For example, if a company is strapped for money, and if a wrong investment decision may threaten its very existence, then the criterion of least risk may be adopted, regardless of expectations of profit. Inherent in other choices, the decision-maker elects that alternative with the least risk or the greatest chance of success. Conversely, in situations where relative costs or losses will have little impact on a company, the executive may choose to “go for broke.” Several criteria are useful in helping executives to balance risk and payoffs and to choose strategies in less obvious instances. Some form of market sharing or stabilization of markets is needed. In this country, advertising rather than cartels serves this function (Unilever Home Page 2008).

Globalization

Using market research, Unilever can navigate the new business environment and adapt new products for existing markets. The advantage of product originality will allow Unilever to create a strong brand image. Brand loyalty will also be an important factor in increasing the costs for customers of switching the products of competitors and using market development strategy (Unilever Home Page 2008). Unilever will capture a larger share of a market for current products through market saturation and market penetration (Fill 1999). Taking into consideration the cosmetics market, it is not enough to operate only on a national market. Global marketing will help Unilever substantially increase the level of sales (Company Profile of Unilever 2004). As a new market entrant, Unilever can raise the level of competition. In order to compete in this market and remain profitable, Unilever should introduce an aggressive advertising campaign informing potential consumers about new products and their benefits. To get the message, different types of media will be used in accordance with a particulate audience. “If deeper penetration into the same target market, for example, is required, then vertical advertising in the media that reach the same target market will be sought” (Hollensen 2007, p, 98). For new products, Unilever can use advertising on commercial television and press. The Internet could help to reach a wider target audience and can be used as a promotion tool. Low cost of the products can help Unilever to achieve better differentiation in market segments. Techniques used here include temporary price reductions; extra value offers, including offers relating to a future purchase; premium offers (incentives), including free mail-in premiums, banded free gifts. Often a critical determinant to estimating demand is the availability of information. The obtaining of such information can be extremely difficult and costly in many countries, particularly developing countries. Focusers, like Unilever, may be able to achieve better differentiation or lower cost in market segments, but they may also lose to broadly targeted competitors when the segment’s uniqueness fades or demand disappears (Unilever Home Page 2008).

Internal/External Government

Through marketing management, corporate resources may be balanced both internally and externally. Internal balance is achieved by the coordination of all marketing activity and its integration with the other areas of the business. External balance is concerned with the continuous adjustment of Unilever to its market environments through changes in product, price, package, channels, advertising, and selling. In this sense, marketing forces are viewed as shaping the total organization and all the business functions (Unilever Home Page 2008). The marketing manager thus becomes concerned with matching market opportunities with the unique capabilities of his firm -the development of differential advantage. The marketing manager establishes offerings in accordance with his perception of both actual and potential consumer demand; he continuously monitors the marketplace to adjust to changing consumer wants and needs; gathers marketing intelligence to delineate market opportunities; and integrates coordinates, and controls marketing resources to achieve more efficient systems of action. Marketing managers must set objectives for the marketing department that are in line with overall corporate objectives. Market opportunities stem from both external and internal forces. Technological developments and changing market environments are externally based, whereas research and development and modifications of products, packages, marketing channels, and advertising campaigns are internally based. Opportunity assessment must account for both (Hollensen 2007).

This alignment depends on organizational arrangements, both internal and external. Since markets are dynamic and consist of threatening competitors, managers must continually review their organizational patterns. Although marketing organizations are dynamic, they must exhibit stable tendencies (Unilever Home Page 2008). They must seek “stable adjustment” or homeostasis — a tendency toward continuing equilibrium. Survival is, of course, a primary objective, although organizational objectives may shift over time. Once survival is assured, other goals, such as profitability or industry position, become important. As the goal focus changes, so does the influence of various executives, and the organizational networks change. Expanding sales, diversification, mergers, and cooperative linkages that intensify the pace of Unilever’s growth also place pressures on organizational functions and mechanisms that must be altered to cultivate market opportunity. Whereas technology influences organizations, organizational arrangements also bring about the conditions and stimuli to advance technology (Kotler & Armstrong 2005). The advantages of American companies lie not only in their ability to mass-produce but also in their capacity to organize the marketing forces. Environmental forces and the existing business system together are critical factors shaping marketing organization. A balanced state of adjustment must be reached between them even though company environments establish conditions that marketing organizations and behavior must fit, internal and external organizational balances can be achieved. Internal adjustments occur through changing authority-responsibility relationships and departmental structures. External adjustments occur through the marketing mix and through the distribution network (Unilever Home Page 2008).

Forecasting Tools

For every retail company like Unilever, future data are anything but factual and are really based on assumptions. Forecasts reflect expectations; as a result, varying degrees of error is bound to occur. Sales forecasts may be short-run (usually designated by a period of up to a year), intermediate (one to five years), or long run (more than five years). Usually, the longer the forecasts run, the greater the error. Regardless of the sophisticated techniques used for forecasting purposes and the records available, future conditions will always deviate to some degree from those predicted by forecasters, and management must expect this. For the purposes of evaluating market opportunity, future information, even though nonfactual, is extremely important (Kotler & Armstrong 2005). Today’s marketing plans and decisions are based on executive expectations of what will occur during some future period of time. To quantify expectations, probability techniques are often used. When sales forecasts furnish marketing managers with information about probable expected market conditions, management can use this knowledge as a basis for planning both company goals and the strategies and resources to achieve them. The potential volume and profit targets resulting from sales forecasts, and the budgets established from them, guide the company toward the cultivation of market opportunity. The cultivation of opportunities in turn affects sales forecasts (Unilever Home Page 2008, see appendix 2).

To make its forecast, Unilever sales management are concerned with three environments: the partially controllable, and the controllable. The noncontrollable environment includes such factors as demographic trends; domestic and international economic trends; and sociological, psychological, and cultural forces that management cannot influence significantly. The partially controllable environment refers to factors such as technology and competition that management can influence to some extent. The controllable environment relates to internal factors, including finances, image, production, facilities, personnel, and others that management can determine over time. As a result of management analysis, judgment, and evaluation, market opportunities are discerned, sales forecasts prepared, and marketing plans and programs developed.

Bibliography

Bearden, W. O., Ingram, Th. N., LaForge, L.W. 2004, Marketing, Prentice-Hall.

Company Profile of Unilever, Updated Report, 2004. Web.

Fill, C. 1999, Marketing Communication: Contexts, Contents, and Strategies. 2. edn. Upper Saddle River, NJ: Prentice-Hall.

Hollensen, S. 2007, Global Marketing: A Decision-Oriented Approach. Financial Times/ Prentice Hall; 4 edition.

Kotler, Ph., Armstrong, G. 2005, Principles of Marketing. Prentice-Hall; 11th edition.

Kotler, Ph, Keller, K. 2005, Marketing Management. Prentice-Hall.

McDonald M. 2002, Marketing Plans: How to Prepare Them – How to Use Them, 5th edn, Butterworth-Heinemann, Oxford.

Unilever Home Page 2008. Web.

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