welcome

Unilever, one of Europe's largest companies, was busy rationalizing its production in advance of 1992 to attain scale economies. Unilever concentrated its production of dishwashing powder for the EU in one plant, toilet soap in another, and so on.

     Even after the removal of barriers to trade and investment, enduring differences between nations in culture and competitive practices open limit the ability of companies to realize cost economies by centralizing production in key locations and producing a standardized product for the single multicountry market. Thus, as we saw in the opening case, Atag, the Belgium-based producer of kitchenware, thought it would be able to realize cost economies by supplying just two types of cookers to consumers throughout the EU. The reality, however, was that consumers in different countries demanded different types of cookers. Atag was forced to respond by producing 11 different models, not 2. Similarly, the profile of the European insurance market illustrated that the removal of barriers to trade and investment is by itself not enough to create a true single market. Cultural, historic, and institutional factors still get in the way. Dealing with these factors requires that insurance companies customize their pricing and selling practices on a country by country basis within the EU.

Threats

     Just as the emergence of single markets in the EU and North America creates opportunities for business, so it also presents a number of threats. For one thing, the business environment within both groups will become more competitive. The lowering of barriers to trade and investment between countries is likely to lead to increased price competition throughout the EU and North America. For example, before 1992 a Volkswagen Golf cost 55 percent more in Great Britain than in Denmark and 29 percent more in Ireland than in Greece. Such price differentials will vanish in a single market. This is a direct threat to any firm doing business in the EU or the NAFTA countries. To survive in the tougher single-market environment, firms must take advantage of the opportunities offered by the creation of a single market to rationalize their production and reduce their costs. Otherwise they will be severely disadvantaged.

     A further threat to non-EU and/or non-North American firms arises from the likely long-term improvement in the competitive position of many European and North American firms. This is particularly relevant in the EU, where many firms are currently limited by a high cost structure in their ability to compete globally with North American and Asian firms. The creation of a single market and the resulting increased competition in the EU can be expected to result in serious attempts by many EU firms to reduce their cost structure by rationalizing production. This could transform many EU companies into efficient global competitors. The message for non-EU businesses is that they need to prepare for the emergence of more capable European competitors by reducing their own cost structures.

     A final threat to non-EU and/or non-North American firms inherent in the creation of a single market has already been alluded to. This is the threat of being shut out of the single market by the creation of "Fortress Europe" or "Fortress North America." As noted earlier in the chapter, although the free trade philosophy underpinning the EU theoretically argues against the creation of any "fortress" in Europe, there are signs that the EU may raise barriers to imports and investment in certain areas, such as autos. Non-EU firms might be well advised, therefore, to set up their own EU operations as quickly as possible. This could also occur in the NAFTA countries but it seems less likely.

     August 12, 1992, was a really bad day for John Martin. That was the day Canada, Mexico, and the United States announced an agreement in principle to the North American Free Trade Agreement (NAFTA). Under the plan, all tariffs between the three countries would be eliminated within the next 10 to 15 years, with most being cut in five years. What disturbed Martin most was the plan's provision that all tariffs on trade of textiles among the three countries are to be removed within 10 years. Under the proposed agreement, Mexico and Canada would also be allowed to ship a specific amount of clothing and textiles made from foreign materials to the United States each year, and this quota would rise slightly over the first five years of the agreement. "My God!" thought Martin. "Now I'm going to have to decide about moving my plants to Mexico."

Unilever; once a classic multidomestic firm, in recent years Unilever has had to shift toward more of a transnational strategy. A rise in low-cost competition has forced Unilever to look for ways of rationalizing its detergent business. During the 1980s Unilever had 17 different and largely self-contained detergent operations in Europe alone. The duplication, in terms of assets and marketing, was enormous. Moreover, because Unilever was so fragmented it could take as long as four years for the firm to introduce a new product across Europe. Now Unilever is trying to weld its European operation together into a single entity, with detergents being manufactured in a handful of cost-efficient plants and standard packaging and advertising being used across Europe. According to firm estimates, the result could be an annual cost saving of over $200 million. At the same time, however, due to national differences in distribution channels and brand awareness, Unilever recognizes it must still remain locally responsive, even while it tries to realize economies from consolidating production and marketing at the optimal locations.

     Notwithstanding examples such as Caterpillar and Unilever, Bartlett and Ghoshal admit that building an organization that is capable of supporting a transnational strategic posture is complex and difficult. Simultaneously trying to achieve cost efficiencies, global learning, and local responsiveness places contradictory demands on an organization. Exactly how a firm can deal with the dilemmas posed by such difficult organizational issues is a topic we will discuss in more detail in Chapter 13 when we look at the structure of international business. For now it is important to note that the organizational problems associated with pursuing what are essentially conflicting objectives constitute a major impediment to the pursuit of a transnational strategy. Firms that attempt to pursue a transnational strategy can become bogged down in an organizational morass that only leads to inefficiencies.

1. For some firms international expansion represents a way of earning greater returns by transferring the skills and product offerings derived from their core competencies to markets where indigenous competitors lack those skills.

2. Due to national differences, it pays a firm to base each value-creation activity it performs at that location where factor conditions are most conducive to the performance of that activity. We refer to this strategy as focusing on the attainment of location economies.

3. By building sales volume more rapidly, international expansion can assist a firm in moving down the experience curve.

4. The best strategy for a firm to pursue may depend on a consideration of the pressures for cost reductions and the pressures for local responsiveness.

5. Pressures for cost reductions are greatest in industries producing commodity-type products where price is the main competitive weapon.

6. Pressures for local responsiveness arise from differences in consumer tastes and preferences, national infrastructure and traditional practices, distribution channels, and from host government demands.

7. Firms pursuing an international strategy transfer the skills and products derived from distinctive competencies to foreign markets, while undertaking some limited local customization.

8. Firms pursuing a multidomestic strategy customize their product offering, marketing strategy, and business strategy to national conditions.

9. Firms pursuing a global strategy focus on reaping the cost reductions that come from experience curve effects and location economies.

10. Many industries are now so competitive that firms must adopt a transnational strategy. This involves a simultaneous focus on reducing costs, transferring skills and products, and local responsiveness. Implementing such a strategy, however, may not be easy.

Unilever has experienced a similar problem in its detergents business. Unilever

has found that the need to resolve disputes between its many national organizations and its product divisions can extend the time necessary for introducing a new product across Europe to four years. This denies Unilever the first-mover advantage crucial to building a strong market position.

When the need for coordination is greater still, firms tend to use temporary or permanent teams composed of individuals from the subunits that need to achieve coordination. They are typically used to coordinate new-product development and introduction, but they are useful when any aspect of operations or strategy requires the cooperation of two or more subunits. New-product development and introduction teams are typically composed of personnel from R&D, production, and marketing. The resulting coordination aids the development of products that are tailored to consumer needs and that can be produced at a reasonable cost (design for manufacturing).

     When the need for integration is very high, firms may institute some kind of matrix structure, in which all roles are viewed as integrating roles. The structure is designed to facilitate maximum integration among subunits. As explained earlier, the most common matrix in multinational firms is based on geographical areas and worldwide product divisions. This achieves a high level of integration between the product divisions and the areas so that, in theory, the firm can pay close attention to both local responsiveness and the pursuit of location and experience curve economies.

Abstract (Summary)

The big Anglo-Dutch consumer-products company, whose core brands include Knorr soups, Dove soap and Lipton tea, posted net income of 230 million euros ($200.2 million) for the quarter, compared with a year-earlier loss of 984 million euros. The year-ago loss was because of restructuring charges and costs associated with the integration of Bestfoods, a U.S. food company that Unilever acquired for $20 billion in 2000.

For the year, Unilever's net income rose 66% to 1.84 billion euros, due to gains on the sale of businesses. Operating profit for the year rose 25% to 7.27 billion euros. Unilever's overall revenue for the year increased 8.6% to 52.21 billion euros from 48.07 billion euros a year earlier.

Unilever's core brands had sales growth of 5.3% in 2001, compared with 3.8% in 2000. Unilever said those brands now make up 84% of its group sales, up from 75% of sales at the beginning of 2000. By 2004, those core brands should make up 95% of group sales.

Copyright Dow Jones & Company Inc Feb 15, 2002

LONDON -- Unilever swung to a profit in the fourth quarter as it posted gains from the sale of several businesses as part of a five-year restructuring program.

The big Anglo-Dutch consumer-products company, whose core brands include Knorr soups, Dove soap and Lipton tea, posted net income of 230 million euros ($200.2 million) for the quarter, compared with a year-earlier loss of 984 million euros. The year-ago loss was because of restructuring charges and costs associated with the integration of Bestfoods, a U.S. food company that Unilever acquired for $20 billion in 2000.

Unilever said its fourth-quarter sales fell 6% to 13.05 billion euros from 13.83 billion euros, mainly because the company has eliminated dozens of brands from its portfolio -- such as Elizabeth Arden cosmetics and Batchelors and Oxo soups -- as part of the restructuring.

The company, which sells its products in 140 countries around the world, aims to whittle down its number of brands to 400 by 2004, compared with 1,600 at the beginning of the restructuring. So far, the company has cut its number of brands to 910.

Excluding items like integration costs and gains from disposals, as well as amortization of goodwill and intangibles, fourth-quarter profit rose 16% to 1.88 billion euros.

For the year, Unilever's net income rose 66% to 1.84 billion euros, due to gains on the sale of businesses. Operating profit for the year rose 25% to 7.27 billion euros. Unilever's overall revenue for the year increased 8.6% to 52.21 billion euros from 48.07 billion euros a year earlier.

Among the brands it still owns, Unilever said it saw strong sales last year for ice cream, deodorant, skin-care and hair-care divisions -- product lines that do well even in tough economic times.

Niall Fitzgerald, co-chairman and co-chief executive of Unilever, said the company was positioned to weather economic downturns well, "because people continue to eat and wash regardless of the economy."

Mr. Fitzgerald said the economic outlook for 2002 isn't likely to improve. "Consumers have built up a lot of debt and are fairly uncertain about the future," he said. "I think you'll see quite tough conditions this year with very low economic growth."

Unilever's core brands had sales growth of 5.3% in 2001, compared with 3.8% in 2000. Unilever said those brands now make up 84% of its group sales, up from 75% of sales at the beginning of 2000. By 2004, those core brands should make up 95% of group sales.

Unilever said its profit margin for 2001 rose to 13.9% from 11.2% at the beginning of 2000. The company also reported 7.5 billion euros in cash flow from operations, up 11% from 6.7 billion euros a year before.

Analysts were pleased with the company's results but noted that sales increases came disproportionately from increases in prices -- rather than volume -- particularly in the fourth quarter, when the company raised prices to compensate for devaluations in Latin America.

"Of the 4% growth in leading brands in the fourth quarter, almost 3% of that comes from pricing, with less than 1% coming from volume growth," said Sylvain Massot, a food analyst at Morgan Stanley in London. While price increases give a boost to sales, "I wonder if the growth in sales is sustainable through volume once the price increases reach their peak," he added.

The company's vulnerability to the economic slowdown and the Sept. 11 terrorist attacks, however, could be seen in its prestige fragrance division, which makes scents for brands such as Valentino and Calvin Klein. That division's sales fell 20% last year, mainly because of the slowdown in travel and the lack of sales in duty-free outlets, said Mr. Fitzgerald.