The multinational companies today face several risks while operating in the global market. These risks have serious impact on their businesses and necessitate them to adopt appropriate risk management strategies and business policies. The paper would study the risks which business organisations face by taking Unilever as the example. It would also delve into strategies which Unilever takes to deal with the risks.
Unilever is a multinational consumer goods manufacturing company having its headquarters in London, the United Kingdom and Rotterdam, Netherlands. The multinational company is a public limited company having strong presence in Europe, North America, Asia-Pacific Region and South America. Its British headquarters is primarily listed on London Stock Exchange while its Dutch headquarters is listed on the Euronext Stock Exchange. The company as the China Daily is the fourth largest consumer goods manufacturer and marketer worldwide (chinadaily.com.cn 2018). The British-Dutch multinational company has a dynamic global expansion strategy which has enabled it to enter over a hundred host countries in the world. The product umbrella of the company consist of home care products, personal care products, food products and water purifier. The company owns brands like Surf, Lux, Bru and Pureit. The company and its subsidiaries like Hindustan Unilever some of which are public limited companies listed on top national exchanges, hold this formidable product line by using the strategy of acquisition of companies from diverse markets boosting assets and market power. Unilever serves millions of consumers all over the world which has earns it revenue worth billions of Euro. The company earned € 53.175 billion in 2017 which proves its revenue generation capacity (unilever.com 2018). This company faces threats and risks due to various factors like changes in market policies and from its main competitors like Procter & Gamble and Nestle. This necessitates the company to form risk management strategies to counteract these risks in order to sustain and grow in the market. The risk management strategy of Unilever stands on its strong financial structure and market position.
The following are the main political risks MNCs like Unilever is subjected to in the global market:
Change of political equations between countries and international unions:
Political factors play key role in the operations of business organisations and the fact holds even stronger for multinational companies like Unilever. According to Gilpin (2016), the political factors which impact the operations of business organisations consists of policies of home government, host governments, public opinion and even perceptions about one country in the other which effect the business of these organisations. As a far as Unilever is concerned it is a multinational company based both in the United Kingdom and Netherlands. This location is of a tremendous strategic importance to Unilever. Britain has strong bilateral relationship with countries like the United States, China, India and Australia. The company, being based in London uses this factor to expand into these countries. Again, being based in Netherlands which is a member of the European Union, the multinational company get easy access to the European markets like France (Pradhan 2017). This strategic presence of Unilever would also shield the company against one of the biggest political risks looming over British MNCs- Brexit. Brexit would end or lessen Britain’s free access to the markets of Europe. The British multinational companies would have to pay more charges to source raw materials and labour from the EU. The other food manufacturers of England have started shrinking their production in order to cut cost and dependence on Europe (independent.co.uk 2018). However, Unilever being based in Rotterdam besides London can continue using the resources of Europe at subsidised rates. This shows that the location of multinational as far as the country of domicile have tremendous impact.
Ban by host governments:
The second political risks which multinational companies face comprise of ban by different governments. The multinational companies like Unilever often face restrictions and bans in host countries which have tremendous impact on their operations like loss of revenue. These restrictions and bans often force the multinational companies take steps in order to continue operating in that particular market. For example, the Environment Minister of Australia threatened to introduce laws to ban microbeads which are minute plastic particles found in body washes and face washes. The minister also hinted on ban on companies altogether which fail to comply with the environmental laws of Australia (abc.net.au 2018). Unilever, considering the seriousness of the government order has agreed to phase out from manufacturing and marketing products using microbeads (smh.com.au 2018). First, the company is required to minimise production of skin products containing microbeads which would impact the revenue it earns from the sale of products. Secondly, the company would have to allocate resources towards innovation to introduce out products without polythene beads but retain the same cleaning power of microbeads. This analysis shows that political risks which multinational companies like Unilever face has strategic and financial effect on them (Deresky 2017).
Risk management strategies by Unilever:
Unilever counteracts political risks by using its global position and financial strength. First, to company in order to adapt to political pressures and government orders forms new policies. The company is able is amass immense wealth, technology and manpower to comply with these orders as discussed above. Secondly, its global presence helps it to diversify the loss of revenue it would suffer in one market due to political pressure (Hoffman, Munemo and Watson 2016).
The multinational companies encounter several environmental risks during the course of their global operations. The following are the environmental risks which Unilever encounter during the course of its operations:
As per Ciambrone (2018) manufacturing consumer products attract various types of costs like handling costs, design costs, disposal costs and compliance costs. Thus, by inappropriately dumping them without recycling actually leads to the wastage of resources. The reusable containers and packages which are dumped into water bodies like oceans and rivers cause immense damage to the environment and create environmental risks. These risks have far reaching impact both to the company and the environment. Multinational companies like Unilever are often held responsible for causing environmental pollution by their productsThe multinational company has been warned by the Australian government to abstain from using microbeads in its products which would prove harmful to its marine ecosystem (smh.com.au 2018). International organisation, Greenpeace also accused Unilever to be among the companies responsible for causing pollution to sea beach of Philipinnes (greenpeace.org 2018).
The multinational company has been accused of causing destruction of rainforests in Sumatra to put set up palm oil plantations for its products. International NGO Amnesty International accused that the multinational company is responsible for not only destroying Sumatran forest but also exploitation of workers (theguardian.com 2018). These environment risks which Unilever cause have far reaching impact on its business and require strategic decisions making.
The first impact of the environmental risks caused by the operations by Unilever is actions from governments of host countries. For example, the Australian Government threatened to form laws to ban companies using environmentally harmful ingredients like polythene beads. The outcome of these actions by host governments would be loss of markets which would in turn attract loss of revenue and financial risks (McNeil, Frey and Embrechts 2015). Unilever managed this risk by initiating research and development towards bringing out products not containing polythene beads. This required the company to allocate resources, manpower and technology towards disruptive innovation. Unilever introduced products like Good Morning in the Middle East and Ayush range of products which are made from natural ingredients like herbs (unilever.com 2018). The risk management strategy helped to counteract the environmental pollution issue faced by Unilever in markets like Australia and Philippines in more than one ways. First, releasing organic products help the company to establish and strengthen its environmentally responsible brand image. Secondly, selling organic products enable the the company to generate revenue to diversify the loss it incurred due to withdrawal of products containing polythene beads. Thus risk management in this case involves new product development and adoption of new environmental policies (Stogner and Miller 2015).
Unilever takes disruptive steps to manage the environmental risks its supply chain is responsible for causing. The multinational company declared that it would stop sourcing palm oil from the Sumatran area where it allegedly caused destruction of rain forests to set up palm plantations. The company declared that it would stop sourcing oil from 1400 mills and 300 palm oil suppliers which are allegedly connected with the deforestation in the region (reuters.com 2018). This shows that the risk management strategy of Unilever in this case consist of terminating unsustainable supply chains. It also consists of acquisition of new sustainable suppliers to replace the older suppliers (unilever.com 2018). This risk management strategy of Unilever enable it to maintain a more sustainable image which strengthens its goodwill.
The following are the economic risks which multinational companies like Unilever encounter in the international market:
Currency exchange rates:
Multinational companies come under the influences of international currency exchange rates which strong bearing on their operations. The international currency exchange unlike the political risks and environmental risks does not pose threat to the operations of the company. It is considered a risk because it effects the expenditure and income of the company in a big way, thus effecting the financial position of the company at a given time.
Figure 1. GBP:USD exchange rate graph in 5 years
(Source: bloomberg.com 2018)
The graph above shows that GBP is showing a downward trend against USD though it shows signs of a little recovery through 2018. This fluctuation can be attributed to Brexit and the uncertainties it has ushered in the financial market in Britain (huffingtonpost.com 2018). This weakening of GBP would impact Unilever since it would have to acquire resources from other countries at a higher rate and sell products at lower rates. This shows that change in international currency impacts the revenue of Unilever which necessitate it to take steps to mitigate or at least diversify the risk.
Cost inflation, economic downturn:
The cost inflation and economic downturn are two economic risks multinational business organisations face today. As per a report published in the leading daily, the Hiffington Post, the United States of America is approaching an economic downturn (huffingtonpost.com 2018). The recession would result in fall in income of the American market which would automatically lead to fall in demand for goods and services. The multinational companies like Unilever would have to acquire raw materials at higher rates which would lead to increase in expenditure of the company. The recession would mean decrease in demand for goods especially the premium goods which require require Unilever to spend immense amount of maintain the stock of inventory. Outcome of this would be lowering of the liquidity of resources which would affect its cash position negatively.
Economic Risk Management Strategy of Unilever:
Unilever adopts several strategies to manage and reduce the two economic risks it faces in the global market. The company in order to reduce the loss of revenue invests in several capital markets around the world. It uses wholly owned subsidiary as the market entry strategy to enter its important host countries. The big and important subsidiaries are public limited companies which are listed on the top stock exchanges in the host markets (Della Corte, Ramadorai and Sarno 2016). Thus, the company is able to acquire capital from its different markets in different local currencies, thus diversifying the loss it incurs due to fall in value of GBP.
Unilever is a global multinational company having presence in more a hundred countries in the world which helps it to diversify the loss it incurs due to fall in demand in one market. For example, the company is present in the United States, Europe, China and India. Now, Europe and North America are experiencing fall I in demand (bbc.com 2018). This means that the Unilever would be required to maintain immense stock of raw materials and finished goods due to fall in demand in these markets. The British multinational company diversifies its resources towards emerging markets of Asia and South America which are experiencing increase in demand. Thus, a global market provides Unilever the substratum to diversify the losses it suffers due to fall in demand in some of its markets.
The two market risks Unilever faces in the global market are competition and customer satisfaction.
Competition:
Unilever as pointed out manufactures four classes of products namely, food products, home care products, skincare products and water purifier (unilever.com 2018). This brings the company into strong competition with other global companies which pose of losing customers before it. Unilever competes with Procter & Gamble and L’Oreal in case skincare and home care products. For example, Surf of Unilever competes with Tide while Lamke competes with L’Oreal. Again, Unilever competes with companies like Nestle when it comes to food products. For example, Bru competes with Nescafe of Nestle. As far as water purifier is concerned, Unilever competes with water purifier manufacturers like LG. These competitors analysis points out that the main competitors of Unilever like Nestle holds stronger position as far as global market is concerned. This puts immense threats before Unilever. The first threat is that these companies are also public limited companies which are capable of raising capital from the securities markets. These companies manufacture identical products. For example, Procter & Gamble owns Head & Shoulders antidandruff shampoo which is answer for Clear or Pure Derm owned by Unilever. The third threat is the outcome of the second threat (Della Corte, Ramadorai and Sarno 2016). The competitors like Nestle and P&G share the same customer base in the global and compete to steal customers from Unilever. This would create loss of revenue for Unilever which would hit its financial base and have long term effect on its business.
Customer satisfaction:
Anselmsson and Bondesson (2015) mention that customer satisfaction is a threat to the multinational companies because customer preferences decide their revenue generation and keeps on changing. Unilever has to manufacture products which are aligned to the preferences of the customers in order to ensure that the customer prefers its products over its competitors’ products. This ensures that the company generates high revenue from its global market and maintains its high position in the global market. This satisfying consumers on continuous basis is a risk because it requires the global company to carry on research and development which attracts immense resources. The preferences of the customers keep on changing owing to owing factors like availability of a larger variety of products and access to products available in other markets through ecommerce (Beck and Kenning 2015). This requires Unilever to continuous match its products with the changing preferences of the customers which itself places a great challenge. Moreover, with the introduction of new products in response to changing customer preferences, old products become redundant and the resources allocated to manufacture them goes waste. This creates immense financial pressure on the company which aggravates the risk. Thus, Unilever is under the pressure of fulfilling customer expectations by introducing new products and earn positive return on the amount allocated to manufacture them in a short span of time (Kotler 2015).
Risk management strategies of Unilever to counteract market risks:
Chang and Taylor (2016) mention that multinational companies introduce new products in order to ensure customer satisfaction. The company promotes its products aggressively to differentiate it from the products of its competitors. The company in order to align its new product development with changing consumer preferences and to differentiate them from its competitor products, Unilever gains information about customer preferences and future trends of the market by using its social media handles on which it communicates with customers on regular basis. The company integrates this information about future customer preferences in its product strategy. These strategies enables Unilever to tackle market risks and earn high revenue (Della Corte, Ramadorai and Sarno 2016).
Unilever forms several micro-organisation strategies to counteract the risks it faces in the global market. The following are the micro strategies which Unilever uses to counteract the risks it encounters:
A SWOT analysis of Unilever would show that the company has power subsidiaries all over the world some of which are public limited companies themselves. These subsidiaries like Hindustan Unilever, the Indian subsidiary are capable of raising capital from the market which ultimately contributes to the capital base of Unilever. This enables the company to counteract economic threats like economic downturns and slump in currency exchange rates. For example, if one market faces economic downturn which result in fall in generation of capital, the company can diversify the shortfall over the other markets (Beck and Kenning 2015). Thus, this capital raising strategy of Unilever accounts for the immense capital base which it requires to diversify the economic risks.
The next micro strategy which Unilever follows is its human resource strategy which renders it with its enviable market performance. The company creates employment opportunities in its host countries and employs their human resources. The company in return gains several benefits like tax rebates from host governments which has enabled it to operate at economies of scale (Della Corte, Ramadorai and Sarno 2016). The company often transfers employees within different subsidiaries and regions. This internal strategy enables it to bring about innovation in its operations.
Unilever uses its product strategy to manage risks and generate high revenue from its global market. The company when faced with ban on product in a market, diversifies the risk it incurs by withdrawal of the product by selling other products. For example, ban on products containing microbeads has necessitated the company to withdraw skincare products containing plastic beads. The company would also require to introduce those products by replacing the microbeads with other cleaning and scrubbing ingredients (Stogner and Miller 2015). Unilever can diversify the expenditure to introduce products with natural scrubbing ingredients by selling other products like home care and food products. Thus, the product strategy of Unilever ensure that it generates high revenue and diversify the risks it faces in the market.
It can be recommended to Unilever that it should reduce its environmental impact. The following are the recommendations with reference to the products of Unilever which has to be considered:
Unilever should use biodegradable and eco-friendly ingredients in its products to reduce environmental pollution. The company to manufacture its products should acquire raw materials from ethical suppliers which would supply it with those nature friendly ingredients. This improvement would enable the company to reduce pollution at two stages. First, while manufacturing products, biodegradable effluents from its plants would cause less pollution. Second, the eco-friendly products would cause less pollution when consumers would use them.
Unilever should strengthen the weak subsidiaries like the ones in its less important markets of the underdeveloped countries. The company should strengthen them financially to acquire brands like its powerful subsidiaries of the US. This would contribute to its product strategy which would enable it to generate more revenue.
Conclusion:
One can conclude from the discussion above that multinational companies like Unilever require to take several strategies to mitigate different types of risks. One can also point out that one risks often leads to the other. For example, Brexit is both a political and an economic risk. The companies like Unilever have strengthen their presence worldwide to be able to diversify the risk encountered in one market over the other markets. This would ensure strengthen of global position and competitive strength
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