Unilever\'s New Global Strategy- Competing through Sustainability PDF

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Unilever’s New Global Strategy: Competing through Sustainability In January 2015, CEO Paul Polman announced Unilever’s financial results for 2014. (See Exhibit 1.) It was hardly a celebration. Despite outperforming competitors, the company’s 2.9% sales growth was its lowest in a decade, and had actually slowed to just 2.1% in the final quarter. The gloomy results were due to depressed growth in the developed world reinforced by shrinking demand in emerging markets, long the engine of Unilever’s growth. But more disturbing than the 2014 results was the news that Polman was not predicting significant improvement in market conditions in 2015. This already challenging situation was complicated by the fact that the company was in the midst of implementing a transformational strategy driven by the Unilever Sustainable Living Plan (USLP). Despite its impressive results to date, this bold initiative had not been fully embraced by some parts of the organization. One problem was that in order to achieve the expected long-term positive impact, USLP’s shift to a sustainability-focused strategy typically required Unilever’s businesses to make significant upfront investments that could be recouped only in the longer term. In an operating environment that Polman characterized as having “more headwinds than tailwinds,” some wondered how far he could push this transformational strategic agenda at such a difficult time. Complicating the issue was the fact that despite making good progress, USLP was well off-target on two key metrics. While reporting a 40% reduction in its own internal greenhouse gases (GHG) emissions and a 31% drop in its water use, Unilever was far short of objectives that encompassed its whole value chain, from sourcing to consumer use and disposal. In fact, against its target to halve the entire environmental footprint of making and using Unilever products by 2020, GHG impact per consumer had actually increased 4% since 2010, and water use per consumer had fallen by only 2%. Even some USLP supporters wondered if it was time to reassess some of its goals and priorities. It was a complex set of challenges that Polman and his top team faced. Until now, the company had been able to deliver on both its financial expectations and its environmental and social commitments. The question was, could it continue that delicate balancing act into the future.

Emeritus Professor Christopher A. Bartlett prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2015, 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

This document is authorized for educator review use only by Emil Bachtiar, HE OTHER until Jun 2022. Copying or posting is an infringement of copyright. [email protected] 617.783.7860

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Unilever’s New Global Strategy: Competing through Sustainability

Behind the Change: Unilever’s Rich History When he became Unilever’s CEO, Polman realized that, as the first outsider ever brought in to lead this venerable consumer goods giant, he needed to understand the company’s rich cultural values as well as its long history of adaptive struggle. Both factors, he knew, would shape his options.

Birth and Evolution: From Global Growth to Static Stall Unilever traced its origins to three family businesses of the late 19 th century. In the Netherlands in the 1870s, two butter merchants, Jurgens and Van den Berg, both decided to expand into margarine, a new butter alternative. A decade later in the north of England, William Lever started making an inexpensive household soap that he hoped could reduce sickness and disease in the crowded cities of the Industrial Revolution. These young companies first encountered each other on global commodity markets as they sought out sources of their common ingredient, palm oil. Their initially benign relationships deteriorated when the Dutch diversified into soap making and built factories in England. Lever countered by launching a brand of margarine. But after Jurgens and Van den Berg merged to create Margarine Unie, Lever initiated negotiations that eventually evolved into a merger agreement in 1927. On January 1, 1930, Unilever was established, pursuing William Lever’s founding belief that a business would prosper only if it operated ethically and responsibly—a philosophy he described as “doing well by doing good.” After surviving the 1930s depression, Unilever saw its overseas operating companies (OpCos in company terminology) become increasingly independent during World War II. In the postwar consumer boom, OpCos used that independence to respond to fast-growing local markets, driving Unilever’s growth through the 1950s and 1960s. But the company over-diversified, and declining profitability led to many restructurings, with much of that effort focused on offsetting the OpCos’ power with business-oriented teams called Category Coordinations. In the 1990s, three decades after making these changes, management still struggled to balance the Categories’ quest for global and regional efficiencies with the OpCos’ responsiveness to national markets. The resulting slow and adversarial decision-making process led to stagnant growth. In 2004, as market share and financial performance continued to deteriorate, the company issued its first-ever profit warning. Four years later, ongoing profitability declines led a major trade magazine to report, “P&G has powered ahead of Unilever over the past five years.”1 Finally, for the first time in Unilever’s history, the board decided to bring in an outsider to lead the company.

New CEO, New Directions In January 2009, when Paul Polman became Unilever’s new CEO, observers expected a major shakeup. More than just an outsider, the 52-year-old Dutchman had been a competitive adversary. In 27 years at Procter & Gamble, he had reached P&G ’s most senior levels before joining Nestlé in 2006 as CFO. While familiar with Unilever, he was not bound by its established practices or its embedded assumptions. Indeed, he took on his new role ready to challenge much of the conventional wisdom.

Shaking the Tree: Challenging the Culture, Changing the Team Assuming leadership in the midst of a global financial crisis and with Unilever’s stock price declining 35% in the previous year, Polman’s actions confirmed his belief in the motto “never waste a 2 This document is authorized for educator review use only by Emil Bachtiar, HE OTHER until Jun 2022. Copying or posting is an infringement of copyright. [email protected] 617.783.7860

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crisis.” In his first meeting with financial analysts, he told them he would no longer provide earnings guidance or publish full quarterly reports. (“I figured I couldn’t be fired on my first day,” he said.2) When the share price fell a further 8%, he attributed the decline to hedge funds that he claimed “would sell their own grandmothers if they thought they could make money.”3 He reinforced his message to the investment community by noting his hierarchy of stakeholders: “We need to know why we are here. The answer is, for consumers not shareholders. If we are in sync with consumer needs and the environment in which we operate, and take responsibility for society as well as our employees, then the shareholder will also be rewarded.”4 To shake up a culture he saw as “internally focused and self-serving,”5 Polman froze salaries and cut overseas travel. He then initiated a management shakeup, replacing the Chief Financial Officer, the Chief Marketing Officer, and the Global Head of Foods, Home, and Personal Care. Within a year, he had changed a third of the top 100 executives.

Redefining the Strategy: Committing to Sustainability While he was tightening operations and making structural and personnel changes, Polman was also preparing a radically new corporate strategy. One of his first commitments was to double the size of Unilever’s business. He felt that 80% of the growth needed to meet that target of €80 billion in revenues would come from developing countries—markets that already accounted for more than half of the company’s sales, a larger share of those markets than any of its competitors. But the big surprise was in how the new CEO planned to achieve that growth. “We think that businesses that are responsible and actually make contributing to society a part of their business model will be successful,” he said.6 So he announced a “Compass Vision” that aimed to double the size of Unilever’s business while simultaneously reducing its environmental footprint and increasing its positive social impact. The boldness of the commitment took many by surprise. In November 2010, the company unveiled the USLP—the key to achieving its new Compass Vision. (See Exhibit 2.) The plan had three goals for 2020: to help a billion people improve their health and well-being, to halve the environmental footprint of making and using Unilever products, and to enhance the livelihoods of those in its value chain. Far from a PR-driven corporate social responsibility program, USLP was introduced as a core strategy that Polman believed would stimulate growth, cut costs, engage consumers, and motivate employees. He saw it as fully aligned with Unilever’s commercial interests and its mission of “doing well by doing good.” What made USLP unusual was its breadth. The commitment not only applied to every Unilever business, function, and country under its direct control, but also extended across its value chain and over the product life cycle. This ambitious scope was revealed in an analysis at that time showing that Unilever’s own manufacturing activities generated less than 5% of its products’ total greenhouse gas (GHG) footprint. Its suppliers contributed 21%, and consumers of its products accounted for 70%. Accepting responsibility to halve that entire footprint represented a huge undertaking.

Communicating the Vision: Aligning Support, Allaying Skepticism Because management had been developing USLP parameters for more than a year before the initiative was formally announced, its detail was well defined. The three core goals were expanded into seven commitments (“pillars” in Unilever terminology) and further broken into more than 50 specific, measurable targets (e.g., to source 100% of palm oil from certified sustainable sources, to reduce salt to a recommended 5 grams a day, etc.). The broad goals and specific targets not only gave 3 This document is authorized for educator review use only by Emil Bachtiar, HE OTHER until Jun 2022. Copying or posting is an infringement of copyright. [email protected] 617.783.7860

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Unilever’s New Global Strategy: Competing through Sustainability

credibility to Unilever’s new corporate purpose “to make sustainable living commonplace,” but were also translated into its operating business model that it depicted as “A Virtuous Circle of Growth” with sustainable living at its core. (See Exhibit 3.) Polman knew that USLP required a radical new way of thinking not only from Unilever ’s 165,000 employees, but also by the 5 million people in its supply chain, and eventually by the 2 billion people worldwide who used one of its products on any given day. It was a huge task, and internally the new strategy was greeted with nervous anticipation. While the idea of doubling revenues seemed exciting, some found USLP’s less familiar environmental and social goals harder to grasp. Having seen several previous corporate initiatives bloom and die, many adopted a “wait and see” attitude. Externally, press reaction was a mixture of cautious admiration, lingering doubt, and outright skepticism. A column in Marketing Week, a generally sympathetic industry publication, reflected some of the questions and concerns expressed elsewhere: “So what makes the Unilever sustainability program so high risk? First, the sheer ambition of the targets compared with the relatively achievable goals of enhanced quarterly earnings or brand share. . . . The second caveat is that there are inherent contradictions between the conventional marketing objectives and the sustainability targets.”7 A Financial Times columnist was more blunt and direct: “I listened for something I wasn’t hearing. Where were the figures on cost savings? Where were the promises about results flowing to the bottom line?”8 The journalist concluded, “Mr. Polman’s appeal to shareholders to take the long view is admirable, but I felt nervous about his own long-term prospects. Even the most patient investor eventually needs a decent return.”

Implementing USLP: From Aspiration to Action Polman understood that it was one thing to create a bold vision, and quite another to implement it—particularly as an outsider upsetting the comfortable status quo. Indeed, when asked about his biggest risk, the new CEO replied, “The biggest challenge, to be honest, is surviving the transition.”9

Leveraging History, Building Momentum Unilever’s “doing well by doing good” philosophy meant that the seeds of USLP were planted in fertile soil. In 2006, its Corporate Social Responsibility (CSR) group had initiated “brand imprint” workshops to help all brand leaders examine the environmental, social, and economic impact of their brands. After reviewing working conditions and environmental practices on its tea plantations, for example, Lipton invited the Rainforest Alliance to certify its tea as sustainably grown and responsibly sourced. And Lifebuoy soap responded to the UN’s Millennium Development Goals by committing to positively affect the health and hygiene of a billion people through handwashing education. Realizing that not all brand managers had responded to the “brand imprint” initiative, Unilever’s category heads commissioned a team to measure the environmental footprint of the company’s entire product portfolio. Karen Hamilton, the leader of the team, recalled the outcome: “By 2009 we had identified the major sources of our greenhouse gases, water and waste. This was soon after Paul became CEO and just before the UN’s 2009 Copenhagen Climate Change Conference, so the data became vital input for the change that followed.” But while the study’s recommendations provided a strong basic platform, Polman knew he would need a lot more support to implement USLP.

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Consolidating Power, Focusing Responsibility Rather than giving USLP oversight responsibility to Unilever’s CSR office, in 2010 Polman named Keith Weed to a new role he created on the Unilever Leadership Executive (ULE), combining the role of Chief Marketing Officer (CMO) with responsibility for the leadership of both Communications and Sustainability. In addition to heading the marketing function, the CMO would also coordinate the development and implementation of the new USLP sustainability strategy. (See Exhibit 4.) Weed described how he saw the role: “In many companies, the head of sustainability is a guy with a beard and sandals urging people to save the planet. We wanted to signal that sustainability was not about ‘corporate social responsibility’ as an isolated activity. It was everyone’s responsibility. So we abolished the CSR office to underline our belief that marketing and sustainability were two sides of the same coin. It was a belief [that] became reflected in our strategy.” Weed’s elevation to the ULE gave him a seat at the table where strategy was discussed, and where the company’s heads of categories, countries, and functions became aligned around future priorities. “Beyond that level, gaining acceptance was tough,” Weed acknowledged. “We realized that it was going to take a long time to embed something on this scale deeper in the organization.” The new CMO’s implementation task was greatly facilitated by his inheritance of an established 12-person corporate sustainability group, most with deep operating and marketing backgrounds. Hamilton, VP of Sustainable Business since 2008, recalled the change: “We had been working on measuring our environmental footprint for a couple of years. But after Paul joined, we started getting a lot more attention from the ULE leadership team. They asked us about environmental targets and metrics, but they were particularly interested in what USLP would mean for the business.” Simultaneously, an intensive communication campaign began. Internally, the new CEO and his management team held meetings, hosted forums, and visited operations to outline the vision, answer questions, and celebrate early achievements. Externally, Polman gave interviews to the media, met with analysts, and spoke at meetings from UN conferences to the World Economic Forum at Davos. Within a year, few in the business world were unaware of Unilever’s USLP strategy.

Delivering Results, Confronting Shortfalls By late 2013, Polman was generally satisfied with USLP’s progress in its first three years. He was particularly pleased with the imagination and passion shown by the supply chain function, whose early embrace of the new strategic challenges had resulted in positive change on many fronts ranging from implementing sustainable sourcing policies to championing smallholder farmers. In addition to dramatically reducing Unilever’s environmental footprint, such actions also played a lead role in creating a platform on which brand management could build consumer-facing claims. These achievements were highlighted in Unilever’s annual report and also celebrated in a separate USLP report that was published annually beginning in 2011. Three years into USLP’s rollout, Unilever sustainably sourced 48% of its agricultural products, up from 14% in 2010. The company was also on track to meet the goal of doubling the proportion of its food products meeting the highest globally recognized nutritional standards, with 31% of the portfolio by volume already meeting that standard. And its efforts to improve the health of a billion people had reached 303 million with handwashing, oral health, and safe drinking water programs. Indeed, of USLP’s more than 50 specific defined targets, at the end of 2013 only five were regarded as being “off-target.” But of those, two were of particular concern: GHG emissions and water usage. Rather than shrinking, over the previous two years, Unilever’s GHG footprint per consumer use had 5 This document is authorized for educator review use only by Emil Bachtiar, HE OTHER until Jun 2022. Copying or posting is an infringement of copyright. [email protected] 617.783.7860

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actually increased by 5%, while its water impact had grown by 15%. Given the size and environmental sensitivity of these shortfalls, they clearly represented major stumbling blocks to the achievement of the USLP goal of halving Unilever’s environmental impact. Having accepted responsibility for the whole value chain of its products, USLP’s early analysis had calculated that consumer use accounted for 68% of Unilever’s GHG impact and 85% of its water footprint. Unsurprisingly, the majority of both off-target metrics was due to c...