Unilever is a good consumer company with a British-Dutch background, which currently operates in 190 countries and is one of the largest multinational companies. Unilever has more than four hundred brands included in its product portfolio that are available to billions of consumers around the world. The multinational company has its headquarters in UK and Netherlands and provides for consumers in every part of the world to improve their living standards with the unlimited number of products.
The firm aims to expand their business in Ecuador, South America. This report evaluates the business strategies used by the company to commence their activity in the country. It provides an analysis of the market situation of Ecuador and the favorable and adverse conditions for the operations of Unilever. Furthermore, this will provide insight into the market conditions of Ecuador and the market strategy developed by Unilever to address the consumer demands in the country. Finally, the report assesses the overall business strategy and the success rate of the decision of expansion into the South American nation, and provides a recommendation.
Unilever is the world’s largest consumer goods company with annual revenue of 50 billion euros in 2016, as reported by Axel (2016). The British-Dutch company is one of the largest multinational companies with its headquarters in the United Kingdoms and Netherlands and operations in over 190 countries (“Unilever global company website | Unilever Global,” n.d.). The company has its reach to 2.5 billion consumers from every part of the world, who use its 400 brands and their products to improve their lifestyle and Netherlands. Later two families combined and created Lever & Co, which was converted into a limited company by 1890 (Jones, 2005).
The founder of Lever Brothers, William Hesketh Lever, commenced the product innovation in the 1890s with his revolutionary “Sunlight Soap” which promoted hygiene in the Victorian Era in England. After, the positive reaction from the market and the growing demand for personal hygiene products, Lever & Co began the production of “Lifebuoy Soap” in 1894. Decades later, by 1920, the company owned large market shares in European countries in products such as soap and margarine. Unilever was formed in 1929 when the two companies, Lever Brothers, and Margarine Unie signed the agreement (“Our history | About | Unilever global company website,” n.d.).
Unilever has a workforce of 169,000 employees around the globe. The company is an equal opportunity provider for both male and females with 46% managers of Unilever being women. Of the total revenue that Unilever earns, 57% of that revenue is earned from emerging markets of the world. Like other companies in the world, Unilever runs its business process of its Code of Business Principles of honesty, openness, and integrity.
The company’s sustainable business plan with sustainable growth is the key model for their business. It has a Unilever Sustainable Living Plan (USLP) that helps more than 1 billion people to improve their health, enhance the livelihood of people, and source 100% agricultural raw materials. Apart from a sustainable business, Unilever is working with different organization and departments for the betterment of the world and face the challenges that people are now facing (Maon, F., Lindgreen, A., & Swaen, V., 2009).
Unilever, having started as a margarine company, has now divided itself into four divisions which include refreshment (ice cream and beverages), foods, personal care, and home care. The focus on beauty and personal care products has increased as Food division has been showing slow growth over the last few years. Apart from this, Unilever has its different research facilities in the United Kingdom, United States, Netherlands, China, and India.
Ecuador is situated on the west coast of South America, with a landscape which includes the Amazon jungle, Andean highlands, and the Galápagos Islands. The capital of Ecuador is, Quito, is best known for its rich Spanish culture and colonial history, with several historical palaces and religious sites attracting thousands of tourists every year. The South American country’s total population is 16.5 million, with an area of over 270,000 square kilometers. The country’s major languages are Spanish and other indigenous languages, while its dominant religion is Christianity. Ecuador uses US dollar as their currency (“Ecuador profile,” 2018).
The country was originally conquered by the Spanish in the 16th century, who left behind the Spanish language and culture, as well as, the historic buildings and religious sites, which proves to be the main attraction of the area. During the 18th century, Ecuador became a part of Independent Gran Colombia and became officially independent in 1830 (“History of Ecuador | By Ecuador Channel,” n.d.).
The political situation of Ecuador has been unstable for years due to its war with Peru over the disputed territory, and the change in government. When Dr. Jose Maria Velasco Ibarra came to power in 1968 after 30 years of five times elected president, suspended the constitution and rules by decree. However, in 1979, democracy was restored to Ecuador. The overthrowing of President Abdala Bucaram Ortiz in 1997 is another sign of the country’s unpredictable nature of politics. However, recent developments in 2006 have led to a more socially reformed and politically stable nation. The new constitution has improved the situation for Ecuador. The powers of a president are limited to ensure the security of the people and the economy and avoid intentional exploitation of their power.
Ecuador’s annual gross domestic product is equal to $183.6 billion and a growth rate of 0 percent. The country’s most economic activities are state-owned such as the oil and gas production is controlled by the government. Ecuador’s economic freedom score is 48.5, which makes it the 165th country on the list of free economy countries in 2018. The countries overall economic scores has decreased by 0.8 points due to the lower government integrity, fiscal health, property rights and labor freedom. These are the factors that affect the living standards of the country. Additionally, the country has made it to the 28th rank among 32 countries in America’s region, with its overall score falling below the averages of countries in the region and around the world (“Getting Started with Business in Ecuador,” n.d.).
Ecuador has been successful in maintaining its unemployment rate at 5.4 percent, while the inflation rate is 1.7%. Past records of increase in prices show that the economy of Ecuador is unstable due to its political situation. Moreover, the country has a discouraging environment for the private sector as most of the economy is controlled by the government. Ecuador’s government policies and structure have been affecting the country’s economic performance.
Ecuador’s unstable economic and political conditions prove to be adverse for a new business set up. The country ranks as the 168th company on the list of suitable companies for starting a new business. Even though, the new policies and changes in economic growth rate have encouraged private investors to take an interest in the country; it lacks the conditions required for private investments. There are multiple legal steps that a firm requires to complete before entering the market. Moreover, other constraints such as arranging a construction permit take about 128 days, while there are several legal procedures required throughout the process of setting up a business. These include getting electricity, registering property, getting and protecting investors, etc. (“Doing Business in Ecuador – World Bank Group,” n.d.).
The business environment of Ecuador is mainly challenging for private firms to commence their operations. The tourist industry, on the other hand, has a potential to expand due to the 200,000 tourists visiting the Islands and to see the historical sites in the country.
It is important to understand the industry Unilever operates in and the one which is plans to continue its expansion into. The United States are among the 190 countries Unilever functions in, which has proven to be a successful venture for the firm. Before the company decides to enter the market of Ecuador, it needs to consider the industrial environment and the possible risks for the products of Unilever.
The United States is home to 325.7 million people who use billions of consumer goods such as personal hygiene products, food items, beauty products, etc. The States offer the largest market for Unilever and other consumer good firms all around the world, which is worth about $446 billion U.S dollars. The good consumer industry can be divided into different segments where all types of finished products are delivered to the consumer such as food, cleaning items, beauty and person care, and many other options under thousands of brands. Unilever operates in all the segments with four hundred brands under the company’s name.
Moreover, the United States has the most favorable market for all types of business with a large and diverse population that helps business target the potential audience. On the other hand, the market is very competitive. Large firms such as Nestle and Proctor & Gamble have 10 and 9 percent of the market shares of the consumer goods industry. These firms create competition for Unilever. Furthermore, the consumer good industry includes several mergers and joint ventures which has brought down the competition to major large firms that hold 10 to 4 percent of the market share (Gruen, T. W., & Corsten, D. S 2007).
While the industry in the United States has tough competition it also provides high demand of these products. The food segment of the consumer goods industry is more crowded with brands than the other segment, where Unilever dominates most of the market. All the firms in the industry have a similar approach to the market, without any specific unique selling point. However, the brands working under these firms are more competitive in their market with a unique approach towards the consumers.
The industry offers a great number of choice for its consumers and maintains healthy competition which makes every firm create better options for lower prices. Moreover, the labor market of the United States has proven to be difficult for firms as the labor is expensive when it comes to production and sales. But, the diversity rate of the United States help firms bring new energy to their business and maintain diversity that improves their approach to the market.
Industry Analysis of Ecuador
Ecuador is a developing country with an expanding market that has potential demand for consumer goods industry. The basic requirements such as food and hygiene products are required by every population. The economy of Ecuador has faced many complications and a fall in growth rate which has affected the investment rates and the preference of entrepreneurs to do business in the country. The country is known for its political and economic instability, which has discouraged foreign investments. However, the demand for consumer goods industry is on the rise. The country depends on U.S imports, which includes Unilever’s products and other consumer goods companies. Hence, there is a potential market that can be easily targeted (Wolff, J. 2016).
The United States is among the top importers of the country in the processed food market. Moreover, its requirement for personal hygiene and beauty products is increasing rapidly. The government has had many restrictions on import which increases the costs and prices of the products available to them. This is also influencing the economic growth. Therefore, the introduction of a consumer food industry will prove to be beneficial.
Moreover, the country’s industry has a very low rate of competition. The major competition comes from imported goods for the domestic products and their low qualities. Additionally, the labor in Ecuador is cheap, but the major risk factor is the political situation which can affect the labor market and the demand for imported or domestic products.
However, business is an expensive option in Ecuador due to the government regulations and the low number of skilled and experienced workers, which means that multinational companies such as Unilever have to move to workers from other countries to join shift to the country. This will increase their costs and expenses of human resource (Romero, P., Hodgson, F., & Gómez, M. P. 2018).
Additionally, the government of Ecuador continues to introduce new laws and policies that affect the prices of the products available to them. These factors affect the business performance and the firm’s ability to control the market and the prices they charge for the products. The industry of the country is not free-floating. Instead, it is restricted and controlled by the state to exploit the market forces of demand and supply.
Even though the market is risky for businesses to develop, the increasing demand for basic commodities in the country and the dependence on imported products is a sign of potential market. Moreover, the rise in tourism has led to restaurants and hotels providing better and high standard services to all types of tourists from around the world, which adds to the increased demand for personal care products.
Unilever successfully operates in 190 countries and has its reach to every part of the world through stores, retailers and other channels of distribution. The company has a variety of options to adopt for their entry strategy into the consumer goods industry of Ecuador, accounting for its market situation. The following are the different entry modes Unilever can use and evaluate all options to choose one or more types of entry strategy to address the market requirements of Ecuador and successfully commence their operations (Watson IV, G. F., Weaven, S., Perkins, H., Sardana, D., & Palmatier, R. W. 2018).
Direct exporting refers to entering the market with first-hand approach and use agents and distributors to represent your company’s products and further sell it into the market. The company enters the market without launching their store or retailing services and opening up their offices in the area.
Ecuador depends on its imports from the United States for all types of products, specifically processed food, and personal care goods. Unilever has a good potential to indulge in the imports of Ecuador. However, the countries import tariffs and new government policies are aimed to decrease the dependence on imports and encourage domestic goods in the consumer market. The high-income tax rate has resulted in lower disposal incomes of the people of Ecuador, which means their purchasing power is low and prefer cheaper options. Hence, imports will be an expensive alternative, and Unilever will be unpopular among the people in Ecuador.
Another option to enter the market of Ecuador is licensing another already established firm in the country to be able to sell and provide Unilever’s products in the country. This reduces the risk of large investments in the country, which can turn out to be a failure and result in a large amount of losses for the company. In this case, Unilever will have to consider a firm that has a large market share in Ecuador and is already established and well-known. Opting for a smaller firm will result in lack of awareness about Unilever’s product and the potential audience will be unreachable (Hattori & Tanaka, 2017).
However, large firms in Ecuador might not be willing to introduce a foreign business into their domestic market due to the high competition imported into the country by other large firms such as Nestle. Some firms might consider the option of introducing the products that are high demand among the population of Ecuador that depends on imported goods for their basic everyday products.
Franchising is one of the most popular modes of entry used by the multinational firm, specifically firms operating in the food industry, who can easily transfer their services to other countries. This requires the Franchisor to be a well-established and popular brand which has potential demand in the country it is expanding into. The brand should be unique and unavailable in the domestic market of that country so that they are attracted to the new product or service in the market.
Unilever, however, is a consumer goods company with similar products and business strategy of its competitors. Franchising might be unsuccessful in the market of Ecuador due to the high competition existing in the market and the increased preference of domestic goods. Moreover, Unilever lacks a business approach that is different than other consumer goods industry. The option of franchising also brings in new complications such as the exploitation by the franchise and the misrepresentation of the brand, which can decrease their sales. Unilever won’t be able to receive the entire profit on their products.
Partnering is one of the modes of entering which is best suitable in a market that is different than the markets the business is already operating in. This option requires the business to partner with another local firm in marketing or a strategic alliance to get the attention of the people of the country. Unilever can enter Ecuador’s market through a partnership with a well-known domestic firm that follows the country’s cultural guidelines. Ecuador is very different than the United States on a cultural and economic basis.
The country’s GDP per Capita in Ecuador equals to 41 percent of the world average. Hence, Unilever is unfamiliar with the market and preferences of the consumer and how it reacts to different market strategies. Moreover, the government’s attitude towards imported goods has discouraged the demand for products of multinational companies. Creating a partnership with a domestic company will help Ecuador’s economic growth, and Unilever will be able to meet the requirements of the population.
Joint Ventures are very similar to partnerships, which involves two companies merging to create a new company in a specific market. Both companies use their expertise and specialization relevant to that market, which increases the chances of the success of the product or project. This reduces the risks of each company. However, joint ventures mean that profits are shared among the companies, which might create conflict among these companies over their share of profit and contribution towards the performance of the new company.
Joint venture with a domestic company in Ecuador might be a good option that has a good knowledge of the market and consumer choice. However, any other international business will be irrelevant to the country. Moreover, Joint Ventures can reduce costs of Unilever if it hires the services of the local company and their production methods that are suitable for the company. The label of “imported products” will be eliminated from Unilever’s products, which will increase the demand for these domestically produced goods that have the same quality as imported goods. It will create employment in Ecuador and contribute to the economic growth; hence, the government will be in favor of the company’s ventures in their country.
The most expensive mode of entry is buying an already existing local company in the country. This requires you the international business to take the ownership of local company to be a part of the market, either due to the government regulations and restriction on foreign companies operating in the country or the domestic company has a substantial market share in the country which can help the international firm to take advantage of their expertise.
Since Ecuador is very different than the other markets Unilever has been operating in, it is important for them to get familiar with the domestic demand and supply forces. A local business that is already well-known and has a big market share will serve Unilever as a readymade business, which will not require them to make major efforts to approach the market. The local business will have information about how the market trends change in Ecuador and work under the cultural guidelines. This will also provide an already established consumer base for Unilever, which will require minimum marketing expenses to increase the sales.
This mode of entering new markets, where firms rely on other international companies to market their goods in the country they are operating in already. This helps the firm reduce their risks and get an insight of the market demand for the product in that specific country. However, this reduces the profits as another agent is added to the distribution channel. While this approach might seem suitable for Unilever to enter Ecuador, the option is not beneficial as the country’s new policies are changing regarded imported goods. This option will not give the tag of a local company to Unilever.
Companies who take up a certain task or project on the request of the government or the country’s demand are called turnkey projects. The option is not relevant to Unilever’s products in Ecuador.
This mode of entry to foreign markets requires commitment and great risk. Greenfield investments refer to the company’s major involvement in the country, where they buy the land and create the facility and commence operations in the country. This is required by most government regulations who want foreign companies to create employment and contribute to the country’s economic growth. Hence, Unilever will require establishing all their production process and sales department in Ecuador.
Greenfield investment into Ecuador will prove to be a very costly and risky option for Unilever; however, it will give them the status of a local company and establish a permanent base in the consumer goods industry of Ecuador. The option will be supported by the government and the nationalist population, who will consider the numerous benefits of the involvement of Unilever in the country. This will increase the demand for Unilever’s products over other competitions.
Unilever will enter the market of Ecuador as new business and launching their products with a marketing strategy that is relevant to the market and consumer demands. Unilever will require to first address the market analysis and their position in the market. This process will need the use of marketing tools such the 4Ps of marketing and Ansoff Matrix (Solomon, M. R., Dahl, D. W., White, K., Zaichkowsky, J. L., & Polegato, R. 2014).
Ansoff Matrix is a tool used to determine the market position of the company and the market strategy to be adopted to address the requirements. Unilever will enter the market of Ecuador, which is a new market, with existing products. According to the Ansoff matrix, when a firm enters a new market with an existing product, it requires to focus on market development and enhancing the uses of the product. Hence, Unilever will need developing a strategy to introduce their existing products to the country of Ecuador, for which they will use PEST analysis of the industry and develop a further strategy using the 4 Ps of the marketing mix (Grünig, R., & Morschett, D. 2017).
The market of Ecuador is familiar with consumer good products, and there is noticeably high demand for the products of personal care and hygiene. Moreover, the market for processed food is already established. Unilever’s products already have a potential market in Ecuador; hence, the firm will not require changing the design or introducing their products to new uses. They can, on the other hand, come up with Ecuador culture-based products that are widely accepted by the mass public receives attention from the consumer who has too many choices in the market with a large number of imported products.
The 4 Ps of marketing mix include product, place, price, and promotion which differs for every market to produce a specialized good or service for the type of consumer the firm aims to target.
Unilever’s products include all essential consumer goods such as food items, personal care, hygiene, household agents, etc. The company will introduce similar products to Ecuador, but with more specifications that are culturally suitable for the country’s demand. For example, all the skin care products should include an SPF due to the high exposure to the sun of the citizens. Moreover, the food items can be more specific to the tastes and food preference of the people of Ecuador. This gives a positive image to the nationalist people who appreciate that a foreign country respects their culture and makes an effort to meet the requirements of the consumer.
Unilever will require using a channel of distribution that is more direct and interactive with the consumers in Ecuador. Retailers and grocery stores are the most relevant approach towards the market. Unilever should also open up their own store to sell their products from 400 brands under the company’s name.
Ecuador’s majority population has a low income, and the high taxation has led to lower disposal incomes, which means that the purchasing power of the people is lower. Unilever’s products will require meeting the demand for cheaper products. The prices will need to be lower than the competitors to attract more consumers and increase the sales, beating imported goods.
Promotion is the key to the success of Unilever’s strategy to enter the market of Ecuador. The firm will require focussing on advertising in the country through the national television and newspapers, as well as the social media. Unilever has always depended on its promotional strategies to ensure high levels of sales. The company can promote their brand with organization different campaigns that is beneficial to the economy such as funded education, creating employment, adopting environment-friendly production methods, etc.
Unilever’s venture into the markets of Ecuador is a way of expansion for the business but involves numerous risks considering the unstable economy of Ecuador. Unilever’s previous markets such as the United States are favorable and include high competitions which keep the company’s success rate high and a large market to operate in. The diverse population of the United States has accepted all types of products produced by Unilever under the four hundred brands owned by the company. However, Ecuador is different from the other 190 countries that Unilever has established in. Ecuador’s political history and economic instability discourage the involvement of new business and foreign investments. Moreover, the country’s economic activity is mostly state-owned with various restrictions and obligation for firms to follow which has reduced private investments.
There is a high demand for consumer goods such as processed food, personal care, and hygiene maintenance products. Unilever can address this high demand for their products, but there is a high competition from international goods such as Nestle. The country depends on its imports from the United States, which has damaged its economic growth. Moreover, there are very few competitions in the domestic market, which means that if Unilever establishes as a local company through greenfield investment, it can dominate the market and contribute to the country’s economic growth.
Unilever is one of those large multinational firms which are favored by governments. Even though the government of Ecuador wants to focus on the domestic industry and discourage imports and charge high cooperate taxation, it might favor Unilever considering the numerous benefits the firm will bring into the country such as employment, a choice for consumers, increased living standards and contribution towards economic growth. Moreover, the labor in Ecuador is cheaper than the majority of the countries it produces in. Cheap labor, little competition, and potential demand will result in a successful expansion for Unilever into the market of Ecuador.
Considering the market survey of Ecuador and the business structure of Unilever, it is concluded that the risk and investment of expanding to the country will be costly for Unilever. The venture might not be successful due to the sudden changes in the market of Ecuador such as inflation rates, new government policies, and cultural indifference. The country can enter the market through franchising or indulging in a joint venture to reduce the risks and get an insight of the economic trends of the country.
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