THE STRATEGIC
MANAGEMENT PROCESS
PART III: EXAMPLE OF SMP – UNILEVER’S “THE
PATH TO GROWTH”
1. Unilever's strategic vision and business mission
"To meet the everyday needs of people everywhere"
2. Objectives of "The Path to Growth"
Five-year strategic plan announced in February 2000 designed to accelerate top-
line growth and further increase operating margins. The plan centered on a series
of initiatives to focus on fewer, stronger brands to accelerate growth. It was
subsequently amended, following the acquisition on Best foods, which was
completed in October 2000.
In our Path to Growth strategy we committed ourselves to delivering by 2004:
Annual top line growth of 5-6%
Operating margins before exceptional items and amortization of goodwill,
of more than 16%, compared to 11% at the start of Path to Growth
Continue to secure low double digit Earnings per share growth through to
2004
3. "The Path to Growth"
Principal components of the plan:
Brands: The cornerstone of the plan is the focus of product innovation and brand
development on a portfolio of around 400 leading brands which will lead to less
fragmentation of resource and bigger hit innovations. By 2004 we expect our
leading brands to represent 95% of the business (compared to 75% in 1999). The
increase in brand power reflects the contribution from our acquisitions, the
planned acceleration in exit from the non-corporate businesses and the disposal
or 'harvesting' of tail brands. Marketing support will have increased by 2004 with
200 basis points of sales.
Supply Chain: The re-ordering of manufacturing plans around a base of 150 key
sites and consequent site reduction of 100, costing some €2.3 billion.
Simplification
The revision of knowledge and information systems for and the refocusing of
resources behind 400 leading brands with consequent reduction of overheads and
streamlining of the corporate centre, costing some €2.0 billion.
Under-performing Businesses
The re-organization or divestment of businesses that do not meet performance
standards.
Best foods Integration
In addition to the Path to Growth restructuring, savings of €0.8 billion (US$ 750
million) will be generated through the integration with Best foods. The total cost
of the programme will amount to €1.2 billion (US$ 1.1 billion) and involves an
additional reduction in job numbers of 8 000 and the sale, or closure of some 30
sites.
The key drivers of value creation in the Path to Growth strategy are:
Growth of the leading brands
The exit from the tail in a value creating way
Delivery of earnings per share growth in a quality way with increased
gross margins partly re-invested in additional brand support.
Restructuring proceeding according to plan
Under-performing businesses being resolved
Organization put in place to execute strategy with a real passion for
winning.
4. Evaluating Performance, Reviewing New Developments
Having just moved past the half-way point in the 5-year Path to Growth
programme and having thus far delivered what it said it would, Unilever is
comfortable with its progress to date and remains confident of achieving its
targets – 5- 6% top line growth and 16%+ operating margin by the end of 2004
and low double-digit earnings per share (EPS) growth throughout the 5-year
period of the programme. Indeed, given
the strong increase in profitability, our
outlook for the year's EPS growth has now been raised to the high-teens.
Key Financial Indicators
Leading Brands sales growth in the quarter accelerated to 5.4%, with a little
over 3% from volume. Foods grew at 4.6% – a significant step up in growth
from Q2 – and Home & Personal Care (HPC) at 6.5% in the quarter. The
good momentum in the quarter is expected to be maintained in the rest of
the year.
Operating margin (before exceptional and goodwill amortization) reflects
the progress made in Path to Growth and moved ahead by 0.5% to 16.2% in
the quarter. Within this, advertising and promotions have risen by 1.8%.
Operating margin for the last 12 months improved to 15.1% (compared to
11.2% at the outset of Path to Growth).
Earnings per share increased by 18% for the quarter and 27% for the year
to date, due to improvements in profitability and lower interest costs.
Key Features
Underlying sales grew by 4.5%.
Total turnover for the quarter was down slightly at €13.11 billion (and for
the year to date at €38.75 billion), due to disposals and the managed rate of
tail attrition in the non-leading brands.
Operating profit in the quarter was ahead by 2% to €2.12 billion (and by
10% to €5.94 billion for the year to date), driven by continued benefits
from our Path to Growth procurement and restructuring programmes and
portfolio re-shaping.
Cash Flow from operating activities in the quarter continued to be strong
at €2.2 billion and, on a moving annual total basis, has gone up from € 5.6
billion in 1999 to € 8 billion in the last 12 months.
Net debt at the quarter end is €18.8 billion, compared with €22.9 billion a
year ago. EBITDA net interest cover was 8.4 times in the quarter.
Key Components
Brands:
Most importantly, the growth rate of the leading brands for the last 12
months it is 4.5 %. Within this, HPC is already growing in the target
range
at 5.6%, while Foods has shown a significant step-up from 1.9% in 2000 to
just under 4%.
For the full year we expect a leading brand growth of 4.5-5%. By the end
of the year leading brands will represent close to 90% of total sales (up
from 75% of Unilever turnover in 1999) and plans are in place to increase
this to 95%+ by the end of 2004.
We have a focused portfolio of 400 brand names (1600 at the outset of Path to
Growth) which we manage as 200 brand positions (at the end of Q3 the number
of brands had been reduced by around half since the start of Path to Growth).
The innovation plan in 2002 is phased differently from 2001, but examples from
the year to date in 2002 include: The launch of Knorr Vie healthy soups in the
UK, the launch of Axe deodorant and All fabric conditioner in the US, roll-out of
Dove shampoo and conditioner across Europe, the introduction of tetrahedral
teabags in Japan, the roll-out of Crème Bonjour and launch of Sunrise (vitamin
enriched) Margarine in Central & Eastern Europe, the launch of Lipton Asian
side dishes, Ragu Rich & Meaty and Hellmann’s flavored mayonnaise in North
America, the launch of Ramen Noodle soups in Mexico and Poland, the roll-out
of Cornet to Soft in Europe and the re-launch of Omo in Africa.
Organizational Restructuring Progress:
New dedicated HPC and Foods organization was implemented on 1 January
2001 allowing a sharper business focus. This includes a new innovation
structure with fully integrated R&D in place and Global Brand Directors
leading key brands on a worldwide basis.
Fresh talent – 40% of the top 100 managers is different from 2 years ago,
with 80% being different from 5 years ago. The average age amongst them
has reduced by 10 years.
An enterprise culture is being re-awakened with a real passion for winning,
through remuneration systems that are designed to reward outstanding
performance.
Excellent progress has been made on the savings programmes and the integration
of Best foods. 90% of the restructuring has been authorized, 70% has been
implemented and 80% of our €3.9 billion savings target has been delivered.
Within this:
We reached this quarter our buying savings target of €1.6 billion 3 months
ahead of plan. Capability will be retained and there is more to be gained in
this area.
Path to Growth restructuring savings of €0.7 billion, to date.
Best foods integration savings of around €0.7 billion to date.
Including Best foods integration, some 83 factories have now been either sold or
closed (a reduction of 8 in the quarter), and 31,500 people (2,900 in the quarter)
have left the business.
Portfolio Shape
Portfolio change adds 1% to Unilever growth rate and 1% to operating
margin.
79 businesses have been sold with proceeds of €6.2bn since the start of
Path to Growth.
We have acquired strong businesses: Best foods; Amora Maille; Slim Fast;
Ben & Jerry's.
Best foods Integration
We set out to integrate 33,000 people, in 63 countries, in 120 factories to
produce a total synergy benefit of €790 million. Some € 700 million has been
achieved to date, ahead of plan.
The sale of the remedy brands to Campbell’s was completed in Q2, 2001, the sale
of the Best foods Baking Company to Weston in Q3, 2001 and in Q2, 2002 we
completed the sale of some North American brands (including Mazola) to
Associated British Foods.
We chose to integrate Best foods using a fast track approach in order to get
through that process as quickly as possible and then turn the attention to growth.
Our plan for 2002 envisaged lower growth in the first part of the year to ensure
that the organization was bedded down and we have now begun to drive successful
innovations across the world.
In 2001 the Best foods leading brands grew by approaching 4% as we
ensured that brands and market shares remained healthy throughout the
integration.
In 2002 innovation has been weighted towards the later part of year to
minimize disruption from integration.
Knorr, our largest brand, grew by an excellent 4% in 2001. This year, the
Knorr family has grown by 5.5% as we move from integration to
innovation. Progress is broad based in terms of geography and is driven by
a strong innovation programme.
Hellmann’s has maintained or grown its shares in all key markets, with a good
performance in Europe and Latin America.
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