Outsourcing of Unilever

Unilever was formed as a result of merger of two companies Lever Brothers of UK and
Dutch Margarine of Holland in 1930. Since then Unilever has expanded into 100 countries
all over the globe. Catering to almost every aspect of life everyday this company has
emerged as one of the best Fast moving Consumer Goods Industry (FMCG) with P&G as
the sole competitor. Dividing the functioning of this company into various division of
Consultation, distribution, Operations, maintenance and finance analysis has been done as
to what was the purpose of the outsourcing the activities to other global firms like IBM and
Accenture to name a few.

This particular case has been chosen, as it is a little peculiar.

If Unilever is such a big company with hundreds of brands all over the world then what
caused it to outsource to other companies instead of producing the products itself?

* Prioritize- decides on which functions to outsource. It should be noted that the core
competencies and strengths should be strictly kept within the firm.

* Select- Unilever as mentioned focuses on marketing and selling its brand names. Hence
while deciding to eliminate it wanted to remove administration and monitoring while
concentrating on its R&D.

* Trust- this is on of the key issues related to the successfully working. It is extremely
essential that the parent company maintain full confidence in the outsourced company so
that the latter cannot steal the business ideas and strategies.

* Monitor- Even if two firms have a history of working together business means no trusting
without monitoring. Constant monitoring and checks have to be kept.

In the 1990’s several forces interacted to drive forward the global big business revolution.
Liberalisation of trade, capital flows, privatisation, collapse of communism and advances in
IT and migration were the main forces. Initially however even with all these advances the
large FDI flows were between the developed countries. However as the time elapsed the
countries and big firms took the advantages of the political economic scenes and the
competitive advantages to move to the developed countries.(Nolan et Al, 2002)
 The structure and functioning of R&D within large corporations has always been
greatly influenced by the overall corporate structure. Particularly this has been associated
with the trend away from a single structure to multi divisions. Hence even if a firm
maintained entirely internalization it was hard to cope up with the specific needs of product
divisions. This gradual structural changes in my large enterprises associated with the
process of diversification has meant that the possible permutations of the R&D
structure and functioning and consequently locational pattern within these firms would be
more complex.(Howells, 1990)

When analyzing the theories and strategies followed by the company there are certain
drivers, which have keenly influenced the decisions of Unilever. Unilever analysis has been
done from the birth of the company in 1930 till date. After a thorough study the main
factors were determined and have been expanded below in detail.

According to (Coase, 1937) the definition of firm takes into consideration a number of
factors. One of the major factors of a firm is the controlling of price mechanism. The
direction in which the firm uses its resources is directly dependent on the price mechanism.
This price mechanism includes the transaction costs borne by the firm. Within a single firm
these transaction costs are not completely but greatly reduced. One of the major reasons for
the big firms, which expand their products or capacity, is to eliminate these kinds of intra
firm costs. The other important reason for the existence is the desire of some people to
control but not to be controlled and to exercise power over others. Hence the entrepreneur
carries out the function at less cost taking into account that the firm may get factors of
production, which it supersedes, and the firm can always revert back to the open market if
it fails to produce efficiently.

The exchange transaction costs on a market and the costs within a firm are also treated
completely differently by the regulatory bodies. The market costs may involve the different
types of taxes like sales tax while a firm involves quota schemes and other methods of price
control. A firm of the scale of Unilever has lots of costs within a firm and has to take several
decisions in order to balance the internal and external costs. On the one hand is whether it
should internalize completely or completely outsource in order to specialize. Outsourcing
completely would increase the costs to a great extent while internalizing completely would
not give the most optimum quality. The best balance between the two has to be obtained in
order to remain consistent with the aim and the long-term goals of the company.

Unilever initially concentrated on expanding its firm size by moving to different countries
and increasing its product range. As we see today Unilever is a perfect balance between its
initial internalization and tremendous outsourcing.

Another dimension is that the welfare gains can take place where a new market is created
which never existed before. Welfare losses however arise when the multinationals
maximize monopoly profits by restricting the output of goods and services. A firm following
internationalization allows more cross-functional and inter plant integration and in the long
term this can stimulate both R&D and its effective integration in production and
marketing. Unilever’s strategy can be considered with regard to this aspect from its
formation in 1930 till around 1970 Unilever focused on internalization. During this period
they focused on improving its R&D, production, marketing and expanding all across
the globe.(Buckley, 1990)

According to Buckeley (1990) the long run nature of internationalization cannot exclude
the competitive advantages a firm possesses which may in the future be imitated by its
competitors. These internationalization benefits can only exist in imperfectly markets. For
Unilever the internationalization of R&D and other process would become obsolete in
the long run. Utmost care should be taken to distinguish these long run benefits and cost of
internalized R&D units from competitive short run advantages by the technological
lead.

Further while the expansion of Unilever continued internationalization of markets across

the international frontiers allowed the reduction of the firm’s overall tax bill relative to
other firms, which traded. It proved to be a strategic weapon against firm in some
strategies. However over time analyzing the reality and the relative simplicity was an issue
of concern. This trade off had to vary depending on the task in hand and the condition of the
markets.

The general statement that the imperfect markets will be internalized till the benefits equal
the costs have to be restricted by defining costs and benefits in relation to particular
markets at specific points of time and across the economic space. Although the cost of
internalization of a firm is a strategic decision to increase profits however a number of
conflicting views have come up by economists. This theory has unconventional cases like
those involving foreign direct investment. Increased changes in social and political
conditions, technology and techniques, tastes and demand patterns have an impact upon
the division of labor and the various costs conditions involved. This new division of labor is
increasingly leading to a vertically integrated structure. The vertical structure in turn is
leading to a multi plant operation and intra firm trade. This combination of internalization
pressures and location of costs results in new division of the industry each specializing in its
own area. However this is not a global strategy. This strategy is constrained by a value chain
and the various coordination issues. Unilever, which also as mentioned above following the
internalization in the early years now focuses on outsourcing.
 Outsourcing which is mainly the international division of labor is of the key strategies
followed by the firms to focus on their competencies whilst giving contracts to other firms
for other departments. (Buckley, 1988)

Hymer’s theory brought to the world the concept of international operations of national
firms. Many firms aiming to expand worldwide are doing so by the process of International
Investment. This international investment can be categorized into International Portfolio
investment and foreign direct investment (FDI).(pg 21)

Again the FDI can take place by direct flow of cash or by franchising, licensing, Alliances,
joint ventures and subcontracts. Unilever uses a combination of these to expand. For
example in China (pg 57) because of entry issues it focused on joint ventures. These are
contrary to Buckley’s theory of internationalization, which saves the costs. However when
we consider the first major determinant of Hymer’s theory of specific advantage we see that
Unilever’s outsourcing policy is directly related to it. The specific advantage policy explains
that exploitations in the market and imperfections in foreign markets give a competitive
advantage to the firm. When Unilever had to expand in India they did so by collaborating
with a number of partners in different fields. Although this increased theoretically
transaction costs the ease with which it established itself, as a brand would have taken a
very long time otherwise. Certain incidents like these of India and China brought to light the
fact that the firm had been realizing that only internalization will definitely not be enough.

Taking a note of these various reasons as to why Unilever, which initially focused on
internalization, would now focus on externalization or outsourcing. Some analysts believe
that dividing the work to companies, which specialize in it, would have lower costs for the
same goods than the cost at which the company produces it. This would be striking the
balance with the transaction costs and the costs of internalization. However a survey done
shows that only 29% of the people consider the cost reduction factor. A major factor is the
quality of the finished products. Outsourcing will increase the organization’s access to a
range of experts and specialists. It is usually hard for a big firm like Unilever to keep track of
advancements in every field of operation. Outsourcing certain functions would help it to
respond quickly to changing market demand and supply. Hence the company to maintain its
quality standards would rather divide it among other companies.

(Kim and Ummnath 2005, cited in Yamin and Sinkovics 2007) see technological
breakthrough in independent partnerships since it radically changes the technological
landscape partners and allows partners to exploit ICT capabilities. Gradually the federative
system is becoming extinct and people are moving more towards outsourcing. This basically
has two dimensions- the disintegration of subsidiary value chains and growth of
outsourcing due to increasing modulation and increasing ICT systems. A wholesome
integration of the company is developed since the process involves electronic integration.
Electronic integration includes a variety like coordination of decision and operation
integration, mutual investment in relationship specific assets, information sharing and
monitoring control.

Unilever follows this strategy exactly in the same manner by establishing one of the biggest
contracts with IBM. Unilever in relation with this theory has decided to sign a long-term
seven-year contract to transform its financial services in Europe. Unilever believes that this
will provide “long term benefits for Unilever” and is “a strong example of the new on
demand business in IBM is targeting in the marketplace for business performance
transformation services”, IBM said.(silicon.com)

However this particular case of Unilever is quite striking. It has contracts with some of the
biggest and equally powerful company in the world. According to (ICT) it was believed that
enabling such a great control in the MNE’s the company may be at a risk and this may
reduce the long-term viability. Care has to be often taken in such a manner that the
company doesn’t start losing its business to companies to which the job has been
outsourced. Sometimes care has often been taken to first establish trust by building a short-
term contract and then extending it. Often Unilever has also maintained full control of its
business by sending some people from Unilever to HP so that the internal functioning of the
company and the data is kept intact.

Apart from the ICT there is often a discussion about MNC on exploitation and exploration.
Exploitation refers to the utilization, refinement and extension of the existing capabilities
while exploration refers to creating the adaptive capabilities of the organization. In most
companies “exploitation drives out exploration”(Ahuja et Al, 2001). Unilever while
following the exploitation also took steps to ensure that exploration is also moving hand in
hand. This is very apparent from the company product expansions. While at some point it
was trying to improve its products and innovations by exploitation its existing technologies
and in other countries it was establish market efficiency by collaborating or making
contracts with market leaders in the same company.

The results from Unilever further provide supports to the view that decentralization of
innovation enhances the overall innovative role of MNEs. Yamin and Otto (2004) found that
internal and external knowledge flows have a complementary and reinforcing positive
impact on innovative performance. The performance of some products that had been
acquired, it was obvious that external connections were key to highly profitable future
innovations. As Hymer put it ‘decentralization within a corporation is often not the opposite
of centralization, but the complement. This was again directly related to gaining the
expertise in a particular subject by reducing the costs of the firm’s staff and R&D and
acquiring it from another firm excelling in it.

It is very evident from this particular case study that the firm has very strategically
followed a growth path in accordance with the main theory of Hymer. In short Unilever
slowly moved from internalization to externalization. This change was brought about
gradually and was to the advantage of the company in the long run. The outsourcing was
important to increase knowledge at the extra costs but also a strong trust had to be
established between the two. The contracts had to be carefully established so as not to
disclose the internal company strategies whilst trying to establish complete knowledge in
the outsourced department. Extra care has to be taken for companies like Unilever where
even the outsourced companies were as massive as the parent company. Unilever even
today is putting its utmost focus on expanding its core competencies to perfection and serve
the finest quality of products and services to its customers. Unilever with its strategies has
indeed established a unique brand name all over the world and this has indeed been made
possible by outsourcing also to some of the finest companies. It can also be noted that
though Unilever outsources to IBM it also outsources to other medium scale firms of IT.
Personally I feel this helps to keep a constant check on their services. This perfect balance,
trust, coordination and flow of information between the two companies have made it
possible to sign deals worth millions. The work done by Coase, Buckeley and Yamin has
indeed been very significant and it has been possible to relate it directly to the actions of the
companies at the various stages of the growth of the company.

Buckeley, P.(1988) The limits of Explanation: Testing the Internationalization Theory of

Multinational Enterprise. University of Bradford

Buckeley, P.(1990) Problems and Developments in the core of International Business.Ph.D.

University of Bradford

Coase, R.(1937) The Nature of the Firm. Available from: (source missing)

Yamin, M and Sinkovics, R. (2007) ICT and MNE reorganization: the paradox of control.
Manchester Business School