Unilever's announcement

Read the following caselet carefully and answer the following questions:

1. 1.           Outline the reasons for Unilever's move into the household services market and what opportunities present them?

1. 2.           The services Unilever proposes to offer are quite innovative. Discuss how the company can create competitive advantage to ensure market leadership.

UNILEVER

Unilever's announcement that it is moving into the household services market is a sign of the times. It proposes to start with a domestic cleaning service, but then envisages to offer gardening, domestic repairs and home security services. This is quite a change for a company that is Europe's largest manufacturer of household products—soap and detergents, foods, cosmetics and ice cream.

This shift from products to services is at the top of the agenda for most ambitious companies. Unilever typifies the problems of most manufacturers. Most of the products it makes are in mature, low-growth markets. Strong supermarket groups with great buying power are pushing own-label brands and squeezing manufacturers' margins. Markets in the developing countries are not growing fast enough to compensate for stagnating performance in the developed world.

The result is that manufacturers are not offering increasing returns to investors. The share prices of product companies like Unilever, Procter & Gamble, Gillette and Cadbury have tumbled in recent years.

Niall Fitzgerald, Unilever's co-chairman, has no doubt reflected that his tenure might be as short-lived as his friend Bob Airing’s at British Airways (BA) unless he can offer shareholders more. To offer increasing returns to shareholders companies have to build competitive advantage in attractive markets.

Today there are two markets that investors regard as attractive. The first is hi-tech markets. In the last decade the two best stocks have been Dell, the US computer producer, and Nokia, the Finnish mobile phone manufacturer. These gave investors returns averaging more than 80% a year, compared to little more than 10% for the average food business. An investor putting £5,000 into Dell and Nokia a decade ago would now be a multimillionaire.

The other attractive market, which should be much more accessible to companies like Unilever, are services. Spending on services—health, education, travel, financial services, entertainment etc—in the developed world, is now double that on product. It is also growing twice as fast. Unilever estimates that the UK home cleaning market is already worth £1.3bn, nearly six times greater than sales of its top-selling brand Persil.

Not only are services bigger and faster growing than product markets, but also they are usually much more profitable. Products are standard and much easier for customers to compare.

Quality differences have also declined, so customers don't really believe any more that Persil washes any whiter than Omo. These all make it more difficult for manufacturers to control prices.

Service is more difficult to compare. It is impossible to standardize a house cleaning, hairdressing, education or consulting service. Each time it is different, depending on the idiosyncrasies of the customer and service staff. Buying services is more risky. Customers often use price as an indicator of quality—high price means good

service.

The car industry is typical. Profits on manufacturing cars are awful. But margins on servicing cars, insuring or renting them, are very attractive. The same is true for Unilever. Margins on household cleaning are more than 20%, at least twice as high as margins on its household products.

Unilever has identified the right market; the real question is whether it can develop the new capabilities to build competitive advantage in this very different business.