Unilever effectively competes in the global consumer goods market. A Five Forces Analysis (Porter’s model) of the company shows the need to strategically prioritize competition and the bargaining power of customers in the industry environment. Michael Porter’s Five Forces Analysis model is a management tool for understanding the impacts of external factors in a firm’s environment. In Unilever’s Five Forces Analysis, competitive rivalry is viewed as one of the strongest external forces, along with the bargaining power of buyers. To ensure long-term success, the company must address the issues related to these forces. Unilever’s market position and organizational strengths are adequate to address such forces.
A Porter’s Five Forces analysis of Unilever identifies competition and consumers as the most important forces in the company’s industry environment. The external factors related to these forces have a direct impact on Unilever’s financial performance in the consumer goods market.
Overview: Unilever’s Five Forces Analysis
Unilever deals with a wide variety of external factors, considering the extent of its operations in the global consumer goods market. However, as shown in this Five Forces analysis, such external factors lead to variations in the intensities of the five forces impacting the business. The following are the intensities of the five forces in affecting Unilever:
- Competitive rivalry or competition (strong force)
- Bargaining power of buyers or customers (strong force)
- Bargaining power of suppliers (moderate force)
- Threat of substitutes or substitution (weak force)
- Threat of new entrants or new entry (weak force)
Recommendations. This Porter’s Five Forces analysis highlights competitive rivalry and the bargaining power of buyers as the issues with the highest intensity in affecting Unilever’s business. The bargaining power of suppliers is also important, but has limited impact on the company. The threats of substitutes and new entry have minimal effect on Unilever and the consumer goods industry environment. In this regard, strategic action must prioritize competition and the bargaining power of customers. A recommendation is for Unilever to further build its competitive advantage through product innovation. For example, the company can increase its investment to produce better and more competitive variants of its current personal care and home care products. This effort should reflect Unilever’s generic strategy and intensive growth strategies, which emphasize product uniqueness as a strategic approach. It is also recommended that the company must enhance its customer relations to attract and retain more consumers. For example, in applying Unilever’s organizational culture of performance on customer relations processes, higher quality request and complaint processing can improve consumers’ perception on the company and its brands. The company has the strengths needed to strategically address these issues (Read: Unilever’s SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats).
Competitive Rivalry or Competition with Unilever (Strong Force)
Competition is a major force in Unilever’s industry environment. This section of the Five Forces analysis identifies the external factors that present the impact of firms on each other. The strong force of competitive rivalry against Unilever is based on the following external factors and their intensities:
- High number of firms (strong force)
- High aggressiveness of firms (strong force)
- Low switching costs (strong force)
There are many firms operating in the consumer goods industry. This external factor imposes a strong force on Unilever. In addition, these firms are generally aggressive, further adding to the intensity of competition. Unilever also experiences tough competition because of low switching costs. For example, it is easy for consumers to switch from one firm to another. Thus, a high level of competition is shown in this section of Unilever’s Five Forces analysis, highlighting the need to consider competitive rivalry as a high-priority force in the company’s industry environment.
Bargaining Power of Unilever’s Customers/Buyers (Strong Force)
Unilever’s business and industry environment depend on the response of consumers to its products. The influence of buyers on business performance is considered in this section of the Five Forces analysis. Unilever must address the following external factors that lead to the strong force of the bargaining power of customers:
- Low switching costs (strong force)
- High quality of information (strong force)
- Small size of individual buyers (weak force)
The low switching costs make it easy for consumers to transfer from Unilever’s products to other companies’ products. This external factor contributes to the strong intensity of the bargaining power of buyers. In addition, consumers have access to high quality of information about consumer goods, making it even easier for them to decide when transferring from Unilever to other providers. For example, buyers can compare products based on online information. The small size of an individual consumer’s purchases has minimal impact on Unilever’s profits. However, the low switching costs and high quality of information outweigh this third external factor in the industry environment. Based on this section of the Five Forces analysis, the bargaining power of customers is one of the strongest forces affecting Unilever’s consumer goods business.
Bargaining Power of Unilever’s Suppliers (Moderate Force)
Suppliers impact Unilever’s industry environment by affecting the level of supply available to firms. This section of the Five Forces analysis presents the influence of suppliers on companies. The following are the external factors that contribute to the moderate force of the bargaining power of suppliers on Unilever:
- Moderate size of individual suppliers (moderate force)
- Moderate population of suppliers (moderate force)
- Moderate overall supply (moderate force)
While Unilever has large suppliers like foreign firms that supply paper and oil, the average supplier is moderate in size. This external factor imposes a moderate intensity force on the consumer goods industry environment. In addition, the moderate population of suppliers enables them to impose significant but limited influence on firms like Unilever. Similarly, the moderate level of the overall supply adds to such significant but limited influence of suppliers. For example, any supplier’s change in production level leads to significant but limited change in the availability of raw materials used in Unilever’s business. Other firms in the industry are similarly affected. As shown in this section of the Five Forces analysis of Unilever, the bargaining power of suppliers is a significant but moderate consideration in the consumer goods industry environment.
Threat of Substitutes or Substitution (Weak Force)
Substitutes can reduce Unilever’s revenues and the strength of firms in the consumer goods industry environment. The impact of substitution is determined in this section of the Five Forces analysis. In Unilever’s case, the following external factors are responsible for the weak force of the threat of substitution:
- Low switching costs (strong force)
- Low substitute availability (weak force)
- Low performance to price ratio of substitutes (weak force)
The low switching costs enable consumers to easily use substitutes to Unilever’s products. This external factor imposes a strong force on the company and the consumer goods industry environment. However, the overall impact of substitution is weakened because of the low availability of substitutes. For example, it is easier to access Unilever’s Close-Up toothpaste from grocery stores than to obtain substitutes like homemade organic dentifrice. In relation, most substitutes have low performance with minimal or insignificant cost difference when compared to consumer goods readily available in the market. This condition makes Unilever’s products more attractive than substitutes, thereby further weakening the intensity of the threat of substitution. This section of Unilever’s Five Forces analysis shows that the threat of substitutes is a minor issue in the business.
Threat of New Entrants or New Entry (Weak Force)
Unilever competes with established firms as well as new firms in the consumer goods market. This section of the Five Forces analysis considers the influence of new firms on the industry environment. The following external factors create the weak force of the threat of new entrants against Unilever:
- Low switching costs (strong force)
- High cost of brand development (weak force)
- High economies of scale (weak force)
The low switching costs enable new entrants to impose a strong force against Unilever. For example, consumers can easily decide to try new products from new firms. However, it is costly to build strong brands like Unilever’s. This external factor weakens the intensity of the threat of new entrants against the company. Also, Unilever takes advantage of high economies of scale, which support competitive pricing and high organizational efficiencies that new firms typically lack. As a result, the company remains strong despite new entrants. Based on this section of the Five Forces analysis, the threat of new entry is a minor concern in Unilever’s industry environment.
References
- Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.
- Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change, 15(5), 213-229.
- Roy, D. (2011). Strategic Foresight and Porter’s Five Forces. GRIN Verlag.
- U.S. Department of Commerce – The Consumer Goods Industry in the United States – Select USA.
- Unilever – Investor Relations – Annual Reports and Accounts Overview.