Analysis of Unilever’s Risks and Risk Management Strategies Essay

With the rapid development of modern economy, companies are always exposed to risks which are penetrating to all walks of life and not only exist in the products market, but also exist in financial market (Ballou, 2005). It is undoubtedly that risks jeopardize the company’s development in that they may increase the cost of a company’s operation and make it harder for a company to make a crucial decision. Accordingly, it is essential to know risks and find out risk management strategies. This essay will firstly map out Unilever’s business model and have a brief analysis on it. Following this, it will illustrate specifically risks Unilever is exposed to in light of the business model. Meanwhile, it will point out some risks Unilever has not managing enough. Next, the essay will assess some risk management strategies Unilever has taken to mitigate or avoid the risks. Finally, it will recommend the company some more risk management strategies in order to help it mitigate or prevent risks. Analysis of Unilever’s Business Model Business Model A business model, strictly speaking, is the organization’s core logic for creating value (Jane & Susan, 2000). After over 80 years’ development, Unilever has become one of the largest suppliers of consumer products in the world. Its strong portfolio of foods, home and personal care brands is trusted by consumers the world over. Unilever’s top 13 brands account for total sales of over EUR23 billion and top 25 brands represent nearly 75% of the sales (Unilever Annual Report, 2009). Unilever is a well-operated company, and its business model is mapped out as follows: Key Partners Suppliers Contractors Distributors Key Activities Research Design Production Sale Value Proposition Produce innovative and good-quality personal and household care goods for consumers and try to make people feel good and comfortable every day; Produce and sell nutritious foods, such as tea, ice cream, dressing to people and to make them enjoy a better life. Customer Relationships Deliver goods to customers via various channels Customer Segments Huge segment of customers Customers all over the world Key Resources Brands /Labels Employees Production Sites & Lines Technology Information, Intellectual Property, Embracing Diversity Channels Malls Supermarkets Stores Groceries Pharmacies Terminal Markets Cost Structure Research cost, design cost, production cost, supply and sale cost, marketing and promotional spend, management cost Revenue Structure Sales of the consumer goods the company researches, designs and produces. Analysis of the Business Model The business model mapped out above indicates that a multi-national enterprise like Unilever has an integrated and inseparable business chain which is global on the one hand, and multi-level on the other hand, that is, its economic activities involve employees, suppliers, producers, storage, terminal markets, retailers, customers and other beneficiaries (Ian, 2009). Such business model enables Unilever to become a world top supplier of consumer products. However, each coin has two sides. Since the Unilever’s business chain connects each other so closely and relates to numerous parties and factors, thus the company’s whole operation is rather vulnerable and is easily subject to various risks. Risks Exposed to Unilever in light of the Business Model Market Uncertainties As a top supplier of consumer products, Unilever’s business activities are operated within a global, vigorous and competitive market. Its business development is subject to the condition and change of the whole market. Firstly, economic condition plays a crucial role on the development of Unilever’s business as consumption demand and purchase ability of consumers directly influence the sale of the products. 2008 and 2009 were relatively tough years for Unilever due to the global economic crisis (Unilever Annual Report, 2009). The economic downturn reduces consumers’ wealth and makes them unable to buy as many products as before. Meanwhile, customers purchasing ability was greatly undermined and turned to buy those inexpensive but substantial products rather than those top-grade products. Customers’ reactions affect Unilever’s turnover, profit and cash flow. Next, more and more companies are targeting the market of consumer goods due to the attraction of billions of consumers. Thus, the market of consumer goods is just like a piece of pie and is shared by more and more competitors. Therefore, the whole market is uncertain and Unilever has to be well prepared for the fight against the economic uncertainties and the industrial fierce competition. Financial Instability The interest rate risk is a risk brought to the value or the cash flow or profitability of a company when the change of the interest rate occurs. To clarify it more specifically, the floating interest rate exposes the company to the risk of the increased interest cost and the increased borrowing afterwards; while the fixed interest rate makes the company subject to the risk of the loss of the fair value. Meanwhile, as a multinational company whose business activities are operated in more than 180 countries, Unilever is exposed to the risk of the fluctuation of the exchange rate during the process of the change of currencies and the actual value of the currency may be decreased due to such fluctuation (Unilever Annual Report, 2009). Provided that Unilever does not handle the issue of interest rate and exchange rate well, the company may be subject to the exposure of the reduction of cash flow, turnover, profits which may subsequently adversely impact the company’s credit rating, ability to raise funds and confidence of investors. Environmental Risk As a top producer of consumer goods, some waste water is generated for disposal and the company also discharges some CO2 from energy that the company uses in the process of the production (Unilever Annual Report, 2009). In case the said issues are not dealt with appropriately, the environment will probably be polluted. One of the Unilever factories in Brazil discharged a great deal of stink smell to the air due to the false operation in 2008 which impacted upon more than 100 thousand people’s normal life and Unilever was imposed a fine of 10 million Brazilian Real by the Brazilian government due to such pollution (Unilever Annual Report, 2009). Similar accidents will greatly damage the reputation of the company as not only the government but also common people’s awareness of environmental protection has been greatly improved nowadays. Accordingly, Unilever is exposed to the environmental risk which may result in the heavy fine and adverse reputation. Loss of Customers Unilever’s extraordinary achievement obtained nowadays is on the one hand because of the superior products it supplies and on the other hand is inseparable to the customers’ sufficient trust of the company and its brands. However, the following three factors may undermine customers’ trust to the company and its brandsï ¼Å¡ a. Products fail to meet high product safety standards. Quality inspectors in each state have set many standards and are doing lots of inspection work to ensure the safety of products sold in the market. In case the product is found insecure or with any shortcomings, customers will feel disappointed; b. Lack of new products and technical capability. Customers have quite high requirements on products. Lack of new products and technical capability will push customers to other supplier of similar consumer goods; c. The service and product provided by the competitive company is better than Unilever. Loss of customers’ trust may be caused by several reasons, while the result is simply the loss of the company’s cash flow and the damage of the company’s growth and profitability. Operation Risk Each step of Unilever’s business activity is separable to each other (Unilever Annual Report, 2009). For example, the company’s production of goods is conditioned by the timely and secure supply of the raw-material, while the successful sale of goods needs effective storage and distribution capability. However, the supply of the company’s raw material, mostly agriculture products, is based on the secure and sufficient agricultural production which may be influenced by weather, water scarcity, and farming practices. Similarly, the storage and distribution of products is usually influenced by the storage and distribution capability, the cost of it and the local social stability. Any issue of the foregoing may badly influence Unilever’s normal production and sale and subsequent cash flow, turnover, and profit and other business indexes. Risk of Employees and Talents Unilever is a company with more than 300 operation agencies in 88 countries, more than 1000 well-known brands and sells its products in more than 150 countries. Thus the successful operation of the company not only depends on the superior products, but also needs appropriately qualified employees. In the event that the company suffers high employment turnover rate, it may be exposed to the risk of high cost of training, suspended market share and loss of some investment opportunities which will impact the smooth development of the company and undermine the company’s capability of competitiveness in the market. Legal Risk Unilever is doing business in more than 150 countries. Different country has very different legal system and regulations concerning the employment, the product safety, the pricing, the intellectual property rights, the disclosure, the environment and other factors (Ian, 2009). Legal risk may probably bring a suit to the company and will do harm to the company’s reputation in local market. Other Risks exposed to but not identified or Elaborated by Unilever Unilever has found out and elaborated some risks exposed to the company; however, there are some risks which have not aroused Unilever’s great attention: Risk of New products Exploitation In order to confront the industrial competition, Unilever needs to exploit continually new products to attract customers and consolidate the relationship with customers. The exploitation of a new product basically involves following steps: design, research, selection of the scheme, the involvement and allocation of the resources, the production and promotion of the products. However, there are some uncertain factors existing in the process of new products exploitation, such as technology, market, fund and environment and each uncertain factor may lead to the unsuccessful exploitation, loss of cost or negative reputation to the company (Michel, 2001). Physical Risk A company is unavoidably exposed to some natural disasters or accidents (Jane, 2000), such as fire, windstorm or earthquake which will cause the property damage or employees’ body injury. Such damage or injury will cause the company’s normal operation affected and subsequently, turnover, cash flow and profitability will be impacted. Other risks The company is also exposed to other risks such as fiscal, tax and so on. Interaction of Risk Factors Economic Downturn ↠ → Market Uncertainties ↙â†â€" ↓↑ Risk of New Product Exploitation↠ → Financial Instability ↓↑ â†â€"↘ ↓↑ Legal Risk ↠ → Loss of Customers ↓↑ ↙â†â€" ↓↑ Risk of Employees and Talents ↠ → Operation Risk All risks illustrated above do not exist independently but rather influence interactively (Geert, 2008). The economic downturn will lead to the financial instability which may cause the company to operate adversely and the subsequent poor operation may cause the company to face more fierce industrial competition and environmental risk. The said issues are easy to lead to the loss of employees and talents which may also subsequently lead to poor operation and vice versa. To sum up, the factors function with each other and the company has to take some effective and holistic measures to defend these risks. Assessment of Unilever’s Risk Management Strategies Unilever has recognized that most of the risks exposed to it may become material obstacles to the company’s further development. Accordingly, it has tried to taken some effective and structured measures to identify and then exploit the key risk management strategies for the business (Michael, 2007). The specific risk management strategies it has exploited are as follows: 1. Unilever has been carefully monitoring economic indicators and consumer behavior in different areas through extensive and professional research in order to respond quickly and take new and flexible measures to meet the changing demand of customers. 2. In order to deal with the issue of financial instability, the company has been making efforts to get access to global debt markets through various ways such as short-term or long-term debt programs. Unilever attaches great importance to the fluctuation of interest rate, trying to have different types of financial services and balance the risks between floating and fixed rate interest after a professional prediction and assessment of the interest rate; Regarding to the foreign exchange rate, Unilever sets a policy which limits the operating companies’ financial foreign exchange exposures so as to minimize such risk. 3. Unilever has made a series of standards and policies for the procedure of design, manufacture, and distribution of products to ensure the high standards of products’ quality. Unilever also has a â€Å"Sustainable Development Group† which is comprised of five external specialists, engaging in the company’s development of the strategy. Unilever also has specific policy concerning products recall in case there’s products quality incident. 4.Unilever has set complete and effective contingency measures and system to ensure the material supply or to share the production task between different production sites or to use substitute materials in case of the lack of the material. The company also calculates the cost of transportation and distribution from time to time and to adjust the policy and service promptly to optimize the cost. These measures enable the company to operate well. 5. Unilever needs to find a way to attract, develop, train and retain qualified employees. The company has an admiring human resource system. It has established Resource Committees to identify employees’ skill and capability, define employees’ career paths. It also provides numerous opportunities for employees to improve their skills, leadership abilities through training and coaching. Meanwhile, Unilever shall take measures to enhance employee’s risk management ability. Ballou and Heiger (2005) propose â€Å"shifting the employee’s attitudes about risk management to include monitoring, measuring, and controlling certain risks while sharing, avoiding, and accepting that other risks will not occur effectively in a short period of time†. 6. Unilever has set policies to make sure employees follow policies and abide by local laws and regulations in all relevant aspects concerning its business and activities. Regarding those crucial issues and activities, the prior legal check and consent are needed in the company. In a word, Unilever has been making great efforts to build effective, reasonable and practicable strategies for risk management. The boards have overall responsibility for Unilever’s risk management and the company has a Code of Business Principles which stipulates the standards of business operation and requires employees to abide by the code. The above strategies enable Unilever to operate its business well in the global market. New Risks Exposed to Unilever and Recommended Risk Management Strategies Besides risk management strategies mentioned above, the writer will recommend some more strategies for Unilever and try to give it some ideas on better monitor and manage its risks. Transfer and Divert Risks In order to avoid the damages and losses brought by such risks to the development of the company, Unilever may select to transfer risks by applying for insurance. Modern insurance system is the idealist way to transfer risks (Mike, 2006). For example, Unilever may transfer the risks of property, employers’ liability and business interruption by applying for the insurance of Property All Risks, Employer’s Liability and Business Interruption so as to transfer risks to the insurance company. Establish an Effective Control System Risk management is not only to establish a risk management for business procedure, more importantly, the company shall establish a comprehensive and effective risk management control system to make sure the effective implementation of the risk management strategy. The company can establish a Risk Management Committee in the head office and shall be directly responsible for the board of directors. â€Å"The board needs to be consulted on matters of risk management and it needs to be able to give guidance to the risk management committee in its deliberations. To do this effectively the board needs to ensure the whole company is engaged in managing risk, thereby making it an intrinsic part of the company culture†. (Corporate Governance: An International Review, 2009, 546-558). The function of the Risk Management Committee is to implement the risk management, to be especially responsible for the risk supervision of the whole company and to make unified risk management policy and procedure; each branch of the company shall establish an independent risk supervisor, responsible for the risk management and to report the matter of risk to Risk Management Committee without consent of the local manager. Establish a Database of Risk Accidents Database of risk accidents is a tool to effectively predict and assess the risk. The data in the database shall include both internal and external data concerning risk accidents. â€Å" We can try to estimate how bad this problem is by looking at the historical severity of these events in relation to any risk factors that we define and then examining the prevalence of these risk factors†(Michel, Dan and Robert, 2001). Through correct analysis of such data, the company will learn a lesson and consider its risk management policy and procedure so as to judge whether the company will prevent the occurrence of the risk accident and how to take precautious measures to avoid the occurrence of similar accidents. Conclusion In conclusion, risks exist in the whole process of business operation, any company shall attach great importance to the risk management to effectively predict and avoid the risk. Unilever is a company which has well recognized its major risks and taken effective risk management strategies. Research on risk and risk management strategy is a long journey and need all employees of the company to make effort and abide by the policy and standards to monitor and manage risks proactively. References Ballou, B. & Heitger, D. L.2005. A building-block approach for implementation COSO: Enterprise risk management-integrated framework. Management Accounting Quarterly, 6(2):1-10. 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