UnileverA Case Study

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As one of the oldest and largest foreign multinationals doing business in the U.S., the history
of Unilever's investment in the United States offers a unique opportunity to understand the
significant problems encountered by foreign firms. Harvard Business School
professor Geoffrey Jones has done extensive research on Unilever, based on full access to
restricted corporate records. This recent article from Business History Review is the first
publication resulting from that research.

by Geoffrey Jones

This article considers key issues relating to the organization and performance of large
multinational firms in the post-Second World War period. Although foreign direct investment
is defined by ownership and control, in practice the nature of that "control" is far from
straightforward. The issue of control is examined, as is the related question of the
"stickiness" of knowledge within large international firms. The discussion draws on a case
study of the Anglo-Dutch consumer goods manufacturer Unilever, which has been one of the
largest direct investors in the United States in the twentieth century. After 1945 Unilever's
once successful business in the United States began to decline, yet the parent company
maintained an arms-length relationship with its U.S. affiliates, refusing to intervene in their
management. Although Unilever "owned" large U.S. businesses, the question of whether it
"controlled" them was more debatable.
Some of the central issues related to the organization and performance of multinationals
after the Second World War can be illustrated by studying the case of Unilever in the United
States. Since Unilever's creation in 1929 by a merger of British and Dutch soap and
margarine companies, 1 it has ranked as one of Europe's, and the world's, largest
consumer-goods companies. Its sales of $45,679 million in 2000 ranked it fifty-fourth by
revenues in the Fortune 500 list of largest companies for that year.
A COMPLEX ORGANIZATION
Unilever was an organizational curiosity in that, since 1929, it has been headed by two
separate British and Dutch companiesUnilever Ltd. (PLC after 1981), and Unilever N.V.
with different sets of shareholders but identical boards of directors. An "Equalization
Agreement" provided that the two companies should at all times pay dividends of equivalent
value in sterling and guilders. There were two head officesin London and Rotterdamand
two chairmen. Until 1996 the "chief executive" role was performed by a three-person Special
Committee consisting of the two chairmen and one other director.
Beneath the two parent companies a large number of operating companies were active in
individual countries. They had many names, often reflecting predecessor firms or companies
that had been acquired. Among them were Lever; Van den Bergh & Jurgens; Gibbs;
Batchelors; Langnese; and Sunlicht. The name "Unilever" was not used in operating
companies or in brand names. Lever Brothers and T. J. Lipton were the two postwar U.S.
affiliates. These national operating companies were allocated to either Ltd./PLC or N.V. for
historical or other reasons. Lever Brothers was transferred to N.V. in 1937, and until 1987
(when PLC was given a 25 percent shareholding) Unilever's business in the United States
was wholly owned by N.V. Unilever's business, and, as a result, counted as part of Dutch
foreign direct investment (FDI) in the country. Unilever and its Anglo-Dutch twin Royal Dutch
Shell formed major elements in the historically large Dutch FDI in the United
States. 2However, the fact that all dividends were remitted to N.V. in the Netherlands did not
mean that the head office in Rotterdam exclusively managed the U.S. affiliates. The Special
Committee had both Dutch and British members, and directors and functional departments
were based in both countries and had managerial responsibilities without regard for the
formality of N.V. or Ltd./PLC ownership. Thus, while ownership lay in the Netherlands,
managerial control was Anglo-Dutch.
The organizational complexity was compounded by Unilever's wide portfolio of products and
by the changes in these products over time. Edible fats, such as margarine, and soap and
detergents were the historical origins of Unilever's business, but decades of diversification
resulted in other activities. By the 1950s, Unilever manufactured convenience foods, such as
frozen foods and soup, ice cream, meat products, and tea and other drinks. It manufactured
personal care products, including toothpaste, shampoo, hairsprays, and deodorants. The oils
and fats business also led Unilever into specialty chemicals and animal feeds. In Europe, its
food business spanned all stages of the industry, from fishing fleets to retail shops. Among
its range of ancillary services were shipping, paper, packaging, plastics, and advertising and
market research. Unilever also owned a trading company, called the United Africa Company,
which began by importing and exporting into West Africa but, beginning in the 1950s, turned
to investing heavily in local manufacturing, especially brewing and textiles. The United Africa
Company employed around 70,000 people in the 1970s and was the largest modern
business enterprise in West Africa. 3 Unilever's total employment was over 350,000 in the
mid-1970s, or around seven times larger than that of Procter & Gamble (hereafter P&G), its
main rival in the U.S. detergent and toothpaste markets.
A WORLD-WIDE INVESTOR
An early multinational investor, by the postwar decades Unilever possessed extensive
manufacturing and trading businesses throughout Europe, North and South America, Africa,
Asia, and Australia. Unilever was one of the oldest and largest foreign multinationals in the
United States. William Lever, founder of the British predecessor of Unilever, first visited the
United States in 1888 and by the turn of the century had three manufacturing plants in
Cambridge, Massachusetts, Philadelphia, and Vicksburg, Mississippi. 4 The subsequent
growth of the business, which was by no means linear, will be reviewed below, but it was
always one of the largest foreign investors in the United States. In 1981, a ranking by sales
revenues in Forbes put it in twelfth place. 5
Unilever's longevity as an inward investor provides an opportunity to explore in depth a
puzzle about inward FDI in the United States. For a number of reasons, including its size,
resources, free-market economy, and proclivity toward trade protectionism, the United
States has always been a major host economy for foreign firms. It has certainly been the
world's largest host since the 1970s, and probably was before 1914 also.6 Given that most
theories of the multinational enterprise suggest that foreign firms possess an "advantage"
when they invest in a foreign market, it might be expected that they would earn higher
returns than their domestic competitors. 7 This seems to be the general case, but perhaps
not for the United States. Considerable anecdotal evidence exists that many foreign firms
have experienced significant and sustained problems in the United States, though it is also
possible to counter such reports with case studies of sustained success. 8
During the 1990s a series of aggregate studies using tax and other data pointed toward
foreign firms earning lower financial returns than their domestic equivalents in the United
States. 9 One explanation for this phenomenon might be transfer pricing, but this has proved
hard to verify empirically. The industry mix is another possibility, but recent studies have
suggested this is not a major factor. More significant influences appear to be market share
positionin general, as a foreign owned firm's market share rose, the gap between its return
on assets and those for United Statesowned companies decreasedand age of the
affiliate, with the return on assets of foreign firms rising with their degree of
newness. 10 Related to the age effect, there is also the strong, but difficult to quantify,
possibility that foreign firms experienced management problems because of idiosyncratic
features of the U.S. economy, including not only its size but also the regulatory system and
"business culture." The case of Unilever is instructive in investigating these matters,
including the issue of whether managing in the United States was particularly hard, even for
a company with experience in managing large-scale businesses in some of the world's more
challenging political, economic, and financial locations, like Brazil, India, Nigeria, and Turkey.
THE STORY OF UNILEVER IN THE UNITED STATES PROVIDES
RICH NEW EMPIRICAL EVIDENCE ON CRITICAL ISSUES
RELATING TO THE FUNCTIONING OF MULTINATIONALS AND
THEIR IMPACT. GEOFFREY JONES
Finally, the story of Unilever in the United States provides rich new empirical evidence on
critical issues relating to the functioning of multinationals and their impact. It raises the issue
of what is meant by "control" within multinationals. Management and control are at the heart
of definitions of multinationals and foreign direct investment (as opposed to portfolio
investment), yet these are by no means straightforward concepts. A great deal of the theory
of multinationals relates to the benefitsor otherwiseof controlling transactions within a
firm rather than using market arrangements. In turn, transaction-cost theory postulates that
intangibles like knowledge and information can often be transferred more efficiently and
effectively within a firm than between independent firms. There are several reasons for this,
including the fact that much knowledge is tacit. Indeed, it is well established that sharing
technology and communicating knowledge within a firm are neither easy nor costless,
though there have not been many empirical studies of such intrafirm transfers. 11 Orjan
Svell and Udo Zander have recently gone so far as to claim that multinationals are "not
particularly well equipped to continuously transfer technological knowledge across national
borders" and that their "contribution to the international diffusion of knowledge transfers has
been overestimated. 12 This study of Unilever in the United States provides compelling new
evidence on this issue.
LEVER BROTHERS IN THE UNITED STATES: BUILDING AND
LOSING COMPETITIVE ADVANTAGE
Lever Brothers, Unilever's first and major affiliate, was remarkably successful in interwar
America. After a slow start, especially because of "the obstinate refusal of the American
housewife to appreciate Sunlight Soap," Lever's main soap brand in the United Kingdom, the
Lever Brothers business in the United States began to grow rapidly under a new president,
Francis A. Countway, an American appointed in 1912. 13Sales rose from $843,466 in 1913,
to $12.5 million in 1920, to $18.9 million in 1925. Lever was the first to alert American
consumers to the menace of "BO," "Undie Odor," and "Dishpan Hands," and to market the
cures in the form of Lifebuoy and Lux Flakes. By the end of the 1930s sales exceeded $90
million, and in 1946 they reached $150 million.
By the interwar years soap had a firmly oligopolistic market structure in the United States. It
formed part of the consumer chemicals industry, which sold branded and packaged goods
supported by heavy advertising expenditure. In soap, there were also substantial throughput
economies, which encouraged concentration. P&G was, to apply Alfred D. Chandler's
terminology, "the first mover"; among the main followers were Colgate and Palmolive-Peet,
which merged in 1928. Neither P&G nor Colgate Palmolive diversified greatly beyond soap,
though P&G's research took it into cooking oils before 1914 and into shampoos in the 1930s.
Lever made up the third member of the oligopoly. The three firms together controlled about
80 percent of the U.S. soap market in the 1930s. 14 By the interwar years, this oligopolistic
rivalry was extended overseas. Colgate was an active foreign investor, while in 1930 P&G
previously confined to the United States and Canadaacquired a British soap business,
which it proceeded to expand, seriously eroding Unilever's market share. 15
The soap and related markets in the United States had a number of characteristics. Although
P&G had established a preponderant market share, shares were strongly contested. Entry,
other than by acquisition, was already not really an option by the interwar years, so
competition took the form of fierce rivalry between incumbent firms with a long experience of
one another. During the 1920s and the first half of the 1930s, Lever made substantial
progress against P&G. Lever's sales in the United States as a percentage of P&G's sales
rose from 14.8 percent between 1924 and 1926 to reach almost 50 percent in 1933. In 1930
P&G suggested purchasing Lever in the United States as part of a world division of markets,
but the offer was declined. 16 Lever's success peaked in the early 1930s. Using published
figures, Lever estimated its profit as a percentage of capital employed at 26 percent between
1930 and 1932, compared with P&G's 12 percent.
Countway's greatest contribution was in marketing. During the war, Countway put Lever's
resources behind Lux soapflakes, promoted as a fine soap that would not damage delicate
fabrics just at a time when women's wear was shifting from cotton and lisle to silk and fine
fabrics. The campaign featured a variety of tactics, including washing demonstrations at
department stores. In 1919 Countway launched Rinso soap powder, coinciding with the
advent of the washing machine. In the same year, Lever's agreement with a New York agent
to sell its soap everywhere beyond New England was abandoned and a new sales
organization was established. Finally, in the mid-1920s, Countway launched, against the
advice of the British parent company, a white soap, called "Lux Toilet Soap." J. Walter
Thompson was hired to develop a marketing and advertising campaign stressing the
glamour of the new product, with very successful results. 17 Lever's share of the U.S. soap
market rose from around 2 percent in the early 1920s to 8.5 percent in 1932. 18 Brands
were built up by spending heavily on advertising. As a percentage of sales, advertising
averaged 25 percent between 1921 and 1933, thereby funding a series of noteworthy
campaigns conceived by J. Walter Thompson. This rate of spending was made possible by
the low price of oils and fats in the decade and by plowing back profits rather than remitting
great dividends. By 1929 Unilever had received $12.2 million from its U.S. business since
the time of its start, but thereafter the company reaped benefits, for between 1930 and 1950
cumulative dividends were $50 million. 19
MANY FOREIGN FIRMS HAVE EXPERIENCED SIGNIFICANT
AND SUSTAINED PROBLEMS IN THE UNITED STATES.
GEOFFREY JONES
After 1933 Lever encountered tougher competition in soap from P&G, though Lever's share
of the total U.S. soap market grew to 11 percent in 1938. P&G launched a line of synthetic
detergents, including Dreft, in 1933, and came out with Drene, a liquid shampoo, in 1934
both were more effective than solid soap in areas of hard water. However, such products
had "teething problems," and their impact on the U.S. market was limited until the war.
Countway challenged P&G in another area by entering branded shortening in 1936 with
Spry. This also was launched with a massive marketing campaign to attack P&G's Crisco
shortening, which had been on sale since 1912. 20 The attack began with a nationwide
giveaway of one-pound cans, and the result was "impressive."21 By 1939 Spry's sales had
reached 75 percent of Crisco's, but the resulting price war meant that Lever made no profit
on the product until 1941. Lever's sales in general reached as high as 43 percent of P&G's
during the early 1940s, and the company further diversified with the purchase of the
toothpaste company Pepsodent in 1944. Expansion into margarine followed with the
purchase of a Chicago firm in 1948.
The postwar years proved very disappointing for Lever Brothers, for a number of partly
related reasons. Countway, on his retirement in 1946, was replaced by the president of
Pepsodent, the thirty-four-year-old Charles Luckman, who was credited with the "discovery"
of Bob Hope in 1937 when the comedian was used for an advertisement. Countway was a
classic "one man band," whose skills in marketing were not matched by much interest in
organization building. He never gave much thought to succession, but he liked
Luckman. 22 This proved a misjudgment. With his appointment by President Truman to
head a food program in Europe at the same time, Luckman became preoccupied with
matters outside Lever for a significant portion of his term, though perhaps not to a sufficient
degree. Convinced that Lever's management was too old and inbred, he dismissed about 15
percent of the work force soon after taking office, and he completed the transformation by
moving the head office from Boston to New York, taking only around one-tenth of the
existing executives with him. 23 The head office, constructed in Cambridge by Lever in
1938, was subsequently acquired by MIT and became the Sloan Building.
Luckman's move, which was supported by a firm of management consultants, the Fry
Organization of Business Management Experts, was justified on the grounds that the
building in Cambridge was not large enough, that it would be easier to find the right
personnel in New York, and that Lever would benefit by being closer to the large advertising
agencies in the city. 24 There were also rumors that Luckman, who was Jewish, was
uncomfortable with what he perceived as widespread anti-Semitism in Boston at that time.
The cost of building the New York Park Avenue headquarters, which became established as
a "classic" of the new postwar skyscraper, rose steadily from $3.5 million to $6 million.
Luckman had trained as an architect at the University of Illinois, and he was very involved in
the design of the pioneering New York office.
Footnotes: