Hindustan Lever

8/15/2008

Hindustan Lever Ltd. Case Study Analysis

FIZZA GULL

HINDUSTAN LEVER LIMITED

Hindustan Lever Limited (HLL) is one of the leading FMCG companies in India. During the year 2004 and 2005, HLL experienced a downturn in its quarterly and yearly profits. The quarterly earnings fell from 4.94 Billion to 3.33 Billion in 2005 as compared to 2004. A decrease of almost 32.6 % and similarly yearly profits showed a decrease of 32.41% between 2004 and 2005. This decrease in revenues had obvious adverse affects on the Market share price and HLL shares have fell from 250 Rs to 155.45 Rs in just 5 years. This presents a grim picture of HLL. In this report I’ll try to figure out the core issues that are affecting HLL’s performance along with the emerging opportunities and threats. suggestions to how the issues should be tackled and also few strategy recommendations for HLL.

HLL’s Power Brands HLL over the past years have been pursuing the ‘Power Brands’ strategy. By this we mean that some brands that show potential growth are developed and promoted more than the other brands that have low potential attractiveness in future. The power brands are invested in and promoted such that they can skim large revenues and generate cash flows that can compensate for weaker brands as well. But for HLL the picture has not been very rosy. The other brands of HLL have been shrinking at a greater rate than the growth rate of the power brands; this has definitely hit the company’s overall revenues. 2

HLL - Core Issues Here I will discuss some of the key issues that need to be effectively addressed by the HLL management. • Price cuts initiated by the consumer goods giant and HLL’s key rival Procter & Gamble. •

Increased competition in Hair Care and Laundry segments.

•

HLL’s strategy change: Abandoning premium positioning strategy to take up cost cutting to compete with P&G.

•

HLL’s price cuts causing the profit margins to shrink. Unable to sustain the previous profit margins without affecting product quality.

• Need to boost the growth rate of power brands to catch up with the losses from other brands. • HLL facing stern competition from local competitors in South from companies such as Ghadi of Kanpur Trading Corporation and Cavin Care in detergents segment. •

Tough competition from Amul in ice cream segments which has developed strong hold in smaller cities and towns.

• Counterfeiting of brands bringing loses as well as earning a bad name for the company.

HLL - Challenges • Innovation requirements to tackle with scarce water problems in order to create demand for detergent products. • Improving access and affordability of the products.

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• Educating consumers about the benefits of frequent use of the products. • Dealing with the problem of capacity over-utilization plaguing the industry today. • Innovation requirements to address changing customer needs such as ‘health consciousness’ and ‘increased utility’ of products.

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STRENGTHS - S

WEAKNESSES – W 1. Decreasing revenues

1. Leading consumer goods company in India 2. Power brands

SWOT MATRIX

3. High brand recognition in bigger cities 4. Diversified business lines 5. Financial resources

2. Falling share price 3. Inability to optimize costs as compared to rivals 4. Weak brand presence in smaller cities. 5. Lack of innovation and product development 6. Poor pricing strategy

O P

1. Potential market in smaller cities

P

2. Potential outsourcing

O

business in India

R T U N I

3. Greater customer demand of easy to use products 4. Low focus of FMCG industry on high

SO Strategies 1. Develop brand recognition is smaller cities 2. Promote power brands through ads and campaigns 3. Use outsourcing to achieve economies 4. Use financial resources to

WO Strategies 1. Expand into smaller cities by acquiring local companies 2. Develop products with better ease of use 3. Price weaker brands competitively with local brands

innovate high utility products

usability products

T I E S O

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T

1. Counterfeiting

H

2. Competition from local

R E A T S –

brands 3. Scarce water problem

1. Use resources for brand extension 2. Diversify existing product

affecting demand for

line for health conscious

detergents and related

consumers

goods

3. Use power brands to

4. Price cuts by P&G

differentiate from P&G low

5. Health conscious

cost product

customers 6. FMCG dealing with

T

ST Strategies

4. Take measures to stop counterfeiting of products

WT Strategies 1. Pursue best-value cost leadership strategy for power brands 2. Introduce innovative products which can be used with minimum water 3. Launch educational and mass awareness programs co-jointly with industry leaders

overcapacity utilization

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The External Factor Evaluation Matrix

KEY EXTERNAL FACTORS

WEIGH T

RATING

WEIGHTED SCORE

Opportunities 1. Potential market in smaller cities

0.13

2

0.26

2. Potential outsourcing business in India

0.10

3

0.30

0.10

3

0.30

0.09

1

0.09

1. Counterfeiting

0.11

3

0.33

2. Competition from local brands

0.14

2

0.28

4. Price cuts by P&G

0.07

1

0.07

5. Health conscious customers

0.14

3

0.42

0.05

1

0.05

0.07

2

3. Greater customer demand of easy to use products

4. Introduction of high usability products

Threats

3. Scarce water problem affecting demand for detergents and related goods

6. FMCG dealing with overcapacity utilization

Total

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1.00

2.24

A total score of 2.24 shows that the company’s strategies are not very well aligned to deal with potential threats. It is a clear indicator that HLL should review its strategies and tune them to maximize the impact of its efforts. There are various opportunities that the company should take advantage of such as introduction of new products with greater usability and utility for the customers. 7

Moreover, it should focus more on dealing with changing customer needs. Because in case the customers start to enjoy healthy choices then HLL’s brands have a lower growth potential in that scenario.

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The Internal Factor Evaluation Matrix

KEY INTERNAL FACTORS

WEIGH T

RATING

WEIGHTED SCORE

Strengths 1. Leading consumer goods company in

0.12

4

0.48

0.10

3

0.30

4. Financial resources

0.09

2

0.27

5. Improved supply chain

0.08

2

0.16

0.05

3

0.15

1. Decreasing revenues

0.11

2

0.22

2. Falling share price

0.10

2

0.20

4. Weak brand presence in smaller cities.

0.08

2

0.16

5. Lack of innovation and product

0.09

3

0.27

0.11

1

0.11

0.07

2

India 2. Power brands 3. Diversified business lines

Weaknesses

3. Inability to optimize costs as compared to rivals

development 6. Poor pricing strategy

Total

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1.00

2.46

A total score of 2.46 on the IFE matrix of HLL shows that the company is not doing very well internally. It has the capacity to improve its performance and this can only be does by efficiently utilizing one’s strengths and eradicating the weaknesses. The two most important weaknesses pointed out here in the IFE matrix are clearly HLL’s poor pricing strategy and lack of innovation 9

and proper market research. If HLL can focus on these two core internal problems, the overall company performance can improve drastically. Overcoming these two issues will also help HLL to achieve the financial stability that is the key concern of the management.

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Porter’s Five Forces Model Here we are conducting the Porter’s five forces model to analyze the FMCG industry. The purpose is to arrive at some strategies that Hindustan Lever can adopt in order to be in a better competitive position. Rivalry among Competing Firms: In the FMCG industry, rivalry among competitors is very fierce. There are scarce customers because the industry is highly saturated and the competitors try to snatch their share of market. They use all sorts of tactics from intensive advertisement campaigns to promotional stuff and price wars etc. so overall the intensity of rivalry is very high. Potential Entry of New Competitors: The industry does not have any measures with which it can control the entry of new firms. The resistance is very low and the structure of the industry is so complex that new firms can easily enter and also offer tough competition due to cost effectiveness. Thus, potential entry of new firms is highly viable. Potential Development of Substitute Products: There are complex and never ending consumer needs and no firm can satisfy all sorts of needs alone. There are plenty of substitute goods available in the market that can be replaced if consumers are not satisfied with one. The wide range of choices and needs give a sufficient room for new product development that can replace existing goods. Bargaining Power of Suppliers: The bargaining power of suppliers of raw materials and intermediate goods is not very high. 11

There is ample number of substitute suppliers available and the raw materials are also readily available. There is no monopoly situation in the supplier side because the suppliers are also competing among themselves. Bargaining Power of Consumers: Bargaining power of consumers is also very high. This is because in FMCG industry the switching costs of most of the goods is very low and there is no threat of buying one product over other. Customers are never reluctant to buy or try new things off the shelf.

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HLL – Synopsis and Recommendations Hindustan Lever Limited has established it roots successfully in the Indian with HLL products becoming a household preference in almost all the major cities. But with the increasing number of competitors in the FMCG industry, HLL should gear up to compete with them. The biggest rival in the market is Procter & Gamble that is threatening HLL’s strong hold by introducing cost leadership strategies and price cuts. Whereas, at the local from numerous small to medium sized firms are enjoying the benefit of local presence thorough TV ads and low cost products. For some time now HLL pursued the strategy of P&G but it could not reap similar benefits and the strategy is now shrinking HLL’s profit margins. Moreover, with increased saturation in the industry HLL is facing problems positioning its power brands. We have found out that the problems with the HLL are primarily related to the environment in which the company is operating. The HLL management should scan and evaluate its internal and external environment and then re-align its strategies accordingly. Here are some recommendations for HLL after the analysis we have conducted above: • HLL should allocate its advertisement budgets more evenly among the major cities and small towns to compete with the international as well as local competitors alike. • HLL should focus on market research and product development. This is very crucial activity if the company wants to see steady growth in future. Innovation is the key to success here. HLL should seriously start developing improved products to cater the emerging needs of the consumers. • HLL should not use price-cuts to compete with its key rivals instead it should promote its power brands as premium and value added products for the following reasons:

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 Price competition among rival firms is stern and it is not possible for HLL to maintain its profit margins without compromising on product quality.  Products of other firms are quite similar to what HLL is offering.  Buyers have low switching costs and thus low brand-loyalty.  There are few ways of differentiating a product from other than developing a new one. Thus, I strongly recommend that HLL should adopt value leadership strategy to skim profits. HLL should maintain its presence as an international brand differentiated by superior quality products. This can be achieved through proper pricing, efficient advertisement and promotion and innovation in product development and brand extension. This will help achieve financial stability and generate cash flows that can be used to support the weaker brands in local markets.

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