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.

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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 2. Falling share price
company in India 3. Inability to optimize costs as
2. Power brands compared to rivals
SWOT MATRIX 3. High brand recognition in 4. Weak brand presence in
bigger cities smaller cities.
4. Diversified business lines 5. Lack of innovation and
5. Financial resources product development
6. Poor pricing strategy

O 1. Potential market in SO Strategies WO Strategies

P smaller cities 1. Develop brand recognition is 1. Expand into smaller cities by

P 2. Potential outsourcing smaller cities acquiring local companies

business in India 2. Promote power brands 2. Develop products with better
O
3. Greater customer through ads and campaigns ease of use
R
demand of easy to use 3. Use outsourcing to achieve 3. Price weaker brands
T
products economies competitively with local
U 4. Use financial resources to brands
4. Low focus of FMCG
N innovate high utility products
industry on high
I usability products
T
I
E
S

-
O

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T 1. Counterfeiting
H 2. Competition from local
R brands
3. Scarce water problem
E
affecting demand for
A
detergents and related
T
goods
S 4. Price cuts by P&G
5. Health conscious
– customers
6. FMCG dealing with
T overcapacity utilization
ST Strategies WT Strategies
1. Use resources for brand 1. Pursue best-value cost
extension leadership strategy for
2. Diversify existing product power brands
line for health conscious 2. Introduce innovative
consumers products which can be used
3. Use power brands to with minimum water
differentiate from P&G low 3. Launch educational and
cost product mass awareness programs
4. Take measures to stop co-jointly with industry
counterfeiting of products leaders
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 The External Factor Evaluation Matrix

WEIGH WEIGHTED
KEY EXTERNAL FACTORS RATING
T SCORE
Opportunities
1. Potential market in smaller cities 0.13 2 0.26
2. Potential outsourcing business in India 0.10 3 0.30
3. Greater customer demand of easy to use
products
0.10 3 0.30
4. Introduction of high usability products
0.09 1 0.09

Threats
1. Counterfeiting 0.11 3 0.33
2. Competition from local brands 0.14 2 0.28
3. Scarce water problem affecting demand
for detergents and related goods
4. Price cuts by P&G 0.07 1 0.07

5. Health conscious customers 0.14 3 0.42

6. FMCG dealing with overcapacity
0.05 1 0.05
utilization

0.07 2 0.14
Total 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.

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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

WEIGH WEIGHTED
KEY INTERNAL FACTORS RATING
T SCORE
Strengths
1. Leading consumer goods company in 0.12 4 0.48
India
2. Power brands
0.10 3 0.30
3. Diversified business lines
4. Financial resources 0.09 2 0.27

5. Improved supply chain 0.08 2 0.16

0.05 3 0.15
Weaknesses
1. Decreasing revenues 0.11 2 0.22
2. Falling share price 0.10 2 0.20
3. Inability to optimize costs as compared to
rivals
4. Weak brand presence in smaller cities. 0.08 2 0.16

5. Lack of innovation and product 0.09 3 0.27

development
0.11 1 0.11
6. Poor pricing strategy

0.07 2 0.14
Total 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

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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.
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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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