Unilever in Indonesia_Group B

8/4/2019 Unilever in Indonesia_Group B

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Sustainable Business

Autumn, 2010

Group B page 2

ContentsIntroduction ............................................................................................................................................. 3

1. Poverty in Indonesia ........................................................................................................................ 3

2. The impacts of Unilever Indonesia at the macro-economic level ................................................... 4

3. The impacts of Unilever Indonesia on employment ....................................................................... 5

4. Low-income consumers in the marketplace ................................................................................... 6

5. Philanthropic issues: Unilevers wider impact in the community ................................................... 7

Conclusion ............................................................................................................................................. 10

Bibliography ........................................................................................................................................... 11


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Introduction

Oxfam as a non-governmental organization accused transnational corporations of

exacerbating poverty instead of improving human development. Unilever, being a MNC, was

concerned that they might become the next target of an Oxfam campaign.Developing countries were central to Unilevers corporate strategy and Oxfam was

increasingly focusing on trade, not aid, as a key to alleviating poverty.

Unilever and Oxfam cooperated to make a research in Indonesia and they are working

together to explore the links between wealth creation and poverty reduction, aiming to

contribute to sustainable poverty reduction.

Indonesia consists of more than 17,000 islands. Its population is approximately 240 million

people.

Good progress is being made toward macroeconomic stability and fiscal sustainability. An

increased investment in productive capacity is the key to growth and poverty reduction in

Indonesia. The challenge for the Indonesian government is to improve the country's

investment climate.

Indonesia increasingly faces the development challenges shared by middle income countries,

such as developing a globally competitive economy; promoting equity by opening up

opportunities for the poor; supporting a dynamic knowledge sector; and becoming a

responsible steward for the world's environmental heritage.

1. Poverty in IndonesiaSome statistics about poverty in Indonesia: in 2007 23.6 million rural Indonesians were living

below the national poverty line, 1 million less than in 1996. Poor people represent 20 per cent

of the rural population and 11 per cent of the total population. But the overall national poverty

rate masks the large number of near-poor people who live just above the poverty line and

are at risk of sliding below that line into poverty.

Furthermore, poverty is concentrated among rural households. The poorest people in rural

areas tend to be farm laborers working on other peoples land, and smallholders farming on

extremely small plots.

The poorest areas of Indonesia are the remote eastern islands, where 95 per cent of people in

rural communities are poor. Unsustainable livelihood systems and isolation make people

vulnerable to external shocks and are the principal causes of poverty, mainly in the upland

areas.


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The road network is in poor condition and requires major investment.

There are some aspects causing poverty:

lack of access to quality and affordable food

lack of access to quality health services

lack of access to quality education services

a lack of land rights

a deteriorating environment and lack of access to natural resources

lack of access to safe water

a lack of access to housing and sanitation services

lack of access to employment and business opportunities

lack of participationviolent conflict

When considering these points, we cannot blame the UI to have exacerbated poverty since

they are actually doing the opposite by providing safe and quality food, certain number of

jobs, even though limited, and even the controversial topic about sachets is significant help to

less affluent consumers as well.

2. The impacts of Unilever Indonesia at the macro-economic levelThe companys business model can contribute a great deal to the macro -economic level in a

countrys poverty reductions efforts. It contributes directly to the countrys tax base and

employment. With Unilever Indonesia the government can get insight into the suppliers and

distributors of UI operations and therefore have a greater insight into tax base and

employment. Ever since the 1997 crisis UI has flourished by expanding sales in products in

smaller sachets, designed for the low-income consumer. The company expanded its

operations in Indonesia making it even more profitable and therefore having greater effect onthe macro-economic level. Many other companies were withdrawing from Indonesia at the

same time as UI was expanding, even though poverty was increasing. The main revenues

created by UI come from local sourcing, wages, taxes to governments and dividends to local

shareholders.

In 2003 UIs price-to-earnings ratio was 17.6, implying investors confidence in future growth

and profits. UI turnover in 2003 was a staggering US$ 948 million. From this number 17.9%

was paid to governments in the form of taxes (not including sales tax). The same year UI put

aside US$ 1 million for spending on community activities.


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In the case of Unilever Indonesia it is clear that governments should apply some of the tactics

that UI is implying, by doing so they could do much more to lower poverty by having the

financial and management information more transparent.

3. The impacts of Unilever Indonesia on employmentBefore making conclusion about Unilever Indonesia being helpful or destructive, it is

essential to consider its impacts on employment in the whole country. UI as a MNC can

affect employment rates and employment conditions because of its size, investment in

production and distribution and reach into the local economy. UI provides jobs to about 5,000

people of whom 60% are permanent or temporary employees and 40% contract workers. In

addition to that, 1,800 people are employed by co-packers and third-party producers in the UIvalue chain. About 105,000 full-time employees work on the supply side of the value chain

and 188,000 on the distribution side. UI provides altogether approximately 300,000 jobs,

supports livelihoods in Indonesia and has impacts on reducing poverty levels. The research

revealed that UI treats their employees with high health and safety standards, good retirement,

maternity benefits, workplace facilities and wages and benefits are above law requirements.

UI is positioned in the top quartile of Indonesian companies. The closer employees are linked

to UIs operations, the more they benefit directly from the company. Contract workers have

generally lower pay and benefits than permanent employees. (Clay, 2 (Clay J. , 2005)005)

Critics, stakeholders, NGOs and any other observers can look at the issue Oxfam brought up

from two different perspectives. Oxfam was concerned with MNCs as giants intervening into

foreign economies with intention to contribute to human development but exacerbating

poverty instead. The first view has been mentioned already which focuses on UI in terms of

them providing certain number of jobs and better living standards.

The second view is wider considering figures scanning the whole country. Figures such as

unemployment rates, poverty rates etc. About half of the population in Indonesia lives in

poverty. The unemployment rate increased steadily from 4.9% in 1996 to 9.7% in 2004.

Talking in numbers, 4.3 million of unemployed people in 1996 increased to 9.9 million in

2004.

The second perspectives supporters may argue that UI, even though large corporation, has

done little to improve unemployment. Furthermore, the numbers of unemployed even

increased! However, we think it is obvious that one player cannot pull the whole country of

230 million people out of poverty. With reference to the number of jobs they provide and


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other contribution to society, their help is significant and people should not ignore it. One

MNC alone does not guarantee improvements in the lives of people living in poverty, other

social institutions and resources are needed. It is essential to join up with governments,

international institutions, businesses and civil society organizations to tackle the issue of

alarming unemployment and poverty. (Unilever Indonesia)

4. Low-income consumers in the marketplaceA study of Unilever Indonesia shows that it is an ever evolving market; it changes as

consumers lifestyle evolves. The ethical debate of FMCG markets for people that live on

limited financial resources is not easily resolved, as it has many social implications. Even

though this is the case many international FMCG companies are reaching out for people onlow incomes around the world. This results in an increase in the worldwide consumer base for

FMCG companies. Within the Indonesian market UIs brand remain popular as it has more

than 50% of the market share of some products.

The recent increase in FMCG companies appears to have resulted in an overall increase in

consumption on the market. Even though this seems to be the case the consumption rate for

some products in Indonesia is very low.

Unilever Indonesia products can be categorized in to three groups:

Personal Care Products (soap, oral care, shampoo, skin care, deodorant)

Household Cleaning Materials (washing detergent, home cleaning products)

Food Products (margarine, tea, seasonings, sauces)

According to recent data 95% of Indonesian households buy at least one UI product. These

products are bought by every socio-economic group in all market segments. In a recent study

interviews suggest that the average low-income consumer spends 5.7% of its monthly

spending on UI products. Some of the research for this report where useful as it gave insight

into what most of the low-income consumers were purchasing, personal care and cleaning

products were popular with this group.

Low-income consumers are not only disadvantaged by low wages and prices, but they usually

have to pay high prices for foodstuffs and other essentials which lowers the value of their

already low income. Households in Indonesia are considered to spend about 60% of their

income on food, beverages and tobacco products. This of course means that the prices for

these goods are a great concern for the low-income consumer. By keeping the prices low UI

will make products more affordable for low-income consumers. The UI concept is helping


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people in countries like Indonesia have made the gain market share constantly since they were

first introduced there.

UI strategy by offering goods in small sachets has made the purchasing power of low-income

consumers greater. By focusing on their day to day cash limitation, consumers can buy what

they need when they need it. Even though this makes it more costly for the consumers in the

long term, they can fulfill their every day need by buying products in smaller quantities.

5. Philanthropic issues: Unilevers wider impact in the communityIn the following part we try to find answers for the next question: what can the UI do in order

to help the human as well the social development and stop the increasing of poverty

somehow?The Indonesian division of Unilever has several best practices avaliable. By the help of these,

they succesfully created developing relationships among the public and private sector as well.

Obviously Unilever get also financial benefits just because they try to achive influence in the

society. Several programmes are used, which should be developed further. The goal of these

projects is very simple: consumer education, which bring indirect and direct benefits to the

business. We have not enough space here to introduce all of these programmes, but need to

take a short look on some of them:

Donations to UNICEF to support the developing of healthcare system

Supporting education system (and not only the higher education like many other

companies do)

Programmes for solving child- and family poverty

Supporting the private sector and achive relationships with them

Developing the human capital to help them become entrepreneurs

Helping in create market regulations

These are just a few examples where the Unilever tried to influence the social network, but

probably not enough and need to participate in more programmes to develop the country.

The UI also try to consider the enviromental issues which are closely related to their

philanthropic approach. Within the confines of their enviromental related issues they

supporting such programmes like SME Composting Program, Sustainable Clean Rivers

Developement Program, Promoting Sustainable Fishing Practice and many others.


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By the other hand there is one another side of Unilevers impact in Indonesia, namely the

impact on their employees. This assumptions should turn our attention to the corporate

governance and the organizational culture

The corporate responsibility (philanthropy) and involvement in the society development play

a role in a companys long-term contribution to the community. The firm get benefits from it

The adaptation of these philanthropic activities depends on the features of every country.

However the indonesian division of Unilever adapt many methods, some of which has already

been shown, but generally all of these try to achive and build a living-community which is

interacts with the private corporates and society at the same time.

Oxfam and Unilver both thinks the same on what is the best method for achieving impacts for

the poorest strata and by the help of it they get opportunities to break out of poverty.

The properties of this method are related to the core values of Unilever (try to help in any

among public and privatearea).

A possible reason for searching collaborations between the private and public sector in

Indonesia is one of the highest observed Power Distance level in the world or at least in Asia.

According to Hofstedes research on culturlal dimensions we can conclude some additional

informations whic can working as empirical background. One of these assumptions is about

the Power Distance Index in the multinational firms (generally in the IBM). Indonesia achived

a high level in that whic is associated with a high level of inequality of power and wealth

within the society.

The second highest Hofstede ranking for Indonesia is Uncertainty Avoidance Index. The high

Uncertainty Avoidance level generally indicates the societys low level of tolerance for

uncertainty.

Finally Indonesia has one of the lowest level in the Individualism factor which mean if we

take a look on the other side of this factor we must expect that a low individualism level

entails a high social orientation.

By the help of this research Hofstede tried to build a model on cultural dimensions for

international business which can be applicable globally. His reasearch and many others like

the GLOBE-Project (Global Leadership and Organizational Behavior Effectiveness) has been

focusing on the organizational culture, and on the cultural dimensions which may observed,

since it was introduced by Charles Handy as we use the definition in our context.

This research was an attempt and by the help of it Hofstede and his team tried mapping the

participant countries depend on different dimensions: power distance index (PDI),individualism (IDV), masculinity (MAS), uncertainty avoidance index (UAI), and finally the


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long term orientation (LTO). The essence of these dimensions is by the help of them we can

describe any corporate or firm. The critics generally believe that the observations adaptable

only to IBM, because only the international divisions of IBM were taken into the research.

In order to become a society-centred corporation, Unilever may need take some steps or just

continue their well-tried programmes: working together with the local stakeholders

(collaborating with the private and public investors as well); differentiation and adaptation on

the market; application of the best (available) international practices, etc. The common feature

of these steps to promote the well-being and to develop the lagging parts of the country.

Unilever has several options available in addition to the options which have been presented so

far. These options based on the international best practice. Here we can only give an

overview on these opportunities wich may help UI to achive the social-responsile dilemma. In

other words to be philanthropic in socially however become a succesfull corporate in the

business life:

develope healthcare system;

expand private pension system at least for their (Unilever) employees;

developing social capital by the help of supporting education system and labour

market.

A multinational corporation has several opportunities available in order to coordinates its

business activities and make influence on the private and public sector. The MNCs activity

involves huge impact on the business culture as weve seen it before when tried to introduce

Hofstedes research on cultural dimensions.

But what else might they, the UI, do? Another potential solution may be to make influence on

the market regulations. The new regulations need to focus on the taxes, broader trade issues,

or tariffs. To achive this they should begin start conversations with the government even build

relations among the government and other private corporates.

UI has built good relations with its business partners and achived succesfully the cooperation

between itself and the government (public sector) thanks to their proposals on regulations of

business ethics. They requires its partners to play fairly and obey tha law as they do.

Obviously need to continue these steps to known UI as a fair player on the stage of business

in Indonesia. In the future, UI have to stand for anti-corruption initiatives in order to preserve

the positive image created about itself.


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Conclusion

To sum up, in our opinion UI achieved a significant contribution to the whole society in terms

of providing safe and quality food, beverages and sanitation. Furthermore, they, as a MNC,

provide almost 300,000 job opportunities which improve life standards to those being

employed. This must have lead to a slight reduction in poverty as well. Critics cannot see this

since they are focusing only on the whole countrys poverty numbers. One corporation cannot

raise the whole country from poverty. It must be the governments goal which can be reached

through cooperation with other organizations and corporations.


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BibliographyClay, J. (2005). Exploring the links between international business and poverty reduction. In J. Clay,A

case study of Unilever in Indonesia (pp. 101-105). nk: nk.

Clay, J. (2005, September). Oxfam. Retrieved October 2, 2010, from

http://www.oxfam.org.uk/resources/policy/trade/

Geert. (n.d.). Geert-Hofstede. Retrieved October 2, 2010, from http://www.geert-

hofstede.com/hofstede_indonesia.shtml

Indonesia, U. (n.d.). Unilever. Retrieved October 2, 2010, from n.d.:

http://www.unilever.com/sustainability/economic/impact-studies/indonesia/index.aspx

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