The startup threat
The emergence of digitally native consumer brands represents a new type of competitive threat for Unilever.
Since its founding in the 1920s, Unilever has played a key gatekeeper role in bringing products to consumers by controlling distribution through its brick-and-mortar retail partners . When a small, up-and-coming brand wanted to sit on the shelves of a Walmart or Target, it’d typically sell itself to Unilever or one of its competitors, who could leverage its deep relationships to expand distribution and grow the brand.
In the last few years, the direct-to-consumer (DTC) business model emerged, allowing the creation of digitally native brands. Entrepreneurs can reach consumers directly by selling through an ecommerce website and shipping right to their homes. Successful brands can build a loyal following online and then expand to physical retail without Unilever’s help.
Unilever, which owns 400 brands and generated revenue of €53.7 billion in 2017 , used to primarily innovate by developing great new products for its existing portfolio of brands. But now, there’s innovation in how new brands themselves are built. Unilever is being forced to re-examine its approach to innovation in this new context.
Examples of Digitally Native, Direct-to-Consumer Brands:DTC brands are disrupting nearly every consumer product category, including many that Unilever competes in. 
Is open innovation a solution?
Unilever has long believed that open innovation — partnering with external parties like startups, academics, and individual inventors — is key to staying relevant in an increasingly competitive and global world. It started its implementation of the concept with its research and development (R&D) efforts. In a 2010 case study by Lancaster University, Unilever went as far as to say that “access [to innovation] is the new ownership.”  The company realized that even with €1 billion of R&D spend and an R&D staff of 6,200, not all great ideas relevant to Unilever brands would emerge from within the company. Unilever used open innovation to eliminate R&D “silos” and began conducting innovation efforts across brands and in collaboration with the outside world.
In the last several years, Unilever expanded its definition of “open innovation” to include supporting technology startups that could become valuable partners for its brands. These startups specialize in areas like enterprise technology and digital marketing platforms. Pursuing these partnerships is Unilever’s current medium-term focus as it relates to open innovation. Unilever launched The Foundry in May 2014 to partner with innovative startups that can enable Unilever to “pilot new technologies more efficiently, effectively, and speedily.”  The Foundry attracts startups by providing three primary benefits: marketing mentorship, financial rewards for startups whose ideas address briefs Unilever posts, and access to Unilever Ventures, the firm’s investing arm. This approach gives startups an entry point to work with a large company like Unilever and gives Unilever the chance to see the latest technological innovations sooner.
The emergence of digitally native brands raises the question of whether Unilever should expand its definition of open innovation further. Unilever could become a partner to startup brands as a way to insulate itself from the competitive threat the new brands represent. The Foundry, to date, has not addressed this opportunity. Instead, it continues to focus on bringing emerging technological capabilities to its set of established brands. But what about a form of open innovation that might enable Unilever to invest in or acquire valuable brands when they’re still early-stage startups?
Unilever’s short-term strategy has been to acquire brands (and thus their innovation) where their own approach to open innovation has come up short. Since the start of 2015, Unilever has made 18 acquisitions.  The high valuations of these rapidly growing businesses show how expensive this approach can be. In 2016, for example, Unilever spent $1 billion to acquire Dollar Shave Club, an ecommerce shaving company, for a valuation of five times revenue.  In the same year, Unilever purchased Seventh Generation, a natural household cleaning brand, for between $600M and $700M.  Had The Foundry had a hand in developing these brands from the start, Unilever may have had an opportunity to acquire them earlier at a lower price.
Unilever should evolve its approach to open innovation given the emergence of digitally native brands. Three steps to do so include:
- (Short-Term) Expand the mission of The Foundry to include incubating emerging consumer brands. The Foundry already coordinates Unilever’s efforts to partner with external groups. Unilever should broaden its mandate.
- (Medium-Term) Attract startups to an incubator program by offering benefits that matter most to entrepreneurs. The Foundry can offer things like discounted workspace, marketing and branding mentorship, and access to capital.
- (Medium-Term) Allow brands in The Foundry’s program to tap into the digitally native brands that Unilever already acquired, such as Dollar Shave Club. This could include mentorship by the founders and access to relevant subject-matter experts within the brands’ organizations.
- Is it realistic for Unilever to identify promising brands earlier, or is this too far from their core strengths as an organization? For most of the company’s history, it purchased brands that already showed signs of promise and expanded distribution. Can Unilever develop this new capability quickly?
 “1920 – 1929: Unilever is formed”, Unilever Website, accessed November 12, 2018, https://www.unilever.co.uk/about/who-we-are/our-history/1920-1929.html
 Unilever Annual Report, 2017, https://www.unilever.com/Images/unilever-annual-report-and-accounts-2017_tcm244-516456_en.pdf
 ” Subscription E-Commerce Market Map,” CB Insights, accessed November 11, 2018, https://www.cbinsights.com/research/industry-market-map-landscape/
 Decter, M; Mather, A; & Garner, C. Institute of Entrepreneurship and Enterprise Development, Lancaster University, http://www.academia.edu/6133963/Access_is_the_new_ownership_a_case_study_of_Unilevers_approach_to_open_innovation
Unilever Press Release, May 22, 2014, “Unilever launches global platform to engage with start-ups,” https://www.unilever.com/news/press-releases/2014/14-05-22-Unilever-launches-global-platform-to-engage-with-start-ups.html
 “Acquisitions and Disposals”, Unilever Website, accessed November 11, 2018, https://www.unilever.com/investor-relations/understanding-unilever/acquisitions-and-disposals/
 Alan Livsey, Financial Times, March 16, 2017, https://www.ft.com/content/9bb5cc54-d368-11e6-b06b-680c49b4b4c0
 “Mega-Merger Target Unilever Is Highly Active in Private Markets,” CB Insights, February 17, 2017, https://www.cbinsights.com/research/unilever-investment-acquisitions/