International Diversification - Essay Example

? INTERNATIONAL DIVERSIFICATION Introduction Diversification involves venturing into ne markets or selling new products (Allen and Gorgeon 2007, p.1). This strategy helps to increase profit though this new Market. In some cases it involves moving into new areas which are untapped to introduce their products while in some cases the company moves to new countries to reduce effects by the economic and political factors. Diversification happens after great deliberation by the top level management due to high risk involved in moving to areas the company has never been before (Allen and Gorgeon 2007, P.1). International diversification occurs when a company trade in more than one country and is measure by the number of the countries the company occupy (Hwee 2007, p.17). Firms are always seeking for ways to increase their activities (Moncada-Paterno-Castello at el 2011, P.586). It can be through portfolio diversification, acquisition, Merger or resource investment (Hwee 2007, p.17). In recent ties international diversification has been made easier by Formation of trade organizations and minimized trade barrier allowing the companies to expand internationally (Gaur and Kumar 2009, P.172). A company may choose to diversify internationally despite its size provided it has products that can be used across the boarder. However according to Hwee (2007, p.17) requires huge capital investment due to marketing, restructuring of the management team, research to understand the new market and other investments while the growth may be hindered by other factors such as cultural values, political stability and exchange rates. There is contradicting information on whether diversification is beneficial to a company or not (Marcelo at el 2008). This paper will critically analyze the advantages and disadvantages of a company diversifying internationally. Advantages Growth A company diversifies internationally to new market one such company is the South Korea based Samsung electronics that has intensified its marketing globally and the outcome has been positive. Samsung electronics is a subsidiary of Samsung group and is the leading mobile phone manufacturer after overtaking the Nokia Company. Electronic companies are expanding like any other business to acquire their market share (Jaemin and Chan-Olmsted 2005, P.183) Samsung electronics especially mobile Phones has Increased its market share by export its products internationally as well as manufacturing products which are affordable by low income earners, mid income earners and high income earners. Africa is one of the fastest growing Mobile phone markets with recent study showing Africa as one of the continent with more mobile phone subscribers than landline users. In Fact, analysts estimates that Mobile Phone use in the last five years has been increasing at a rate of 65 percent per year. The growth s associated with the fact that they are the major means of communication, networking and also development (Kreutzer 2009, P.1). The leading Mobile manufactures have tapped into this opportunity by designing products that fits the Africa Market and setting up offices to drive their goals. This is also China is focusing to grow manufacturing its Market in Africa (Brenton and Walkenhorst 2010, P. 577). According to Thinesen (2011), Samsung is leading in the mobile phone Market share with about 25.3 percent of the total market share. Samsung electronics has realized growth in their mobile phone market share in Africa and USA overtaking Nokia in 2012 (Jackson 2012), for the first time in a long period Nokia has been replaced as the leading company. It has intensified its Marketing strategy, increased its investment in new mobile application, and rolled out offices in new territory and their investment has paid of thus the realized growth. Globally, according to international data corporation mobile phone sales grew by 2.4 percent in the third quarter of 2012 with total sales amounting to 444.5 millions units compared to 434.1 units sold during the same period in 2011 with the greatest gainer being Samsung. During that period Samsung also led in Smartphone sales with about 31 percent of the Smartphone market share in that quarter (Mass 2013). New market The Main Reason why a company chooses international Diversity as a growth strategy is to open up to new areas which have not been fully exploited and have business opportunities. A company may choose to diversify internationally by opening new businesses in the virgin areas to increase their profits or by increasing their geographical presences to cushion itself against economical melt down, inflation and political risks. The new territories present opportunities to increase their customer base since new customer increases profit Margin, revenue and boost economies of scale. There is a strong relationship between increased markets, convenient product, company growth and profitability (Allen and Gorgeon 2007, P.5). Samsung has increased their customer base by investing in different continents more than their local market in South Korea could have provided. The company is also coming up with new products to tap into existing customer who wants to upgrade their products. The use of mobile is on the rise especially among the youth who has low sources of income (Kreutzer, T. 2009, P.4), Samsung tapped in to this opportunity by offering sophisticated products at a lower price. When an existing company penetrates to a new area the cost of driving sales is great and sometimes not sustainable, however the company is supported by the profits from established markets. International operations also enhance growth due to access to capital through bank loans (Jang 2012, P.1) as compared to domestic companies only who have limited borrowing opportunities. International companies are also able to raise funds through public offers and bonds in their existing territories compared to single economy country selling bonds and shares in other countries. Revenue International diversity allows the company to increase their revenue by selling their products to ne market. Larger market with different factors that affect that affect trade cushions the company from making losses when one economy is not performing well. Diversification offers different political risks and economical risks. International diversification offers an opportunity for the company to increase their sales and lower production cost due to mass production (Mitchell at el 1992, P.420). Lager geographical breath offers the company an opportunity to make profit even when their domestic economy is no performing well. Mobile Phones are necessary but not basic need and when the buyer power decreases some consumer may opt to post pone the purchase thus affecting company’s profit. In recent times there have been higher rates of unemployment, higher inflation rates and higher cost of living in different countries, this has affected the business across the whole word. However most international companies have been able to survive the economic melt down as their risk is spread. Mobile phone is a communication tool but in middle and higher class earners it is also shows your social status. Due to high use of mobile phones and internet access most people will choose a product than that offer convenience, meets their needs, easily available and offer value for their price as well as good customer services. Mobile manufacturer have realized this and most off them has opened offices in Africa. Samsung has realized immersed growth in the Market share and these translate to higher sales and higher profits. However, for the company to increase its market share and maintain the lead for a long period it must strive to meet consumer expectation through providing more value than their competitors. Competition helps to build efficiency (Mitchell at el 1992, P.420) Management and services International diversity offer a company an opportunity of the company to invest in several territories. This strategy requires a lot of planning before embarking on it. Its also offers and opportunity of the company to compete with the leading international brand and therefore the company is forced to raise its management standards, this s beneficial to the company it self as well as the consumers. The company increases creativity and prove their products to outdo their competitors. Companies that operate in one economy normally focus on establishing their business and maintain customer loyalty against their competitors. This is different for a multinational company in a diverse business environment that requires a well structured action plan to incorporate divisions of the company. The compare has a strategic plan on their staffing requirements, marketing and production processes (Chaneta n.y. P 30). Mitchell at el (1992, P.419) argues than when ac company expand international it improves it marketing skills, management strategies and its technical capabilities among other benefits due to implementation of resources based management in different markets. Use of mobile phones is growing at a high rate especially among the youth and busy executives who are not stationed in their office and their mobile phones acts as their office. Samsung Stall faces stiff completion from other mobile phone manufactures such as Nokia, LG, and Motorola among others and there have embarked on offering excellent customer services to their customer. This has greatly increased their sales and builds customer confidence especially in the developing countries. Diversity also allows the company to interact with people from different cultural background. Once the company has been able to create one strong brand, it can take advantage of customer loyalty to promote its other products. For example Samsung has created a niche with their smart phones and can ride on this to push their other electronics such as TV, Fridge and washing machines; this will lower the marketing cost and thus management cost. A Good example is Crocs a foot wear company that specialize on multicolored plastic shoes with funny shape but very comfortable. The USA based company has reaped benefits world wide by reaching its target Market in china, United Kingdom, Brazil. It has improved its services and increasing its distribution channels and brand awareness. By understanding their business, training their management and adopting production cost reduction method the company has realized growth (Vessels 2012) Increase in assets A company may expand globally by acquiring already established business enterprises. For example the Indian Based Bharti Airtels expanded to African Market by buying the assets owned by Zain International thus increasing its asset value. This helps to create competitive advantages internationally as well as in the home country (Mitchell at el 1992, P.420). International diversity also helps the company to accumulate intangible assets and value such as marketing and production strategies used in different economies (Mitchell at el 1992, P.419). A company also benefits from foreign opportunities to learn about different skill thus becoming more innovative and dynamic in a changing business environment (Tongli at el 2005, P. 66). Exchange rate adjustment Multinational companies operate in countries that use different currency from their domestic currency. A company may choose to use a common domestic currency to compute their prices as well as sales and revenue. Fluctuations in exchange rates affect their operation frequently. Appreciation of foreign currency has positive impacts. For example Nokia Finland based company uses Euro as their computing currency while most in country outside Europe they use USA dollar as their trading currency. In 1990s the company recorded immense growth due to appreciation of the USA Dollar as compared to the weak Euro (Nok20-F 2009, P. 64) Disadvantages Cost When the company is moving to a new territory the is increased cost such as the cost of establishing new offices abroad, Cost of travelling by the employees, cost of recruiting new staff and training them, cost f communication and marketing cost. This is the reason why this strategy is most successful when a well performing company embarks on it than a struggling company. Its hard for a company that is not performing well locally to venture internationally because the risk is unpredictable in the new market and the company may take long before it starts making profits or worse the new venture may not be profitable in the long term. Previous study shows that international diversity is profitable though this has received critics in the recent study (Marcelo at el 2008). The company opting to diversify must therefore conducts enough research to know the viability of their investment. The area must present favorable environment for profitabity (Chaneta n.y., P. 33). However, profitable areas are expensive to penetrate in which means the company choose to use. Most companies who are doing badly at their country may choose to increase their profitability by investing into new territories but they end up repeating the same mistakes in the new area, (Vessels 2012). The new venture will not be profitable and sustainable due to increased cost, the company should be strategizing on cost cutting measures rather than increasing their cost. The company should focus on building their brand locally then expanding internationally when it has enough resources to propel the long-term goal. Vessels (2012) insist that it takes a lot of time and resources to build a brand international and maintain it due to cultural diversity. For example, attempts by Zain to penetrate African countries failed due to market nature forcing it to sell its assets to Bharti Airtels who operates a low cost model. The African Mobile phone market was untapped especially in the rural areas but a successive company would have to lower their prices due to poverty and unemployment in these areas. In 2010 Zain Sold out its Africa assets to concentrate on its core Market areas since Africa Market was not profitable (Salamah 2011, P.3). A company may enter a new area though several ways. One of the way is acquiring an existing company, this can be very expensive especially if there is potential for grow. In some cases competitor may offer higher price by joining into the bidding raising the price her than the company exact value (Allen and Gorgeon 2007, P.15). The company may also opt to start their companies; this is very expensive as a new company may take long before making profits. The company should also push their products through aggressive marketing. Rules, regulation and cultural back ground A company entering into a new territory needs to confirm to the trade rule of the new country. These rules may include Taxation, labor laws, environmental laws among other which may be different from the rules in their domestic companies. A company operating in different economy is regulated by different rules as each country as well as the laid down company rules and regulation which some times can be contradictory. For example Wal-Mart an international retail supply Chain has no been successful in penetrates German Market (Clark 2006). The Chain was accused of lowering their prices for short term gains by attracting customers and putting other retailers out of business. The business regulator forced the company to raise prices for consumer good such as food. Concern has also been raised about the German citizens who were unwilling to embrace changes that Wal-Mart brought into the market such as greetings by the employees at the entrance (Clark 2006). For a company to be able to do business, it must embrace the rules and the regulation governing business in the new territory as well as cultural practices. The rules may require changes in pricing strategies, products presentations, customer services and production. The company should familiarize it self with policies such regulating tax such as value added tax which may different from their original country and affect its profitability. Failure to consider such policies may affect profit projection calculated on domestic market models Complex management structures Diversifying to new territories result to expansion. This requires additional management teams and staff. Though most companies prefer to have a centralized management for the entire company and most probably transfer some of their domestic manager to the new area, it’s always advisable to seek serviced and advice from experts with experience on the local market who can advice on the market opportunities to avoid predictable losses (Vessels 2012). While their domestic managers understand the companies’ products, services and business model, they lack knowledge the new market and cultural practices. The recommendable structure is to have a local chief executive officer and the other top manager may be local or from other established markets of the same company (Vessels 2012). Companies should also strive to develop locally based products since most customers associate with local names with few brands where consumers’ values imported brands. This does not necessary mean to conduct marketing in local language but to have advertising that have local values and are understood by the target market segment. Multinational company requires restructuring when they expand to new areas to enhance management. Risk International diversification is a risk strategy since the company is introducing its operation in new areas where it has little knowledge on the market situation and no experience in marketing and selling its products in these areas. The company will need lots money to pay the experience experts or to pay to obtain the required information. Its managers may not be able to penetrate the new market without help of the experienced experts and this may turn a profitable project unprofitable. The cost of running a business in new territories is high that some times it takes for the company to realize any profit. One mistake the company makes is to concentrate on the new venture while paying less attention to the established market since the cost of running the entire company depends on the revenue from their domestic market. Sometimes a new venture may not perform as expected thus a company should be ready to invest more capital to ensure long term goals are achieved. Worse still when the company enter the market though acquisition, the company may lose its competitive advantage, leaving domestic companies with the burden of managing non profitable multinationals (Mitchell at el 1992, P.420) Conclusion Companies are always seeking for ways to increase their customer base and profits. Most companies embrace different strategies to realize its goals. Each strategy has its advantages and disadvantages. A company should therefore evaluate all the available options and come up with what suits them the most. International diversification is one way to increase a company’s customer base. This strategy requires a comprehensive plan and should not be a short term plan but a long term due to the cost implication. When effectively implemented it’s definitely a means to profitability though it should not be used as a quick fix. However due to its complexity nature a company should consider other factors that affect firm’s performance. Factors that can influence company profitability include time of operation, its client base, its asset base, its market and economic factors (Tongli at el 2005, P. 66). . References Allen, D and Gorgeon, A 2007. Diversity Strategy, IE Business School. Mardid. Spain. Brenton, P and Walkenhorst, P 2010. 'Impacts of the Rise of China on Developing Country Trade: Evidence from North Africa', African Development Review, 22, pp. 577-586, Academic Search Premier, EBSCOhost, viewed 7 April 2013. Chaneta, I (n.y). ‘Corporate Diversification Strategies’ Journal of Comprehensive Research, Volume 6, Page 30-38 Veiwed 6th April 2013. 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