International Corporate Diversification - Case Study Example

International Corporate Diversification Introduction Many business scholars have provided extensive evidence indicating that, in a globally competitive economic environment, numerous companies worldwide are progressively extending operations to foreign market segments. This is a part of the companies’ growth strategy, and the increasingly predominant phenomenon is directly linked to globalization effects, as well as, the ever rising competition intensity. This phenomenon is generally referred to as international diversification and many academicians agree that, it offers a company access to a wide array of opportunities in overseas markets thus making it possible to overcome development challenges. International diversification could also enhance the respective company’s general performance. In academics, varying outlooks have been utilized to elucidate this phenomenon diversification. For instance, theoretical concepts like portfolio investment, foreign direct investment (FDI), and resource-based theories, all propose that, international diversification is associated with increased economies of scale, broadened learning scope, stable revenues or profits, and operational flexibility (Waisako, 2002, pp. 109-134 ). However, irrespective of the numerous advantages associated with global business diversification, research has shown that, simply venturing overseas does not guarantee exemplary performance for companies. The diversification process usually requires an organization to accrue sizeable costs as a result of strategies’ restructuring or resource reallocation. Other challenges include concerns such as increased complexity in managerial structure, target market or employees’ resistance to transformation and increased communication problems owing to the diversity of cultures involved. Additionally, global diversification could be accompanied by unexpected, yet substantial expenses like fluctuations in currency exchange rates, political insecurity and inflation. This paper seeks to explore the varying advantages and disadvantages associated with international corporate diversification. The study attains this, by evaluating drivers of international diversification; cases of companies that have either succeeded in the venture of international diversification and those that failed extensively, as well as, the reasons that led to this success or failure. General Advantages of International Corporate Diversification International Talent Pool and Opportunity to Lower Labour Costs Increasing globalization and competition among businesses has constantly driven operation costs to an elevated level. Additionally, the escalating competition requires organizations to have unique methods of conducting, which can best be attained by employees with distinctive talents. For this reason, the increased costs of hiring workers, as well as, the need for a highly gifted labour force, are both crucial drivers of global diversification. For example, Apple, Inc. a computer and peripherals manufacturer develops its products’ designs in California, but assembly of the products takes place in China. The same applies for many multinational companies (MNCs) which seek to lower labour and other operation costs. This happens mainly because; labour in developed nations is more costly in comparison to that available in developing nations. Additionally, global diversification makes it possible for an organization to gain access to a labour force that is highly diverse in terms of talent and expertise, thus gaining a higher chance of succeeding in the business environment (Dastidar and Weiner, 2007, pp. 24-36). Occasionally, as certain areas of developing nations evolve and costs increase, MNCs may opt to move their operations to locations of the same nation that have not developed fully, thus continually saving on costs. In addition, a global company can get cost benefits through economies of scale. This is attainable through centralizing production processes in one or a few locations hence doing away with redundant expenses and effort. Another crucial component the labour is skill. The skill and expertise of workers develops with the growth of their nations’ economies. For instance, foreign scholars that opt to stay in adopted nations after graduating, usually take their acquired skills to their countries of origin, particularly in India and China. It is for this reason that, developed nations are turning to the developing ones, for both improved expertise and assembly of electronics. Additionally, a MNC with predominant presence in the recipient country has the capability to easily locate and recruit locals with sufficient knowledge about how businesses are run in the area, thus acquiring competitive advantage over competing rivals. Other organizations even invest in local economies in order to nurture and develop a dynamic talent pool, by subsidizing infrastructure and learning institutions (Dastidar and Weiner, 2007, p. 37). Technology Technology has led to the development of a wide array of economic sectors. For instance, it has virtually converted the world into a village, by acutely reducing the amount of time required by an individual or corporation to convey a message from one part of the world to the other. Unlike in the past, where information could only get to the recipient depending on the pace used by the messenger, the internet and improved telecommunications sector can guarantee instant message delivery. Further, the internet has made it possible for many business ventures to engage in electronic commerce (e-commerce), or communicate via video conferencing, thus carrying out business transactions spanning across the globe with much ease. MNCs, therefore, can benefit extensively from technological advance, operating as efficiently, as a business operating only in its domicile would. Trade Agreements Trade agreements present yet another crucial benefit to global ventures. These agreements seek to ease government trade regulations and restrictions. An excellent example of a trade agreement is North American Free Trade Agreement (NAFTA). This trade agreement is among the U.S and its trade partners, Mexico and Canada. Since the commencement of operations in the year 1994, it has done away with majority of the tax and non-tax impediments to unrestricted investment and trade between the three nations involved. The same reduction and later elimination of trade barriers took place after the European Union (E.U.) was established in the year 1993. The initial twelve E.U. members were free to trade with no restrictions at all, making this zone the largest integrated market in the world. The efforts to call upon others to join have continued to grow, since there are currently twenty seven nations affiliated to the agreement. This implies that companies growing across diverse nations have numerous opportunities to reach a broader market base and make extra revenues (Hyland and Diltz, 2002, pp. 46). The final general advantage stems from the fact that organizations are always looking for unexplored markets. This often requires a given company to follow its rival to a new market. This occurs because no company would like to lag behind, while its competitors are making immense profits from unexploited market segments. Advantages of International Diversification As can be discerned from the discussion above, most companies diversify, in order to gain advantages like reduction of labor and operation costs, to earn revenues from unexploited markets and to also compete with rivals in terms of technology. Additionally, MNCs seek to benefit from advantages that come from joining regional trade blocs, like unrestricted exports and limited or no imposition of taxes. Internationally diversified companies also acquire a multicultural and multi-talented labour force, which not only improves the respective company’s image to the customers, but also increases chances of performing better than competing rivals. These are general benefits acquired by companies that diversify internationally. Nevertheless, there are specific advantages attained by MNCs, some of which are discussed in subsequent paragraphs. One of the principal advantages of international diversification is that a company builds the capacity to control its inputs, have basic continuity, as well as, improve in provision of quality services. For example, in 1984 and 1985 News Corp got the Twentieth Century Fox, as well as, other six television stations belonging Metromedia Broadcasting Group in the United States. The acquisition gave the organization a wider platform to consolidate related activities because of its access to studios, thus enabling them to produce television programs and movies. Another exemplary example of a company that has attained this advantage is Telefonica, a telecommunications company, as explained below. Case Study 1: Telefonica Telefonica can be termed as one of the world’s biggest and most inexhaustible telecommunications organizations. In Europe, it is ranked as the third best company dealing with fixed line operations, while in the entire South American region; it is ranked as the first. The Company’s ability to control inputs and foster fundamental continuity is evident from its tentative growth from home domains like Peru, Chile and Brazil before moving to European countries like Spain and the U.K. The success in its globalization efforts’ is principally attributable to the company’s profound investment in Latin America before it ventured in the international market. Another significant advantage is that, companies have the capability to control markets by guaranteeing sales as well as distribution once they are internationally diversified. This is attained by combining appropriate links in the value chain. For instance, when the production and distribution channels get combined, there company will be able to control the price and all other factors that will enhance better flow of products. Additionally, a company utilizes its already established brand names and business identity in order to amplify its benefits in the new markets (Bai and Green, 2010, pp. 237-243). Coca Cola best illustrates the advantage of enhanced distribution channels and products’ sale from its widely recognized brand, as explained hereunder. Case Study 2: Coca Cola Coca-Cola is another international organization that has grown to be the most recognized companies in the world. The success of the company is attributable to its unique brand and product differentiation. International expansion in Coca-Cola has been taking place for the last fifty years. This has enabled the company to position itself better in the soda beverage industry. The Coca-Cola’s is attributable to it “think global, act local” campaign. This is because nearly all their marketing strategies, as well as, distribution channels focus on virtually every custom and culture worldwide. Therefore, localization is a principal aspect in the efficiency of Coca-Cola’s global strategy (Fama and French, 2010, 1915-1947). It is imperative to note that, when a company is internationally diversified; it is able to take advantage of the already existing professionalism, resources and knowledge while expanding to new territories. Therefore, there can be transfer of skills, research advancement and expansion knowledge and resource sharing. These aspects of international diversification translate to enhanced risk control because there is no overreliance on a single market. This is an advantage best illustrated by Renault and Nissan, renowned automobile manufacturers that decided to merge in their international diversification efforts. Case Study 3: Renault and Nissan The alliance between these two companies does not necessarily depict the attributes of an extremely formal merger. Instead, this amalgamation could be considered as a decision to work together, in order to diversify on their international market. This is evident from the fact that the two organizations maintain their identities but combining their resources towards achieving a common goal. This has contributed greatly to their exceptional international performance in comparison to car companies working as single entities. Additionally, the merger enabled them to combine their reputations of professionalism, their resources, as well as, distinctive expertise in improving their international performance. These companies were also to spread out their operation risks by venturing into the international market together, explaining their resilience at a time when other car companies like General Motors were suffering the extensive impact of the global recession (Polwitoon and Tawatnuntachai, 2006, pp, 2767-2786). Another advantage of international diversification that cannot be overlooked is; the fact that international markets provide an opportunity for companies to move away from dilapidated business activities. The shift to different business venture makes it possible for a company to spread out risks among the numerous businesses. International diversification, therefore, can enable a firm to avoid making decisions that rely entirely on a single business entity or one region only. An international company that benefits not only from regional diversification, but also coupling this international growth with differentiation of business entities is the Virgin group of companies, whose case is explicated further herein. Case Study 4: Virgin Virgin is currently one of the world’s most diversified organizations. This is because the Company has about three hundred or more business establishments worldwide. These business entities under Virgin fall under a broad range of activities, including: record stores, air travel, other modes of travel, radio stations, health clubs and even shopping malls (Li, Sarkar and Wang, 2003, pp.60-75). These international diversification strategies appear unrelated, but Virgin’s management insist that the Company looks for gaps in different economies, where they believe in creating value. The Company’s CEO, Branson, says that the company ventures into new market segments by initially examining a particular region and determining whether they can provide something new or distinctive from other businesses. Virgin’s management has, therefore, done well by identifying places of value and complacency in diverse markets. This is the principal reason why; the company has been successful in international diversification. The fact that, the Company has ventured into different business sectors in the international setting, makes it possible for Virgin to venture into the most lucrative sectors of different nations’ economies. This also spreads the Company’s risks and enables it to perform exceptionally well, even during periods of poor economic performance. Through international diversification, Virgin is able to invest in emerging economic sectors, hence reducing investment in poorly performing business entities. Disadvantages of International Diversification International diversification is usually taken as a positive venture in any business that has flourished in the local market. Venturing into new markets would diversify their products globally thus more revenue. However, there are times when businesses trying to diversify get faced with problems and they are unable achieve their principal objective in the international market. In a few cases, some companies can experience slow growth in its main business. This is usually caused by disvalue in their share prices. When a company is venturing internationally, there can be problems of growth in the principal business because they tend to only venture into other businesses that will raise revenue. This slows the growth of the mother company because the company is concentrating on developing the subsidiaries. This can be demonstrated by the case study described herein. Case Study 1: AES Is a U.S. based energy company that runs one hundred and twenty four generation plants in twenty nine different countries on five continents has been struggling in order to show that it can be able to operate the sum of its individual geographic units. However, since the company diversified, AES’s share price has toppled because some of the investors who were initially enthusiastic of the company globalization strategy are skeptical of the operations. This has made some of the investment adviser’s call for the company’s split into three. This is an indication of failure in the international diversification strategy laid by the company (Alexander and Korine, 2008, p.2). Another disadvantage in international diversification can be experienced in the resources both financially and in production. International diversification needs to have a lot of resources thus this causes additional management costs. Many companies are have been faced by financial constraints when diversifying. This is because they fail to plan and lay strategies that will assist them work under a particular budget. Additionally, a company may incur negative synergies thus affecting its production. Therefore, they are faced with unnecessary and unplanned business ventures and they end up investing unwisely causing extra cost. This may lead to production of less valued products. This can be depicted in the case discussed hereunder. Case Study 2: Merger between Daimler-Benz and Chrysler In 1998 Daimler-Benz merged with Chrysler so as to create a Welt AG which as an international corporation. However, the organizations did not attain the markets power and suppliers like it was expected in the global position. There was a high cost of operations because they could not be able to maintain a successful luxury brand and also maintain the quality of Mercedes. This made the company to flop in the international market and also in Mitsubishi which was one of its partners. The failure in the merger between Chrysler and Daimler-Benz is an indication of failure in international diversification (Alexander and Korine, 2008, p.4). There are additional complexities in bureaucracy. Additionally, there company might also have additional bureaucratic complexities coordination and control of the major operations of the organization (Hennart, 2007, p. 425-450). This brings the possibility of incurring losses during the process of market consolidation which may result in a few business units being promoted by other profit earning units (Hyland, and Diltz, 2002, pp. 51-79). For instance, News Corp experienced losses of almost ₤10 million every month after implementing its international diversification strategies. In many cases, when a company is diversifying, the management can decide to integrate in order to expand their international market. However, there are problems that can be experienced during this venture as shown in the case study below. Case study 3: ABN Amro This is a Dutch financial services company. The company embarked on acquiring banks in many countries it was unable to accomplish the appropriate integration that was needed in order to generate value with the newly acquired international network. This contributed to the dismembered of ABN Amro last year. This was a huge failure for international venture because the management planned to diversify greatly and improve in its value (Alexander and Korine, 2008, p.2). Diversification via acquisition of national boundaries can result in the company having to deal with unstable particulars the external business environment like political and legal requirements in the different nations in which the company has no controlling power (Doukas and Kan, 2006, pp. 352–371). For instance, Rupert Murdock was not allowed to own more than 25% of any organization with a broadcasting license because he was non U.S national (Matsusaka, 2001, p. 421). Therefore, he had to get a U.S citizenship in 1985. Case study 4: Deutsche Telekom Deutsche Telekom had announce that in the spring, it would be selling its products in the U.S T-Mobile USA, and other places in the U.S like the AT&T. this was all in the hope of diversifying its business and become strong in the international market. However, it was unfortunate because of the major resistance by the Federal Communications Commission (FCC) and the Justice Department against its venture. Therefore it failed in its venture to become one of the best international companies in the telecommunications industry (Alexander and Korine, 2008, p.3). Acquisition as a way of diversification might fail because of much investment in infrastructure while creating new business and then fail because the money invested is not gained back. Joint ventures are challenging because many organizations do not take into considerations the kind of companies they are venturing into business with because their main focus is a merger that will enable them take their products into the international market. The joint venture may get affected by this fact which can lead to major losses that affecting the growth of the company internationally. This is demonstrated in the case study discussed below. Case study 5: TCL-Chinese Electronics Manufacturer TCL, which is Chinese producer of diverse electronics like TVs and mobile phones, expanded fast in the U.S and UK by acquiring joint ventures. It now has many R&D centers, manufacturing bases as well as sales companies. However, the operation and managing cost of the compound infrastructure has been unable to compensate for amount of money used to venture in business. This has led to major losses for TCL and numerous of its joint ventures partners leading to failure in international diversification (Alexander and Korine, 2008, p.7). Conclusion Evident from the discussion above, economic globalization has always been seen as the best hope for stability in the world market, but others see it as a big threat. Nevertheless, many people accept that all types of business must embrace it. However, weak strategies have led failure of some major businesses all over the world. International diversifications strategies need to be established by companies in order diversify growth especially in the international market. Bibliography Alexander, M., and Korine, H. 2008. When you Shouldn’t go Global. 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