Internalization Analysis of Telefonica - Essay Example

The company is currently transforming into a ‘Digital Telco’ through extensive investments in digital communication solutions that are the key drivers of future revenue growth (Telefonica, 2015). The mission of the company is to ensure everyone has access to the possibilities offered by technology so that people can live better and do more things and be more. The company culture aims to enable people to live better through the use of technology, transform society through the use of social innovation and promote environmental sustainability (Telefonica, 2015). The company structure incorporates the digital offering as the main focus of commercial policies and provides flexibility since local business CEOs are empowered to make decisions that concern the specific country's operations (Telefonica, 2015). The company registered 50, 377 million euros in consolidated profits in 2014 and more than 5.1 million pay TV accesses. The mobile phone accesses were 274.5 million while the mobile internet accesses were 18.15 million. The fixed telephony access reached 36.8 million by the end of 2014 (Telefonica, 2015). The company registered positive year-on-year access growth and average revenue per access grew by about 0.3 percent. The company also registered positive revenue growth due to improvements in data monetization (Telefonica, 2015). The company has a diversified workforce that comprises more than 100 different nationalities and Latin American countries such as Brazil account for the highest percentage of personnel (Telefonica, 2015).

The Brazilian brand is referred to as Vivo and offers the customers fixed line, mobile, broadband, and television. According to the company, the mission is to offer Brazilian customers simple and accessible services and the brand uses multicultural colors to appeal to Brazilian cultural values and norms (Levi, 2007).

The main issues that Telefonica faced in its internalization process in Brazil were the marketing strategy, the sourcing of the products, and the need for investment and control. The company had to consider product sourcing and pricing mechanisms, distribution mechanism, and inventory management methods (Elsner, 2013). The company's foreign market entry mode considered the level of risk involved in the entry mode since indirect exporting is less risky than establishing its foreign manufacturing or subsidiaries (Levi, 2007). Accordingly, the entry mode should consider the competencies and skills required to run foreign operations since telecommunications operations require technical specialists to manage the network infrastructure (Elsner, 2013). Other factors considered are the flexibility and ease of exit from the foreign market and ownership issues since joint ventures and partnerships with foreign firms may entail ownership restrictions (McDonald and Burton, 2002).

Telefonica aimed at spreading the market risk by expanding into Brazil since the predominant Spanish and UK market experience demand fluctuations. Accordingly, the company sought to attain an international scale advantage since the increase in the scale and capacity of operations would lead to a reduction in the variable costs of operations (Doole and Lowe, 2008).

There are various methods of foreign market entry such as exporting, licensing, joint ventures, foreign manufacturing, and wholly-owned foreign subsidiary (Muhlbacher, Dahringer, and Leihs, 2006). The managers are expected to select an entry mode that is consistent with the company resources and intended local position. The management must make a trade-off between the desired degree of control over the entire value chain and the degree of risk that the company is willing to assume by internalization of its operations (Wagner 2009). Exporting offers the least level of risk and low level of control since indirect exporting models such as casual exporting, telephone sales, and export trading companies do not require direct involvement on part of the firm (John and Allen, 1998). However, the use of direct exporting entry modes such as import houses, branch offices, and foreign sales representatives involves direct marketing and distribution by the firm thus granting some level of control (Wagner, 2009). The use of representative offices and branches is capable of gathering market intelligence information and maintaining relationships with customers (Doole and Lowe 2008). Licensing and franchising involve a limited degree of risk and faster access to foreign markets with minimal capital involvement. The entry mode strikes a balance between the need for localization of the product to the local market conditions and standardization of the products in the global market. The acquisition is another entry mode used by multinational companies that seek to serve the target market faster and more efficiently through access to new technologies and learning experiences (Doole and Lowe, 2008).

Telefonica established its fully-owned subsidiary due to the geographical distance, the legal restrictions, and the cultural environment of Brazil. Accordingly, the high market volume in Brazil, the need to gain market information, and the desire to control distribution channels forced Telefonica to establish its subsidiary (Levi, 2007). Another factor that made its subsidiary more favorable was the need for a high level of control to foster product differentiation and innovation, the high financial resources involved, and the highly competitive nature of the industry (Ghosh, 2011).