Introduction
In this paper we project a scenario to examine the
impact of diversification and foreign expansion on Brazilian Mobile Services
business. While prior papers have examined the strategy in the local
environment this paper provides empirical validation of how external moves such
as diversification and international expansion can could greatly increase
shareholder value while spreading risk and increasing sales.
The first part presents the diversification
strategy for Brazilian Mobile, based on the theory of Steiner (1964) diversification
is defined while Cope’s Law supports the idea that the company must diversify
or die. Further, the strategy of diversification on related business is presented
where it is assumed that the company has very high technologic resources which
could be used into leverage a cross-business value chain relationship strategy.
In the second part the foreign market penetration strategies
of multicountry strategy defined by Thompson (et al 2010) are
discussed as more appropriate for Brazilian Mobile Services to enhanced potential and to build a global brand
name with significant power in the market place. In sequence the challenges to
invest in a foreign market are discussed, the differences between traditional
industry and the industry where Brazilian Mobile is inserted are pointed out.
Based on Freeman (et al, 2012) theory the paper suggests actions that could minimize
the impact of these challenges.
In the third part, a scenario for both
diversification and expand to foreign market is drawn up. After reviewing the
pros and cons, expanding in to a foreign market was considered too risky for
the company. Therefore diversification would be the best strategy to greatly
increase the company’s shareholder value.
Finally
the paper describes how the business’ ethical environment is extremely
important for the company to maintain profit and increase value in the market.
Based on the studies of Prakash & Sama (1998) the paper assesses how the company can
create a business environment conducive to ethical behavior.
Diversification Strategy
According to Steiner (1964 pg. 11)
diversification means: “entry into new product lines, processes, services, or
markets” and its activity by a company in two or more of those classes. The
range of diversification may be from new products or services in new markets to
the extension of existing products into new markets. The fact is that diversification
is as old as business history, since the eighteenth century with the great
trading companies. However, the phenomenon has assumed striking dimensions in
recent years and, unless impeded by applications of the antitrust laws, is
likely to continue at a rapid pace. Cope's law (La Barre, 1954) assumes that business
firms must diversify or die. This is because in the course of market evolution
some companies concentrated too much on one characteristic to exploit a given
environment. It resulted in their undoing. When the environment changed the
animals could not adjust. Therefore they must, diversify to permit adaptation
to new environments. If they do not, they will become extinct like dinosaurs.
Brazilian Mobile Service is inserted
in a rapid change environment principally because of lightning fast
technological development and advancement. In this environment the threat of product obsolescence drives
company to improve present products and to develop new products to assure sales
and profit stability. Therefore, as the sports application life cycles are
completed, new life curves with other applications must be started.
Additionally the company is experiencing growth and effective use of new
managerial techniques which facilitate the development of, and planning and
control in, multiproduct.
Due to the fact that Brazilian
Mobile Services already has very high technological resources the company could
use this expertise to leverage a cross-business value chain relationship
strategy. With this strategy the company will diversify into related business
with important value chain, gaining more competitive advantage potential than
companies that diversify into business whose value chains are totally unrelated
(Thompson, et
al 2010). Then Brazilian
Mobile Services can transfer skills and technology from the applications with
soccer teams to applications for another sport such as volleyball or just games
in general. In this way the company could reduce costs via sharing use of
common facilities and resources, and utilizing the company’s well know brand
name and distribution muscle to grow sales.
Once Brazilian Mobile diversifies
into new applications the strategy will fit in to Thompson (et al 2010) R&D
and technologic activities
with great potential for cost savings from economy of scale in R&D and potentially
reducing the time of getting new product
to market. In addition technology advances in the new applications will lead to
increase sales for both the new and the existing products.
Foreign Market Penetration
Since Brazilian Mobile Services is already
inserted in South America the company should enter in one of the neighboring
countries, especially countries like Argentina, Uruguay and Chile which are
experiencing real GDP growths rate of 8%, 6% and 7% in the few last years and probably are going to maintain
in the next few years (CIA, 2011). Additionally they also have very strong and
well established soccer teams such as Boca Juniors in Argentina and Universidad
in Chile, which can make it easier for Brazilian Mobile to transfer its
business model. The strategy to be used would be a multicountry strategy (Thompson, et al 2010), where the company would vary a little in the
company’s strategic approach in response to differing local market, competitive
conditions and local preferences.
With the whole business based on
online applications, by entering in a foreign market Brazilian Mobile Service
will be able to coordinate activities across different countries and therefore
build competitive advantage. For instance, the Brazilian plant will still be
the main developer of the product applications and can quickly communicate via
internet with the other plants to coordinate the product schedule and
adaptability. Additionally knowledge accumulated in marketing the company’s
products in Brazil can easily be exchanged with company personnel in Chile,
Argentina or Uruguay.
Furthermore, as Brazilian Mobile
Service becomes a multinational company by consistently incorporating the same
differentiating attributes in its products worldwide the company will be able to
enhance the potential to build a global brand name with significant power in
the market place (Thompson, et al 2010). Actually the reputation for quality mobile
applications established in Brazil and further in three other strong countries
in South America can be the first step for Brazilian Mobile Service to reach
the whole Americas inclusive of the United States.
Foreign
Market Challenges
Brazilian Mobile Service operates in
dynamic markets where the windows of opportunity open and close rapidly. The
company’s very survival and success is determined by how quickly, efficiently and
holistically they anticipate, and then act upon, foreign opportunities (Nordman
and Melen 2008). Unlike other firms, Brazilian Mobile Service as a software
company faces unique challenges in discovering and exploiting foreign market
opportunities. Although language, different culture and preferences still have
an impact because of company’s short history and accelerated pace of internationalization
and technology development the company faces more difficulties and more
competition. In fact, while the traditional companies entry in to foreign
market emphasizes the importance of international knowledge (Johanson and
Vahlne, 2006), software companies emphasize the importance of technological
knowledge for foreign entry in order to be ahead of the competition (Nordman
and Melen 2008).
Another important challenge is the regulatory
environment. Nowadays Brazil, Argentina Chile and Uruguay are under the
Mercosul agreements which can pave the way for Brazilian Mobile Service to
enter these countries. However, any changes in the future can make the company rethink
their skills and capabilities and subsequently move into other markets which offer
fewer barriers.
In order to minimize the impact of
these challenges the company should focus on the internal development of firm
knowledge and other resources, in which merger or acquisitions to a local
company could also help the company’s relations to that market. According to Freeman
et al (2012) theoretical examination integration with local companies will
serve to increase understanding about the chosen foreign market. First with
respect to establishing a network and second with regards to the use of market
assets such as knowledge of local competition and market conditions.
Scenario: diversify or expand into a foreign
market.
Expanding to other markets or diversification can
be very challenging, unpredictable and a very high-stakes game, in fact there is
little conventional wisdom to guide managers as they consider a move that could
greatly increase shareholder value or seriously damage it. Although by
expanding Brazilian Mobile Services to foreign markets the company might be
able to enhanced potential to build a global brand name with significant power
in the marketplace, this scenario seems to be much more risky than diversification. In fact changes in foreign
politics, taxations and increase competition can have dramatic
consequences in the business, especially if the company is not prepared to
spread the risk among other business.
Therefore diversification seems to
be the better strategy to achieve a sustainable advantage which can result in
the creation of enormous shareholder value. This is because Brazilian Mobile strengths
allow the company to create something unique. By identifying company’s unique
and unassailable competitive strengths the company can move beyond a business-definition approach
and instead launch a diversification effort based on its strategic
assets (Markides, 1997). Considering Brazilian Mobile’s main strategy concerns
“sports and entertainment” the company can build on their excellent skills in
technology and flexible payments to start new applications in games and launch
similar applications for other sports. In this
way the company will not be so dependent of the soccer teams and can
consolidate their position in market before expanding into foreign markets.
Ethical behavior in the business environment
Ethics in
the business environment is clearly extremely important. However, the given
nature of the activity in which the business is engaged would temper and define
the outer limits of ethical behavior and the mode in which it manifests itself, on the part of
business institutions and their managers. Even knowing that the company is
inserted in a highly competitive industry which according to Prakash
& Sama
(1998) also creates greater opportunities for unethical behavior, the company
must behave ethically.
But
the question is how? Given the existence of opportunities in order to create a business environment
conducive to ethical behavior the company must be
engaged in ethical behavior in the marketplace and these attitudes must flow
from the top level managers to the low level. In fact, managers’ ethical values serve as
example to influence each employee’s choice of ethical/unethical behavior,
while corporate culture supports each decision as the right thing to do.
Additionally the company
must develop a minimum level of ethical business conduct such as norms and
minimal conduct behaviors. It must consider a business conduct for the
organization to conform
to the prevailing societal norms, traditions, and culture of the relevant
environment especially if the company decides to expand into foreign markets. For
instance, as a Brazilian company their managers are likely to vary in their
adherence to this level of ethical business conduct in response to external,
competitive-economic factors, organizational imperatives, e.g., corporate
culture, and institutionalized standards and values. Finally to create a
business environment conducive to ethical behavior it is necessary to extend higher
ethical standards of fairness (Prakash
& Sama,
1998) through the way the corporation and its managers
interact with its stakeholders in Brazil or around the world.
Conclusion
This paper addresses the question of
how diversification or expansion to foreign market can impact the firm’s
performance. The hypotheses are tested through scenario analysis employing
various studies to support the ideas. This particular study about
diversification reveals that the company can save money in research and
development expenditures which could increase firm’s performance. Also the fact
that the company can spread the risk with diversification looks like the
biggest advantage for Brazilian Mobile now, especially because now the company relies
heavily on one customer. Therefore diversification was chosen as the best
strategic move for the company at the current time.
On the other hand the study of
scenarios showed that expanding to foreign market can lead to a great
competitive advantage. However it was consider that the company is still not
well enough established in the market therefore going global could represent
too much risk. Although expanding to foreign markets provides a lot of opportunities
that are attractive to the firm, to engage in global markets there are still multiple
challenges to be deal with which it was consider created too much risk.
The determinants of diversification or
foreign expansion are still an issue to be studied further and more
comprehensive real perspectives should be developed for a better understanding.
In addition, casting different approaches and data from various disciplines
would strengthen the insights derived from the scenario. To sum up, whatever
the company decides there are risks and rewards, it will depend on the
management decisions to take the right approach in order to lead to success or failure.
Finally independent of any issues
for management team to bear in mind, the company must commit themselves to
ethical behavior. While in Brazil or around the world the company must be
engaged in ethical business conduct in their decisions in order to keep their
image and consequently their profitability.
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