Solution: Around 1990’s, there were many changes both on political and economic front which actually change the working conditions for all the companies in different industries including Telefonica which was a state owned typical monopoly company in national telecommunication sector in Spain. Some of the political changes are as under: The government privatized the company.
There were many deregulation happened in the Spanish Telecommunication Market. Some of the changes in the economic front which resulted due to the changes done by the Spanish government were: The company started to reduce their workforce and thus trying to achieve better results by minimizing the cost involved. Rapid change in the technology, companies started to perform better by way of adapting to the new and advanced technology available.
The Motive of the company changed to increasing the profits and thus increasing the shareholders’ value. The company started to concentrate more on efficiency and ways to survive the competition. Due to all the above changes Telefonica became more and more capable of surviving and expanding its business beyond Spain and thus they started expanding globally. What did Telefonica initially focus on Latin America?
Why was it slower to expanding Europe, even though Spain is a member of the European Union? Solution: The same type of political changes were happening in Latin America also, they were also going for privatization and deregulation in these sectors. This gives opportunities to players like Telefonica to look and focus.
Having already learned to transform itself from a state-owned enterprise into an efficient and effective competitor, Telefonica believed it could do the same for companies it acquired in Latin America, many of which were once part of state-owned telecommunications monopolies.
Factors which lead Telefonica initially focuses on Latin America rather than expanding it in European countries in spite of the fact that Spain is a member country of the European Union are as follows: Latin America is a vast region to concentrate on, with common language shared. They had strong historical and cultural ties with Spain.
Though in past, Latin America had very slow growth, at that time Latin American markets were growing rapidly. There was an steep increase in the adoption rate and Their usage not just of traditional was fixed line telecommunications services, but also of mobile phones and Internet connection.
Increasing number of competition in Europe was again a vital concern which slowed down the expansion of Telefonica in Europe. For years, there had been a tacit agreement between national telecommunications companies that they would not invade each other’s markets was another important reason for looking at different countries. Telefonica has used acquisition, rather than Greenfield ventures, as its entry strategy. Why do you think this has been the case? What are the potential risks associated with this entry strategy?
Solution: Telefonica was a transformed as a company from state run organization to a privately controlled which has learned and grown as an efficient and effective competitor. In Latin America many companies were once part of state-owned telecommunications monopolies, so acquiring stake in then will be similar to its own transformation and will be under its control.
Again Telefonica must have thought that entering a new territory as a competitor will not be very effective as its goal was to have a presence globally and spread throughout the continent and not acquire a small stake in the telecom market. They acquired nearly 40% of the market of Latin America in 2000.
The potential risks associated with the entry strategy adopted by Telefonica were: Regulatory Risk – in the case foreign location choice, the main risk involved is the risk of regulations followed in that country. Risk of non cooperation – Company self operating is more controlled and it they want to operate through the companies they have invested they lose control due to lack of cooperation.
What is the value that Telefonica bring to the companies it acquires?
Solution: Through various acquisitions Telefonica acquired 40% of the market share and have managed to earned 18% of its total revenue from the region of Latin America.
Thus in early 2000, Telefonica became the leading player in the telecom industry. The companies which Telefonica acquired also gained the value by increasing their efficiency, effectiveness and competitive spirit. They have in together reached a high position and better control over the market.
Thus the acquisition had transformed Telefonica along with all its acquired comapnies into the second-largest mobile phone operator in the world, measured by customers behind China Mobile. In other words, Telefonica tightened the grip over the telecom industry by the mode of its acquisition and thus growing larger with the companies it acquired. In your judgement, does inward investment by Telefonica benefit a host nation? Explain your reasoning?
Solution: For years, there had been a tacit agreement in European Union between national telecommunications companies that they would not invade each other’s markets. So the companies like Telefonica looked for other countries for expanding and making investments. Off course the inward investment could have definitely benefited the host nation as the opportunities are made available, like More of employment opportunities.
Economic growth leading to better standard of living.
Adoption of newer and better technology for reducing the cost of products, improving the quality of precuts. Maximum utilization of available natural resource.
Overall growth and development of the host nation.
There are some disadvantages also with this type of inward investments are: Profits generated from such inward investments are drained out of the host nation.
The Government of the host nation tends to lose control over the resources and sometimes people associated with the same. Companies putting inward investment tend to exercise undue pressure or influence on the government of the host nation to make regulations and laws which are more favorable to them than in public interest.