Telephonica Global Strategy, Structure, and Operations - Case Study Example

Telephonica Global Strategy, Structure, and Operations Liberalization, privatization, foreign ownership and mergers will have a major impact upon thefuture structure of the telecommunication industry, but many regulatory and ownership barriers remain in force worldwide. Organizational type has been dramatically influenced by the rise of globalization. Telephonica, like other telecommunication companies, is seeking to maximize its global reach, in the belief that if a company offers a global service it is in the strongest competitive position. Globalization process posed tremendous opportunities for Telephonica. The economics of scale in producing and marketing a product in the same way worldwide would produce substantially lower costs, and thus allow lower prices that would overcome remaining differences in tastes. According to the case study: "the telecommunications industry has today become the largest in the world, generating $US 1 trillion (US$1,000 billion) in revenues in 1998 in worldwide service revenues and equipment sales. In 1997, telecom services alone generated a revenue in excess of USS650 billion" (Telephonica Today, 1999). Globalization allows Telephonica to maintain high-speed growth through continuous optimization of is product mix and constant technological innovation. It has also realized rapid expansion through capital injections. In 1997 Telephonica became "a completely private company" and has begun to follow a strategy of withdrawing from small markets with limited potential for its core products and to look for markets in countries with a major growth potential for telecommunication industry. "The first half of 1999 was putting Telef6nica's aggressive strategy of investing in Latin America to the test" (Telephonica Today, 1999). The choice of Brazil was not accidental. This market is considered as the most potential one for telecommunication industry because it had the poorest telecommunication infrastructure development among other Latin American countries. The other potential markets were Argentina, Venezuela, Puerto Rico, Colombia, Peru, Mexico, El Salvador and Chili. The situation is marked by two factor - specification, which is to do with the 'design quality' of service, and conformity, which is to do with the 'process' quality which is achieved are of particular importance to customers. The main challenge is that Telephonica is well-positioned to take on this important global leadership role. It has the global resources and certainly has the technological capability. According to Johnson and Scholes (1998) the size of the investment required by a business wishing to enter an industry is an important determinant of the extent new entrants. The higher the investment required, the less the threat from new entrants. The lower the required investment, the greater is the threat. In this situation: "Telefonica saw opportunity in Latin America whereas most other companies saw risk, and is now present in nine countries with an annual average growth of 13% since 1995" (Telephonica Today, 1999). Another important challenge of global strategy applied by Telephonica is the concept of international culture, which "was absent in the world of telecommunication at that time" (Case study). Latin America has a complex culture which interacts with business in the way of socialization (the influences which shape behaviour in a particular social setting). At its deepest level. In spite this fact, it was more easy for a Spanish-based company to penetrate into Latin American market and gain its competitice position. Another important opportunity is great belief of management team in potential and success. Juan Villalonga commented that "Latin America is to Telefobica what the United States is to AT&T, It is our home, our culture and our language" (Telephonica Today, 1999). In general, it is possible to say that culture in Telephonica is based on the interrelationship of strategy formulation and implementation. The success of the company was caused by correlation of strategy, structure, systems, style, staff, skills and shared values. The rapid growth of information technologies, cooperation and integration activities have caused changes in this sector with EU integration and Single Market policy. Strategic alliances, strategic international alliances, and global strategic partnerships were used to link Telephonica and Latin American national companies to jointly pursue a common goal. Form the strategic point of view it helped to preserve prices and protect services which ate being eroded by deregulation, Once thought of only as joint ventures with the more dominant party reaping most of the benefits of the partnership, cross-border alliances are taking on surprising new configurations and even more players (Brake et al, 1995). Moreover, to be successful in a world of alliances, managers of Telephonica acquired new skills. In 1987, Mr, Solana, President of the company, developed a strategy to acquire a stake in Entel. "Entel was finally acquired in 1989 followed by stakes in other telecom companies in Latin America" (Telephonica Today, 1999). Besides, Telephonica was aimed to strengthen its positions on the European market and negotiate a strategic alliance with a Pan European joint venture Unisource in 1993. To improve its market positions in Latin America, Telephonica decided to join Concert (a partnership between BT and MCI). Nevertheless, it disagreed with policy of Unisource, and Telephonica was asked to leave this alliance. By focusing on rates of return on investment, adjusted for inherent risks, strategic alliances develop an economic overview of those options likely to produce the best returns for them. In 1997, Telephonica signed agreement with Portugal telecom, in 1999 with MCI World Com. This strategy opened US and European markets for Telephonica and maintains leading position in Latin America. In spite opportunities and challenges Telephonica is faced with strong competition in Latin America and around the world. Competitive advantage exists when there is a match between a firm's distinctive competencies and the factors critical for success within its industry. Any superior match between company competencies and customers needs permits the firm to outperform competitors. New entrants to an industry raise the level of competition. The major competitors in Latin America are France Telecom, Telecom Italia, GTE (a US-based company), Bell South, AT&T. The presence of substitute products lowers industry attractiveness and profitability because they limit price levels. But using high technology Telephonica proposes competitive prices to its customers. In relation to minor competitors, Telephonica provides comparable buyer value but perform the activities more efficiently so as to attain a cost advantage, or perform the activities in a unique way which raises the value to the consumer and thus allows them to command a premium price. "Telefonica defended its 96% market share by advertising special bargain rates that had not yet been approved. Telefonica won rate hikes in its local monopoly to compensate for competition in long distance. Meanwhile, the titan slugged it out with newcomer Airtel by slashing rates and creating special cell-phone deals for customers with fixed lines"(Telephonica Today, 1999). In general telecommunication industry is fragmented, battles for market share and creative attempts to overcome local or niche market boundaries often result in a few companies' obtaining increasingly larger market shares. When product standards become established for minimum quality and features, competition shifts to a greater emphasis on cost and service. Slower growth combined with overcapacity and knowledgeable buyers put a premium on a firm's ability to achieve cost leadership or differentiation along the dimensions most desired by the market research and development shifts (McDonald, Christopher, 2003). Structure is the pattern of relationships among positions in the organisation and among members of the organization. As every company, Telephonica has a layered organization which consists of technical, management and community levels. "At an internal level, in 1998, it reorganized itself into eight independent subsidiaries and one corporate center" (Telephonica Today, 1999). This structure makes possible the application of the process of management and creates a framework of order and command through which the activities of the organisation are planned, organised, directed and controlled. In Telephonica the determination of policy and decision making, the execution of work, and the exercise of authority and responsibility are carried out by different people at varying levels of seniority throughout the organisation structure. It is possible to look at telephonica in terms of interrelated levels in the hierarchical structure. "Telefonica's restructuring was aimed at putting the group's activities into units with distinct names to create greater transparency in the group, and improve efficiency" (Telephonica Today, 1999). To focus on changes, Telephonica created self autonomous groups which provide security, social satisfaction for members, support individual needs and promote communication. This method helped Telephonica to meet changes in technologies and markets. "For example, Telefonica Data is experiencing rapid growth (29% growth in revenues in the first half 1999 against those of the first half of 1998) (Telephonica Today, 1999). Advantages of this method include reduction of delivery times and delays and reduction of stock and work in progress; easier progress chasing and control of quality; social benefits from group working. Telephonica reduced the number of employees who focus on group optimization. This policy helped to reach greater productivity and efficiency (Sterman, 2000). The research shows that the Internet world is growing fast and is becoming the integral part for many business spheres. Internet has influenced company's structure and operation. For Telephonica it rationalizes the expensive and cumbersome proposition of large-scale customer service. The system serves to reduce at least the appearance of risk associated with time-space distanciation and the opacity of the expert system. In only a short time, online finance has become immensely popular around the world. There are, of course, risks for customers associated with online trading. "The Internet is creating an upheaval and allowing for new modes of entry into the telecom business" (Telephonica Today, 1999). Operating results such as sales and profits are measures that depend on the level of psychological value created for customers: The greater the perceived consumer value, the better the strategy. "In terms of operating revenues, 88.7% were, in 1998, generated by three subsidiaries: Telefonica de Espana (48.6%), Telef6nica Internacional (26,3%) and Telefonica M6viJes (13.8%)" (Telephonica Today, 1999). This return on investment, in its broadest sense, includes the actual business profit generated by the customer relationship, and the wider customer insight gained from it. Annual revenue growth rate is about 11% per year. Telephonica marketing strategies are the broad approaches intend to adopt in the longer term to achieve its marketing objectives in accordance with its marketing policies. New strategy should take into account increased competition. The blend of controllable marketing variables required producing the response wanted in the target market. The mix includes new products, prices, promotion, packaging, advertising, field sales and distribution. Internet services and Internet providers are another potential area for Telephonica. This strategy will help to improve market position in Latin America and gain market share. This will help to gain results in foreseeable future. Today, Internet is one of the most promising area in Latin America, and it is very attractive for Telephonica to be number one in this sphere. The allocation of resources will help Telephonica to avoid additional investments and achieve its the objectives faster than other companies. The achievement of these goals is dependent on investing in an appropriate set of critical resources to create the potential for doing business and ensure that performance targets can be sustained in the long term. Telephonica can capture a larger share of an existing market for current products through market saturation and market penetration. Based on the present day situation it is possible to predict in the next ten years Telephonica will retain its dominant position as the top telecommunication company worldwide. References 1. Brake, ., Walker, D. M., and Walker, T. Doing Business Internationally. Burr Ridge, IL: Irwin Professional, 1995. 2. Johnson, G., Scholes, K. 1998. Exploring Corporate Strategy. Hemel Hempstead: Prentice Hall. 3. McDonald M., Christopher M. Marketing: A complete Guide. Palgrave Macmillan, 2003. 4. Sterman, J. D., 2000. Business Dynamics: Systems Thinking and Modeling for a Complex World, Irwin McGraw-Hill, New York. 5. "Telephonica Today". 1999. INSEAD. Read More