The New Conquistador International Business Management Case Study Review the case “The New Conquistador” (pages 325-327) and respond to the end of the case

The New Conquistador International Business Management Case Study Review the case “The New Conquistador” (pages 325-327) and respond to the end of the case questions. Submit you responses in a MS word document, 12 pt. font, single spacing. Please run a spell check before submission. Use question numbers, titles to separate your responses.The responses must draw on the case material and IB concepts (from the chapters) where relevantcase study is attached below.number of pages does not matter as long as all Q are fully answerd. il Sprint
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CHAPTER 11 • INTERNATIONAL STRATEGIC MANAGEMENT
325
distinctive competence, and synergy) likely to
vary across different types of corporate strategy
(single-business, related diversification, and
unrelated diversification)?
11-18. The new Disney theme park in Shanghai will open
later this decade. Develop a list of at least five ways
other units of Disney can help promote and publicize
the park’s grand opening.
11-19. Is a firm with a corporate strategy of related
diversification more or less likely than a firm with a
corporate strategy of unrelated diversification to use
the same business strategy for all its SBUs? Why or
why not?
11-20. Identify products you use regularly that are made by
international firms that use the three different business
strategies.
11-21. Related and unrelated diversification represent
extremes of a continuum. Discuss why a firm might
want to take a mid-range approach to diversification,
as opposed to being purely one or the other.
Building Global Skills
Form a group with three or four of your classmates. Your
group represents the planning department of a large, domesti-
cally oriented manufacturer that has been pursuing a corporate
strategy of unrelated diversification. Currently, the firm makes
four basic products, as follows:
• All-terrain recreational vehicles. This product line
consists of small two- and three-wheeled recreational
vehicles, the most popular of which is a gasoline-powered
mountain bike.
• Color televisions. The firm concentrates on high-quality,
wide-screen, LED televisions.
• Luggage. This line is aimed at the low end of the
market and comprises pieces made from inexpensive
aluminum frames covered with ballistics material
(high-strength, tear-resistant fabric). Backpacks are
especially popular.
• Writing instruments. The firm makes a full line of
mechanical pens and pencils pitched to the middle-market
segment, between low-end products such as Bic and high-
end ones such as Montblanc.
the corporation should begin pursuing a strategy of related
diversification. This may mean selling off some businesses and
perhaps buying or starting new ones. The CEO has instructed
you to develop alternatives, evaluate those alternatives, and
then make recommendations as to how the company should
proceed. With this in mind, follow these steps:
11-22. Characterize the current business strategies the
company appears to be following with each of its four
existing businesses.
11-23. Evaluate the extent to which there are any bases of
relatedness among any of the four existing businesses.
11-24. Using any criterion your group prefers, select any
single existing business and assume that you will
recommend that it be kept and the other three sold.
11-25. Identify existing competitors for the business
you chose to keep, including both domestic and
international firms.
11-26. Identify three other countries where there might be
potential for business expansion. Explain why.
11-27. Think of at least two other businesses that are related
to the business you will keep and that might be targets
for acquisition.
Your firm’s CEO is contemplating international expansion.
However, the CEO also thinks that to raise its profitability
CLOSING CASE
The New Conquistador
The South American continent emerged as one of the hottest
markets in the past two decades as a result of economic pol-
icy changes and the region’s growth prospects. Privatization,
deregulation, and regional economic integration unshackled
the imaginations and energies of the continent’s entrepre-
neurs and attracted the attention of foreign investors, while
surging commodities exports boosted the economies of such
countries as Brazil (iron ore), Chile (copper), Bolivia (tin),
and Venezuela (oil).
One industry directly impacted by these policy
changes is telecommunications. Once the sleepy preserve
of inefficient and overstaffed state-owned enterprises, the
industry has become a magnet for new firms and new
technologies. The most aggressive entrant is Telefónica SA.
Telefónica’s managers knew all too well the problems
of state-owned telecommunications monopolists because
Telefónica was just such a firm in its former guise as
government-run Telefónica de España. Telefónica de
España first obtained its monopoly concession on telephone
services in Spain in 1924. Originally privately owned, the
company was nationalized in 1945, with the government
owning outright 41 percent of the company’s shares.
For four decades the company enjoyed the easy life
of a monopolist. The seeds of change were planted in
1986, however, when Spain joined the European Union
(EU). Telefónica de España was ill-equipped to handle
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PART 3 • MANAGING INTERNATIONAL BUSINESSS
the explosive growth in telephone service or the chorus of
complaints about poor service that followed. Moreover, as
part of its single market initiative, the EU announced that
state-sponsored telephone monopolies would be abolished
by 1998. Any European telecommunications firm would
then be able to provide service anywhere within the EU.
Faced with the threat of new entry from European
rivals that promised increased competition, lower prices,
and smaller profit margins, Telefónica’s managers realized
they had to transform the company. A leaner and more
competitive company emerged as managers trimmed fat,
shed unprofitable operations, and invested in new tech-
nologies and facilities. With the EU-directed ending of state
telephone monopolies, Telefónica’s managers confronted
a new strategic problem: Should they change the scope of
their operations? Should they erect a fortress in Spain and
keep out EU rivals, expand into other EU markets, or do
something else?
In analyzing their strategic choices, Telefónica’s
managers recognized they had a strong position in Spain,
and that domestic demand for telephone services would
continue to grow in the relatively underserved Spanish
market. Thus, they continued to invest in new equipment
and technologies there. This approach has worked:
Telefónica has 12 million local fixed-line subscribers and
24 million cellular customers in its home market. Despite
the EU’s competition directive, at the end of 2012 Telefónica
retained 69 percent of Spain’s fixed-line business and about
41 percent of its mobile phone market.
In assessing their international prospects, Telefónica’s
managers decided that the company lacked a competitive
advantage against European rivals like British Telecom
and Deutsche Telekom, who had equal if not better
access to the latest technology and managerial talent. That
ruled out attacking other EU markets, at least initially.
However, they noted that many South American countries
were about to privatize their own state-owned telephone
monopolies, and that investing in these companies
made strategic sense. Telefónica did have a competitive
advantage vis-à-vis local entrepreneurs in accessing
technology, capital, and managerial talent. Moreover,
because of linguistic and cultural ties between Spain and
South America, Telefónica believed it had a competitive
advantage over any of its European rivals who might wish
to enter the South American market.
Telefónica de España launched its invasion of the
South American market in 1990, when it acquired a
minority interest in Compania de Telefonos de Chile and
a contract to manage the southern half of Argentina’s
telephone system. In 1995, it purchased a majority interest
in Telefónica del Peru, that country’s state-owned monopoly
provider of telephone services. A year later it acquired
35 percent of a regional Brazilian telephone company at
a state-sponsored auction. Telefónica also acquired inter-
ests in Argentina’s largest cable company and a digital
satellite TV provider. The Spanish government then sold
off the last of its ownership position, making Telefónica
de España wholly privately owned. In 1998, the company
changed its name—to Telefónica SA—and paid $4.9 billion
at auction to acquire control of the fixed-line and cellular
operations of Telebras, Brazil’s former state-owned tele-
phone giant. In 2000, Motorola sold its Mexican cellular
service operations to Telefónica for $2.6 billion, and in
2006 Telefónica purchased 50 percent (plus one share) of
state-owned Colombia Telecommunicaciones, making it the
largest landline operator in that country as well. In 2010
it acquired full ownership of Brazilcel, a Brazilian mobile
phone joint venture, by buying out its Portuguese partner for
€7.5 billion.
All told, Telefónica has invested more than $64 billion
in South America. It is the largest telecommunications com-
pany on that continent and now has more landline customers
there—24 million—than in Spain. Its wireless subsidiary,
using the brand name Movistar, has 177 million customers
in Latin America. It has followed the same pattern in each
country it has entered: Trim excess payrolls ruthlessly and
expand capacity aggressively. For example, it laid off half
of the 22,000 workers in its Argentine subsidiary while
doubling its network there to 4 million lines.
Telefónica’s actions in South America have not
lacked criticism, however. Telefónica’s tactics have been
denounced by local skeptics as “conquistador capitalism.”
After winning the Telebras auction, it moved quickly to
expand service in Brazil’s commercial center, São Paulo,
while laying off thousands of workers. This strategy
of doing more with less backfired, as chaotic disrup-
tions in service led to numerous complaints. Minority
shareholders also complained that Telefónica charges its
South American subsidiaries exorbitant management fees
that reduce the value of their interests. For example, its
Argentine subsidiary pays 4.6 percent of its revenues to
Telefónica for management services provided by the parent
corporation.
Minority shareholders have also protested Telefónica’s
practice of transferring product lines with high growth
potential from the subsidiaries to the parent. For example,
Telefónica created Terra Networks SA to consolidate all
of its South American Internet operations. It then sold to
the public 30 percent of Terra Networks, retained the other
70 percent, and listed it on stock exchanges in Madrid and
the United States. As part of this deal, Telefónica transferred
the Internet operations of its Chilean subsidiary to Terra
Networks for $40 million; minority owners believed that
the price should have been double that figure. Minority
shareholders in other subsidiaries have made similar
complaints. Similarly, Telefónic has been transferring
telemarketing operations of its South American subsidiaries
to an umbrella company in Madrid, arguing that they would
benefit from the economies of scale that a consolidated
operation would offer.
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operations to reduce its debt burden. Telefónica also sold off
23 percent of its stake in its German subsidiary through a
public offering, raising €1.4 billion through the sale. In 2013,
the company raised $1.25 billion by selling treasury stock;
the sales proceeds were use to pay off some of its remaining
€51 billion in debt.
Case Questions
Telefónica also faces some operational challenges.
Some are of its own doing: It was forced to pay $8 million
in refunds in 1999 to São Paulo customers because of poor
service. Others are not: It was forced to take a $300 million
write-off for currency losses after Brazil devalued its
currency in 1998 and a €1.8 billion markdown of its
Venezuelan assets in 2010 after the bolivar was devalued.
Moreover, changes in government policies have increased
competitive pressures. For example, Argentina and Peru
began to deregulate their telecommunications industries
in 2000, ending their reliance on monopoly provision of
telephone service. And Telefónica’s success has attracted
new competitors. In 1999, for instance, BellSouth signed up
1 million cellular phone subscribers in São Paulo, captur-
ing nearly 50 percent of that market in only 10 months of
operations. But BellSouth executives were unhappy with
the venture’s profitability, and in 2004 Telefónica purchased
BellSouth’s Latin American subsidiary for $5.9 billion,
thereby eliminating a well-funded, technologically sophis-
ticated competitor.
Having built strong bases in Spain and Latin America,
in 2005 Telefónica turned its attentions back to Europe. It
purchased Çesky Telecom, the leading provider of landline
and mobile telecommunications services in the Czech
Republic. In 2006, it acquired 02, the largest provider of
mobile phone service in the United Kingdom. O2 is a major
player in the German and Irish markets as well. In 2007, it
purchased a minority position in Telecom Italia. In 2009,
it paid €913 million for HanseNet, a German provider of
telecommunications services. Telefónica now serves some
50 million European customers outside its Spanish home
market. It also purchased 5 percent of China Netcom in
2005, the second-largest provider of landline service in
China. In 2008, it agreed to buy an additional 2.2 percent
of that company for €309 million. After China Unicom
acquired China Netcom, Telefónica entered into a strategic
alliance with China Unicom and increased its ownership of
that company to 9.7 percent.
Overall, this strategy seems to be working. In 2012,
Telefónica earned €5.9 billion on revenues of €62.4 billion.
Under the direction of César Alierta, the firm’s CEO since
2000, the company has become Europe’s second-largest
telecommunications company. Almost half its revenues—and
more than half its operating profits—are generated by its
Latin American operations. Its grip on the Spanish market
remains firm, and Telefónica has made significant inroads
in the British, Irish, Czech, Slovakian, and German mobile
phone markets. Telefónica now operates in 25 countries,
serving 40 million landline customers and 247 million
mobile phone customers. Telefónica does, however, face one
significant financial challenge: it has to its cessive
debt burden, the result of its rapid expansion through
acquisitions. In 2012, the company liquidated a portion
of its China Unicom position and some of its Colombian
11-28. How important was the EU’s directive eliminating
national telecommunications monopolies by 1998
in shaping Telefónica’s strategy? What would
the company look like today if Spain were not a
member of the European Union?
11-29. How important were cultural ties in determining
Telefónica’s success in Latin America?
11-30. Why did Telefónic initially choose to enter the
Czech market, rather than the larger French or
German markets?
11-31. Considering Telefónica’s large and persistent
share of the Spanish telecommunications market,
how successful has the EU’s directive been in
promoting competition within the European
telecommunication industry?
11-32. Minority investors in Telefónica’s South American
subsidiaries are unhappy with the parent
corporation. Suppose you are a senior manager at
the parent corporation. How would you handle the
problem of the minority investors? What would you
recommend to the CEO should be done about the
minority investors?
Sources: www.telefonica.com, accessed on April 24, 2013; “Telefónica’s
Receding Debt Hangups,” Wall Street Journal, April 2013; “Telefónica
Sells Shares to Cut Debt,” Wall Street Journal, March 26, 2013; “Foreign
Gain, domestic pain,” The Economist, March 9, 2013; “Telefónica Eating
into Giant Debt,” Wall Street Journal, February 28, 2013; Telefónica Annual
Report for the year ending December 31, 2012; “Telefónica to list stake in
unit,” Wall Street Journal, May 26, 2011; “Telefónica battles rising costs,”
Wall Street Journal, May 13, 2011; “Brazil calling,” The Economist,
July 28, 2010; “Get off the line, ” The Economist, May 22, 2010; “Telecom
Italia’s shares plunge as debt-reduction plan disappoints.” Wall Street
Journal, March 7, 2008 (online); “Telefónica adds to stake in China
Netcom Group,” Wall Street Journal, January 21, 2008 (online); “Telefónica
insists major deals are out,” Wall Street Journal, July 16, 2007, p. A8;
Hoover’s Handbook of World Business 2006, p. 338; “Telefónica revamps
its structure,” Financial Times, July 27, 2006, p. 18; “Telefónica’s growing
pains,” Wall Street Journal, May 23, 2006, p. C4; “Enlarged EU expected
to open opportunities for Telefónica,” Financial Times, June 14, 2005,
p. 4; “Telefónica aims to become world’s fifth largest telecommunications
group,” Financial Times, December 21, 2002, p. 4; “Telefónica digs
in to Mexican mobiles market,” Financial Times, November 27, 2002,
p. 19; “Wrong numbers dog Telecom Argentina,” Financial Times, March
19, 2002, p. 17; “Telefónica makes its move into Mexico,” Wall Street
Journal, October 5, 2000, p. A19; “Telefónica posts 43% jump in earnings,”
Wall Street Journal, November 19, 1999, p. A18; “Spain’s Telefónica jolts
Latin America with tough tactics,” Wall Street Journal, November 18,
1999, p. A1.
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