Man as Natural Being

Spains Telefonica: A Case Analysis

Lyceum of the Philippines University - Batangas Graduate School

Spains Telefnica

Case Analysis

International Business ManagementMBA 511

Dr. Hermogenes B. Panganiban, DBE

April 25, 2015

Case and Company Background:Telefnica, S. A. (Telefnica) is a telecommunications provider operating in Europe, Asia, America and South America. It started as a public telecommunications company when it was operating as Spains state-owned national telecommunications monopoly from 1924 until about 1997. Aside from the brand, Telefnica, it also trades asO2, Vivo and Movistar. These brands represent Telefonicas mobile, landline, internet and television telecommunications services to more than 300 million customers from several countries.In the 1990s, the Spanish government privatized and deregulated its telecommunications market. This resulted to a sharp decline in Telefonicas workforce, rapid adoption of new technology and focus on driving up its profit and shareholder value.After its deregulation, Telefonica, looked for growth. Considering that majority of the Latin America region shared a common knowledge, deep cultural and historical ties with Spain, Telefonica believed that it could expand its business in the said region. Further, at the same time, the markets in Latin America were growing rapidly, there was in increasing adoption rate and usage of traditional fixed line and mobile phones and internet connections.Thus, Telefonica invested some US$11Billion in Latin America by acquiring companies, most of which were also State-owned companies. Its largest investment was in Brazil which had the biggest market share in Latin America. In Argentina, it acquired 51% of the southern regions monopoly provider. In Chile, Telefonica became said countrys leading shareholder.By the early 2000s, Telefnica was either the 1st or 2nd player in every Latin America country. It had a contract-wide market share of about 40% and as generating 18% of its revenues from the region. However, there were also several multi-national enterprises which extended its business in Latin America, such as American Movil which is Telefnicas strong challenger. In 2008, American Movil had 182 million wireless subscribers as compared to Telefnicas 123 million. There was thus an intense price competition between these two companies.In the mid 2000s, Telefnica turned its attention to its neighboring European countries. Before, there was a tacit agreement among national telecommunication companies that they will not invade each others market. However, when France Telecommunication purchase Spains Amena, the second largest telecommunications company after Telefnica, this tacit agreement started to break down. Telefnica immediately acquired Britains major mobile phone operator, O2 which had a significant operations in Germany and United Kingdom. This acquisition made Telefnica the worlds 2nd largest mobile phone operator, next to China Mobile.As of March 2014, Telefonica was among the top ten (7th, in particular) in the telecommunications sector worldwide.

Introduction:The case discussed who how Telefonica was able to transform itself from a state-owned telecommunication company in Spain in the 1920s into an efficient and effective competitor today. Through Foreign Direct Investment, Telefonica became the worlds 2nd largest mobile phone operator today. The telecommunications market was privatized and deregulated by the Spanish government in the 1990s. Telefonica started acquiring corporations, majority of which were also State-owned companies, in Latin America. By the mid 2000s, Telefonica moved to acquire companies from its neighboring European countries.This Case Study will analyze the company from the perspective of the corporation itself. This paper will lay down strategies on how Telefonica can continue to increase its customer-base.

Identification of Stakeholders Problems, Goals and ConcernsIn general, stakeholders refer to the organizations and individuals that are significantly concerned with the companys operations, development and investment processes. Evaluation of relative importance of the various stakeholders and their relative power is necessary background for effective and transparent telecom policy and regulations. They may be internal, those that can be considered part of the organization, or external. For a telecommunications company such as Telefonica, the following are its main stakeholders:Internal Stakeholders:Shareholders/OwnersShareholders buy shares in a company and, as such, are part-owners of the business. Shareholders do not get involved in the day-to-day decisions of a company. However, shareholders have the right to vote at a company's annual general meeting. One way that shareholders manifest their control and interest over the company is when they vote to elect the directors to the company and approve the annual accounts and reports.Shareholders are very important stakeholders because they put money into the business. They contribute capital to the business and expect to share in the company's profits. To support its plans of expanding operations to its neighboring European countries, Telefonica needs the support of shareholders for the necessary funding. In fact when it expanded to Latin America, Telefonica spent about US$11B and US$31.4B when it acquired Britains major mobile operator in mid 2000s. With these huge investments, a Telefonica shareholder expects a reasonable, if not substantial, return of its investment. EmployeesEmployees are one of a company's most important assets. A committed workforce helps a business to achieve its objectives. Employees bring skills such as creativity and problem solving. The employees must be motivated. All employers want a motivated workforce. Dissatisfied or unhappy employees tend not to produce good work and will look for other jobs.Telefonica will not enjoy the same advantages it had when it acquired Latin-American companies. The language in non Latin American countries will be different and there will not be deep cultural and historical ties with Spain. Telefonica will thus have multi-racial and multi-cultural employees.

External Stakeholders:Government and industry regulatorsTelefonica must comply with rules and regulations set by the governments and industry regulators in the countries in which it operates. These stakeholders directly affect Telefonica in several ways. They issue Telefonica with licences to operate in the telecommunications sector, without which, it will not be able to do business.Governments and regulators also set various technical and legal requirements. CustomersTelefonica must continue to attract and keep its customers. This requires continuous investment in and innovations on new services. Telefonica cannot, however, impose high prices due to the intense competition among telecommunication companies. At the same time, due to customers increased awareness to environmental issues, Telefonica must be able to develop more environmentally efficient solutions to its customers. SuppliersIn view of Telefonicas plan to further expand its operations worldwide, it must have a global supply chain. By having this, the suppliers can deliver the materials, components, products and services that will enable Telefonica to achieve a technical and competitive advantage. Cost and quality are important considerations. However, Telefonica must also maintain an environmental focus to its relationships with suppliers. The communityAll companies can have an impact on the communities in which they operate. This is why the wider community is an important stakeholder. These impacts can be positive. For example, businesses provide jobs, which have an impact on local economies.There can also be negative impacts, such as pollution and other environmental disturbance. All businesses must be sensitive to community concerns. Negative publicity can damage a company's reputation.

Identification of ProblemsWith a very intense competition in the telecommunication industry worldwide, how can Telefonica continue to expand its operations in Europe and worldwide?Telefonica can continue to expand globally, not just in Europe, thus allowing it to further increase its profitability and rate of profit growth.There are a number of modes for a company to make its presence felt in other countries Foreign Direct Investment (FDI), licensing agreements, exportation, entering into agreements of licensing, franchising agreement or joint venture, and turnkey projects.FDI occurs when a company invests directly in facilities to produce or market a product in a foreign country. The benchmark accepted by the U. S. Department of Commerce is 10%, i.e., FDI occurs whenever the citizen, organization or affiliated group takes an interest of 10% or more in a foreign business entity. Once a firm undertakes FDI, it becomes a multinational enterprise (MNE), also known as multinational company (MNC).FDI takes two (2) forms. The first is greenfield investment which involves the establishment of a new facility in a foreign country. The second is through merger with and/or an acquisition of (M&A) an existing local firm.Most manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market. In firms that specialize in the design, construction, turnkey projects are usually the norm. In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation-hence, the term turnkey. This is a means of exporting process technology to other countries. Turnkey projects are most common in the chemical, pharmaceutical, petroleum-refining, and metal-refining industries, all of which use complex, expensive production technologies.Another mode to enter a foreign market is through licensing agreements, whereby a licensor grants the rights to intangible property (such as patents, inventions, formulas, processes, designs, copyrights, and trademarks) to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee. Intangible property includes. Franchising is another option, which involves longer-term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. The franchiser will also often assist the franchisee to run the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisee's revenues. Whereas licensing is pursued primarily by manufacturing firms, franchising is employed primarily by service firms.Lastly, there is joint venture which entails establishing a firm that is jointly owned by two or more otherwise independent firms. Establishing a joint venture with a foreign firm has long been a popular mode for entering a new market. The most typical joint venture is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control. Some firms, however, have sought joint ventures in which they have a majority share and thus tighter control.Telefinoca should be able to study these entry of modes, weigh the advantages and disadvantages of the available options, fully knowing that trade-offs are inevitable when selecting an entry mode.

Given Telefonicas substantial investment in Latin America, how can Telefonica surpass America Movils 182 million subscribers in Latin America? In Latin America alone, Telefonica invested about US$11 billion in the late 1990s, acquiring companies throughout the region and, as of 2004, about US$46.32B. However, despite these huge investments, it only had 123 million subscribers, as compared to America Movils 182 million.America Movil is the largest mobile operator in Mexico and operates in many other Latin American countries. With a market cap of US$78 billion, America Movil is the most valuable company in Mexico. Due to lax regulation, Slims monopolistic control over telecom in Mexico and Latin America has been unchallenged. The lack of competition has inevitably led to higher prices for consumers and business with little incentive for modernization and new services. Over the past years, however, the government in Mexico has strived to reform telecom regulations and foster competition. Telefonica can take advantage of the Mexicans governments move to encourage competition and enlarge its market share, if not surpass that of America Movil. This can be done in a variety of ways. Telefonica can expand the market for the product in general. Alternatively, it can increase the usage for the product by: finding new users, finding new uses for the product and increasing the usage by existing customers. Telefonica can also innovate continuously and/or could introduce new product variants and customer services. It could undertake cost reduction and thereby decrease selling prices and improve distribution net work. Most importantly, Telefonica must keep on maintaining and improving its competitive advantage and provide increased value to its customers.

Given the substantial investments of Telefonica, how can it return the investments of its shareholders thereby ensuring their continued support to Telefonicas continued expansion?Without its shareholders, Telefonica will not be able to expanding either in Europe or in other countries as well. Thus, Telefonica should maintain close relations with its major shareholders. It will keep shareholders informed about its financial results and its plans for growth.Given the multi-cultural composition of its employees, how can Telefonica have an identifiable and unified corporate culture? One of the biggest obstacles in merging two organizations, or expanding operations in different parts of the world is organizational culture. Each organization and country has its own unique culture and most often, when brought together, these cultures clash. Usually, employees point to issues such as identity, communication problems, human resources problems, ego clashes, and inter-group conflicts, which all fall under the category of "cultural differences".

Alternative SolutionsWith a very intense competition in the telecommunication industry worldwide, how can Telefonica continue to expand its operations in Europe and worldwide?Solution 1: Telefonica can adopt the greenfield approach of FDI.There are a number of advantages under FDI. First, since Telefonicas competitive advantage is its technological competence, there is less risk of losing control over that competence. Second, Telefonica will retain tight control over operations in different countries. This is necessary for engaging in global strategic coordination (i.e., using profits from one country to support competitive attacks in another). Third, a wholly owned subsidiary may be required if a firm is trying to realize location and experience curve economies (as firms pursuing global and transnational strategies try to do). Finally, establishing a wholly owned subsidiary gives Telefonica a 100 percent share in the profits generated in a foreign market. However, the perceived disadvantages are as follows: it is costly to undertake FDI through greenfield approach. It is also riskier. The greenfield approach would require Telefonica to set up an operations in a different country, as if it is putting a new company.

Solution 2: Telefonica can expand in Europe/worldwide through M&A Acquisitions have three major points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market. In fact, Telefonica has already done this when it wanted to have a quick way of establishing its presence in Latin America. Second, in many cases firms make acquisitions to preempt their competitors. The need for preemption is particularly great in markets that are rapidly globalizing, such as telecommunications, where a combination of deregulation within nations and liberalization of regulations governing cross-border foreign direct investment has made it much easier for enterprises to enter foreign markets through acquisitions. Such markets may see concentrated waves of acquisitions as firms race each other to attain global scale. In the telecommunications industry, for example, regulatory changes triggered what can be called a feeding frenzy, with firms entering each other's markets via acquisitions to establish a global presence. Third, managers may believe acquisitions to be less risky than greenfield ventures. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream. In contrast, the revenue and profit stream that a Greenfield venture might generate is uncertain because it does not yet exist. When a firm makes an acquisition in a foreign market, it not only acquires a set of tangible assets, such as factories, logistics systems, customer service systems, and so on, but it also acquires valuable intangible assets including a local brand name and managers' knowledge of the business environment in that nation. Such knowledge can reduce the risk of mistakes caused by ignorance of the national culture.One obvious drawback in M&A is the difficulty in trying to marry divergent corporate cultures. A number of acquisitions fail because there is a clash between the cultures of the acquiring and acquired firms. After an acquisition, many acquired companies experience high management turnover, possibly because their employees do not like the acquiring company's way of doing things. These cultural differences created tensions, which ultimately exhibited themselves in high management turnover. The loss of management talent and expertise can materially harm the performance of the acquired unit. This may be particularly problematic in an international business, where management of the acquired unit may have valuable local knowledge that can be difficult to replace. Further, M&A oftentimes erode shareholder value. Usually, the acquiring firms often overpay for the assets of the acquired firm. In addition, the management of the acquiring firm is often too optimistic about the value that can be created via an acquisition and is thus willing to pay a significant premium over a target firm's market capitalization. Third, many acquisitions fail because attempts to realize synergies by integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. Solution 3: Telefonica can enter into a Joint Venture arrangement with well-established telecommunication company in Europe and/or other parts of the world. Joint ventures have a number of advantages. First, Telefonica benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems. Second, when the development costs and/or risks of opening a foreign market are high, Telefonica can sharing these costs and or risks with a local partner. Third, in many countries, political considerations make joint ventures the only feasible entry mode. Usualy, joint ventures with local partners face a low risk of being subject to nationalization or other forms of adverse government interference. This appears to be because local equity partners, who may have some influence on host-government policy, have a vested interest in speaking out against nationalization or government interference.Despite these advantages, there are major disadvantages with joint ventures. First, a firm that enters into a joint venture risks giving control of its technology to its partner. A second disadvantage is that a joint venture does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Nor does it give a firm the tight control over a foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals. Many joint ventures establish a degree of autonomy that would make such direct control over strategic decisions all but impossible to establish. A third disadvantage with joint ventures is that the shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be.

Problem 2: Given Telefonicas substantial investment in Latin America, how can Telefonica surpass America Movils 182 million subscribers in Latin America?Solution 1: Telefonica can also innovate continuously and/or could introduce new product variants and customer services.Because of most of the countries move towards deregulation, the competition in telecommunication industry has become very fierce. Interconnected and wholesale markets favor those players with far-reaching networks. The company that can easily take advantage of the applicable technology survives the battle.Carriers which have both a granular fixed network with full-area coverage and a mobile network infrastructure (heavy asset) are at an advantage over companies doing business strictly as mobile network operators (MNO). In the long run, only integrated carriers of this type will survive on the market. Network operators wanting to maintain control over the growth in transmission traffic and ensure seamless connectivity across all infrastructures and widely varying access technologies must integrate their infrastructure and constantly refine the intermeshing of its components.Continuous innovation and introduction of new variants require Telefonica to invest heavily in research and development, which thus require substantial investment in terms of capital expenditures and also on personnel.Solution 2: Telefonica can increase the usage for the product by: finding new users, finding new uses for the product and increasing the usage by existing customers. This requires Telefonica to be involved in aggressive marketing scheme as well as advertisements. Compared with capital investments, the expenditure for marketing and advertisement is not that high.Solution 3: Telefonica can undertake cost reduction and thereby decrease selling prices and improve distribution net work. In case the finances of Telefonica would not be enough to undertake either of the above solutions, it could engage in a price war with its other competitors. It can also reduce costs like have a leaner workforce.

Problem 3: Given the substantial investments of Telefonica, how can it return the investments of its shareholders thereby ensuring their continued support to Telefonicas continued expansion?The primary concern of the shareholder is recouping its investment. Telefonica can give allow its shareholders to share in the profits through:Solution 1: Declaration of dividends. This, of course, requires that Telefonica will have sufficient unrestricted retained earnings and profits. Telefonica can increase its profits by: growing its business through offering new goods and services to increase sales; building the company reputation to win new customers. Telefonica can also increase its profits by becoming more efficient. It can increase its profit margin by reducing costs. This will allow it to pay higher dividends, improving the return shareholders get on their investment.Solution 2: Make the Shareholders be part of each and every decision.Solution 3: Develop a strong and trustworthy corporate reputation

Problem 4: Given the multi-cultural composition of its employees, how can Telefonica have an identifiable and unified corporate culture? Solution 1: One way to combat such difficulties is through cultural leadership. Organizational leaders must also be cultural leaders and help facilitate the change from the two old cultures into the one new culture. This is done through cultural innovation followed by cultural maintenance.Cultural innovation includes internal changes that depend (and are limited) upon the recombination of already existing elements in culture. They can occur independently in different times and places, however not all lead to change in culture. They occur more frequently in technologically complex societies than in less developed ones.On the other hand, cultural maintenance includes integrating the new culture, reconciling the differences between the old cultures and the new one and embodying the new culture by establishing, affirming, and keeping the new cultureSolution 2: Develop and Adopt cross-cultural literacy in all Telefonicas companies Differences in cultures across and within countries affect affect international business. Thus, in order to maintain its success outside Spain, Telefonica must develop and adopt cross-cultural literacy, meaning an understanding of how cultural differences across and within nations can affect the way business is practiced.

Recommended Solutions Telefonica can enter into a Joint Venture arrangement with well-established telecommunication company in Europe and/or other parts of the world. Given the current position of Telefonica, it would be less risky if it will expand its foreign operations by entering in to a Joint Venture arrangement with well-established company. Joint ventures have a number of advantages. The advantages have already been discussed above.With regard to the disadvantages, Telefonica can minimize the adverse effects. First, the joint venture agreements can be constructed to minimize this risk. One option is for Telefonica to hold majority ownership in the venture. This allows Telefonica to have greater control over its technology. Further, it can also impose strict confidentiality arrangements with its partner. Another option is to "wall off' from a partner technology that is central to the core competence of the firm, while sharing other technology. Furthe, being the more dominant in the partnership, Telefonica will have a greater say in major decisions, thus lessening the conflicts.

Conclusion With the ever changing and fiercer telecommunication industry, surviving has proven to be very challenging, often requiring huge capital expenditures. The telecommunications market is highly competitive. In the future, telecommunications and information technology, as well as different media technology applications, will often merge. In order to keep ahead of the field, Telefonica must continue to differentiate itself with its competitors and build on its current strengths and include its high frequency technology expertise. In order to stay afloat, it can continue expanding its business operations. However, it should know when to stop.

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