Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include:
· Mergers and acquisitions
· Strategic alliances
· Joint ventures
· Internal development
Whatever the choice, it should create value for all stakeholders – employees, suppliers, distributors, and the organization’s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own.
When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities.
Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions.
eBay had countered the intense competition in the online auction industry by engaging in aggressive acquisitions of online businesses worldwide, and by forming joint venture partnerships with providers and marketers in both related and unrelated businesses. In addition, eBay pursued strategic alliances, both with its joint venture partners like Tom Online, and competitors such as Yahoo, partly to minimize the intense competition from rivals like Google.
eBay also expanded into new markets by focusing on business-to-consumer in addition to consumer-to-consumer transactions, and by generating revenue through fees from PayPal and Skype in addition to fees from merchandise listings.
With increased competition from Google and other major online companies, eBay had to continue to diversify and provide depth in its product offerings to remain competitive. In most cases, eBay expanded into new markets through acquisitions and slowly incorporated the newly acquired site into its global platform. This approach had been ineffective in the Asia Pacific region, and therefore prevented eBay from successfully competing in key markets like China and Japan. In the case, eBay ex-CEO Meg Whitman indicated that eBay competed through its specialties in e-commerce, payment, and voice communication, and was primarily focused on these areas, not competing with the likes of Google in search, or Yahoo in content. As of 2008, eBay therefore had no plans for further big acquisitions, intending instead to grow by identifying synergies in its existing businesses.
Growth strategies should create value for all stakeholders: employees, strategic partners, and owners. The choice of growth strategy should create synergy so all parties gain something they would not have on their own. Corporations can achieve synergy by sharing tangible and value-creating activities across their business units; or through the use of common facilities, distribution channels, and sales forces, or through venture partnerships. However, cultural issues can doom intended benefits.
International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management.
In Asia Pacific, eBay’s management risks might have included:
· Language & culture
· Managing employees
· Managing technical processes
· Handling customer preferences
There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.4.
eBay followed a global strategy. Advantages of a global strategy included a unified approach that allowed users to conduct transactions in an online global community. Users could interact and purchase or sell items with anyone in the world over a single platform. Having a single platform also minimized company costs, such as maintenance and development. Disadvantages were evident by eBay’s inability to truly meet specific local business needs. Having a single platform provided standardization across all markets, which may or may not have been effective in certain markets with customers that had specific needs and expectations.
eBay’s decision to use a single platform to provide online trading in all its markets had been successful in most of its global communities. However, this decision appeared to have hindered eBay’s ability to compete in the Asia Pacific region. eBay was perhaps uncomfortable turning control over to local partners, and fully leveraging local expertise.
A transnational strategy, where the company could provide a standard product and meet specific local needs, would be the optimal strategy for eBay to adopt for competing in the Asia Pacific region. The company could achieve this strategy through its local acquisitions and realize further benefits by tailoring customized local sites for each market. A transnational strategy would allow eBay to sustain costs while meeting specific market needs. The company had a global strategy that prevented it from successfully competing in certain markets. A transnational approach would instill consistency across eBay’s global platform and at the same time provide flexibility when entering new markets. A transnational approach would also allow eBay to retain central control in the U.S. and enable local management in each of its markets. It would therefore allow eBay to share knowledge among its various worldwide holdings.