Diversification is expanding a company's current operations by adding new markets, products, services or stages of production to its current portfolio. It is all about entering a single or a series of new business lines that differ from its current operations (Cengage, 2006). Murphy Auto Company (MAC) is one of the largest luxury automobile company which wishes to diversify and enjoy even greater profits compared to its competitors. The justification behind the need to diversify first and foremost is the intense competition that the brand faces from cheaper car companies, since due to recession, people prefer buying cheaper alternatives compared to buying such brands like Mercedes and MAC.
Another justification for diversification is the inability of the firm to fully satisfy the needs of the target market owing to the cultural differences of societies they operate in. By diversifying into a product that is the best and general fit for all consumers around the globe, the company could remove this weakness and thus strengthen its market position. As the company's manufacturing facility has been established in only a few areas, it is unable to reap the rewards from global efficiency and thus if diversifies and set up it facility globally, will be able to take advantage of these operational benefits.
Moreover, the firm's decision of expanding its product line to producing green vehicles would be a master stroke that will help it grow even further, since high fuel prices and global warming has made the production of fuel cars somewhat counterproductive. Diversifying in this field would help the firm earn greater profits at lower costs. Furthermore if the brand diversifies in introducing Hybrid-electric fusion cars, it will be entering in this market as a competitor to Mercedes and thus would have the chance of taking advantage of selling efficient plug in cars to customers alongside Mercedes and intensify competition for them. With a diverse product portfolio the company would be able to relieve the marketing competition pressure as customers would have many options to buy from which have not yet been introduced by any other automobile company.
The diversification strategy that would go best for the company is Concentric diversification. Concentric diversification is where a company expands its operations by adding related products or markets and thus creating a strong product or brand portfolio bringing benefits of earning higher profits and growth (Cengage, 2006). MAC should diversify into new markets by launching its products into new foreign economies. Although the brand is available in four continents of Europe, Middle East, North America and Asia, there are certain countries within these continents which could be potential markets for the company to expand in. Moreover, the company could expand into new markets and industries, by introducing products that do not belong to automobile industry.
The products that it could introduce in the existing markets is the production of fuel efficient green cars which are environmentally friendly and will have solar panels installed to provide energy to the car. Another new product,/car that MAC could introduce is the electric/Hybrid cars which will require electricity current to recharge the battery rather than internal combustible engines. As the brand is all about luxury cars, it could diversify by introducing sports cars as well. The brand is well-known for its luxury cars and has a huge loyal customer base. Being the only competitor against Mercedes, the brand will do well in the market.
The industries in which the brand could diversify are the environmental technologies. By introducing fuel efficient cars, it will be giving birth to a new industry of environmentally friendly technologies. It could diversify through backward vertical integration by acquiring or merging with suppliers of vehicle parts, thus stepping into the primary industry of vehicle supplies. Moreover, it could diversify through horizontal integration with Mercedes and produce Hybrid cars. The firm could master in automotive research and development, thus entering into the research and development industry.
This form of diversification would help the company gain synergies in various ways. Synergy is all about creating a greater worth of a brand after its merger or acquisition with another company compared to the worth of the two companies separately. By expanding its operations in other markets, the company will earn greater profits at low costs owing to the economies of scales it enjoys being a large scale producer. With the introduction of environmentally friendly cars, the brand is enjoying the status of first company producing these cars, thus earning it a huge market share increment. By collaborating with other firms, the company will be sharing resources like common Research & Development, distribution facilities etc. Thus the firm must diversify (Georgia State University Faculty, 2012).
Foreign markets and Entrance strategies
There are several foreign markets in which the company could expand its operations. One of the most prominent automotive industries is that of Japan. The country was the largest automobile manufacturer in 2008, but lost this rank recently to China which is the leader in the automobile industry currently worldwide. The industry is one of the most significant industrial sectors in the Japanese economy. In comparison, however, China has an automotive industry almost as large as Japan, U.S. And Europe's combined together. Therefore, launching the luxury cars of MAC in these foreign countries would be a great opportunity. However, the industry is already filled with intense competition as big names like Volkswagen, Hyundai, Nissan and Toyota, Honda, Suzuki and Shanghai GM are already established in these foreign markets (Russo, 2011).
Since the two markets of Japan and China have intense competition existing, the firm could make use of market penetration strategy, where it charges the price on luxury markets lower than its competitors. This is achievable for the firm because the company operating at the country has the advantage of lower production costs due to low labor costs and rich infrastructure. Thus it could enter the market using market penetration strategy.
Challenges in Foreign markets
The one challenge that the company will face in these foreign markets is high level of competition. This means that the company will have to keep on fighting to maintain its market share in the Chinese and Japanese market. The company could address this challenge by diversifying and introducing the new products discussed above in these markets alongside its usual operations. Another challenge is the cultural fit. Due to differing culture, the firm might not be able to satisfy the customers' wants. To deal with this challenge, MAC could hire the management and labor of these economies, thus creating a product fit for their culture and an organizational culture compliant with the country's culture.
The firm may also face supply chain problems. It might not be able to get efficient enough suppliers and thus face the issue of mediocre production quality. For this purpose, although the cost will increase but firm could use its local country's suppliers. Also china is known to impose specific product standards on technological goods, thus compelling them to customize technology as per Chinese requirements. The cost increase however could be recovered from cheaper labor, supplies and infrastructure. Lastly China also imposes policies that aim to take technologies from foreign companies by making them conduct joint ventures with local companies and copyrighting technology is difficult. This could be avoided by copyrighting technology from home country and patenting the rights so they could not be copied (Su, 2011).
Situation where Diversification in Foreign market makes no sense
Diversification would be useless in a situation where the foreign market has minimal demand for luxury automobiles. This would be the case in poor economies like some areas of Africa where the population is poor and deprived of even the basic necessities and thus will not demand for luxury…