Changes Following Coscos Transformations Into A Multinational Company Business Essay

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The main focus of this assignment will be the strategic choices made by COSCO Group that enabled the organization to transform into a world-class multinational conglomerate. I will begin with the brief description of the company's history and the changes it had gone through, and follow with the examination of these changes in terms of strategic decisions that had been made or avoided upon them.

COSCO was the first in the history international shipping carrier in China, the government owned company founded in 1961. Throughout the years it has established its position in the global shipping industry by expanding its services into different countries and establishing several partnerships and joint ventures. In 1998 Asian financial crisis forced the COSCO's CEO Wei Jiafu to rethink the company's strategy, because the shipping industry, like many other industries in south Asia, was experiencing hard times.

Considering the previous strategy of COSCO, from before all the major transformations, the company was simply offering international liner service - strictly transactional operations. The organization therefore followed the intended strategy, carefully planned strategy to fill the gap in the shipping industry in China according to agreement with government. In 1980's the western developed countries became aware of the potential benefits of transferring the manufacturing eastward. This and other external and environmental changes as well as internal changes within that particular market encouraged the company to continuously extend the range of services that it was offering at the time. COSCO had realized these opportunities and established first COSCO America, followed by COSCO North America and purchasing the shares held by its business partner in UK [1] . These strategic moves emerged from changes in the industry and enabled the organization to follow the strategy of providing services and operations in the international arena. It is the instrumentalism perspective on the strategy formulation, where the strategy is reconsidered upon the changes within the industry, COSCO's strategy therefore every couple of years had expanded to new countries, new partnerships and subsidiaries, and new services, whatever the management considered as essential and potentially profitable.

For the purpose of this essay let's examine and evaluate the major transformation of the organization that took place in 1998, when Wei Jiafu decided to introduce the "two transformation" strategy at COSCO.

The first aspect of the strategy transformation was to become a global logistic operator based on the shipping business, rather than what COSCO introduced at first - being a global shipping carrier [2] . In order to obtain that position company decided to offer a broader range of services from 'base level services' (something the customer would normally expect from the carrier) to 'value added services'(special, additional services available through 'One Stop Service' introduced in 1998) [3] . The second part of that transformation was the plan to evolve from cross-border business to a multinational conglomerate. The main activities of the 'two transformation' strategy were therefore moving business to logistics, terminal operations, ship repair and building and entering international capital markets.

To analyze the strategy change that took place in COSCO's I would like to focus on the corporate level strategy, its definitions, frameworks and perspectives that can be linked to this particular case.

When the organization is facing tough times, like COSCO around year 1998, the management needs to decide how to sustain the position in the market, whether to extend the business in different directions (by offering new products or services or by serving new segments of the market) or to go even beyond thus to become Multi-business Corporation. COSCO had entered new lines of business internally (by starting up new activities) as well by acquisition (buying another firm e.g. COSCO Logistics had eight regional subsidiaries across the nation). This way of expanding the organization's activities is called diversification, and can be either vertical or horizontal. The horizontal integration means entering other businesses but businesses within the same industry. COSCO vertically integrated its businesses by offering new destinations as the shipping carrier, therefore serving more customers in different places in the world. The organization also chose to follow the horizontal diversification inside and outside of the industry. Expanding horizontally, firm entered new businesses like ship repairs and building and outside of the maritime industry into logistics, and therefore created value-added activities to its core business - global shipping carrier.

I would like to point out that the multi-business synergy is only justified when it creates value as a result of coordination of different business units. Synergy means that it is " the effect that the combined return of the 'whole' is greater than the sum of returns from the individual parts" [4] According to Porter (1987) [5] there are three tests that can define whether the synergy can lead to the above mentioned advantage: attractiveness test, cost-of-entry test and the better-off test. Respectively the tests should determine whether the new businesses are potentially attractive and profitable, the cost of entry will not overcome the potential profits and benefits, and finally that linking these new lines of business together with the core competencies will result with the increase in the competitive advantage and that they give higher benefits together rather than if they would be performed independently.

Synergy can be achieved by one or more relatedness factors: by leveraging resources, aligning positions or/and integrating activities [6] . Synergy by leveraging resources means that the resources are being allocated between the organizational units therefore optimally utilized by all units. On the other hand synergy by aligning positions means that organization extends the range of products and services to improve its competitive advantage and to increase the bargaining power. Synergy by integrating activities provides the integration of the value-creation activities thus adding logistics, marketing or production activities that can increase the value of the products and services. COSCO used all of these approaches to synergy and improved its position in the international market by broadening the range of the services from shipping carrier activities to other value-added services (moving to logistics), industry related activities (ship repairs, supply of marine equipment and spare parts) and even to financial related activities (marine insurance brokerage services).

At the corporate level strategy we can distinguish between two opposite approaches: portfolio organization perspective (responsiveness over synergy) and integrated organization perspective (strong central core of shared resources, products and activities).

COSCO is the second largest shipping company in the world with several subsidiaries, partners, joint ventures, thousands of employees, offering range of mixed shipping and other services. Working in that complex construction of many business units working together COSCO believes that cooperation with partners, employees and other external and internal parties is essential. "We are open to cooperate. In liner business, we formed 'CKYH' to share capacity with K Line, Yangiming and Hanjin. In terminal business, we are strengthening the cooperation with P&O and Maersk. In finance and shipbuilding, we are using UK lease and German KG scheme (…) A lot of well known companies are out strategic partners, such as Wal-Mart, Exxon-Mobil, etc…" [7] Formation and working within the network provides a complex problem of whether to cooperate or compete more with the other parties. At this level of strategy managers decide how far the organization can cooperate while still sustaining competitive position in the market. COSCO cooperates with others, because the management realized that the company possessed significant power in the market (especially with its core competencies within the shipping industry) and benefits from the work experiences collected over the years and the amount and quality of resources it holds.

Since the COSCO Group was founded in 1961 the company took rather resource-driven approach when formulating the strategy of the organization. Management tried to utilize the resources held by the government-owned company in the best optimal way. With the changes in the shipping industry (competition increase, new technology, customer needs requirements changes) and external environmental changes (government regulations, Asian crisis) COSCO decided to reconsider its strategy at different levels and transfer the company into multinational global logistics operator which is in my opinion market-driven approach, because it is realized upon the changes in the external and market environment. COSCO became much more consumer-focused company trying to extend its services to different, somehow related lines of businesses, therefore satisfying needs of the customers (existing customers by taking care of the logistic issues, potential customers by offering brand new, also independently available services). Taking the approach of expanding and exploring new markets was arguably great choice of the president and CEO of COSCO. Nowadays the conditions in most of the industries change quicker than ever and these changes are often unpredictable, or at least difficult to predict, and therefore serving market broadly rather than narrowly is an optimal choice, if exploring new markets can be potentially profitable and attractive in relation to the core business.