1.1 Background and Significant of Research
1.1.1 Background of Research
With the progress and development of society, the needs of the whole society has beencontinually improved on product quality, health of life, safety of production and living,environment protection, and unbalance transaction information between both tradeparties. Therefore, the third party inspection and certification industry has beendeveloped increasingly.
Since China has joined in WTO on July 11, 1995, development of foreign trade hasbecome booming. Thus, the third party inspection and certification industry has enteredinto rapid development stage. It was an important effect on eliminating trade barriers,ensuring quality and safety, improving environmental awareness, maintaininginternational economic development and trade facilitation. Nowadays, each country putproduct inspection and certification on a high priority all the time. China administrationof quality supervision issued regulation of 180 act regarding to the management methodfor inspection of import and export commodities in 2016, it clearly defined the lawregulation for inspection and certification bodies. The issue of this regulation issuedwould accelerate the establishment and development of Chinese third party inspectionand certification bodies. Currently Chinese inspection and certification industry coversengineer, environmental protection, agriculture, quality inspection, food, drug,mechanical, electronic, light industry, textile, aircraft industry, national defense andothers national economy. The third party inspection and certification was not only toensure the safety of food and clothing, but also promoted the generation of new products,it even played a vital role on health development for society.
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1.2 Ideology and Methodology of Research
1.2.1 Ideology of Research
The research ideas of this paper were based on the existing diversified strategy theoriesat domestic and overseas, describing the issues Chinese third party inspection andcertification bodies encounter now and their necessity of diversification strategy. Theauthor analyzed a typical case of successful diversification strategy of SGS China, usedSWOT tool to research the issues SGS China encountered at the beginning of enteringinto Chinese market. Through analyzing the situation of internal and externalenvironment at that time, and studying the ideas and implementation strategies of itsdiversification strategy, then finally assessing the performance of its diversificationstrategy. SGS China carried out diversification strategy to broaden its businessindustries and occupied a certain market share, the overall performance of institutionand brand recognitions have been greatly improved. It will be a good guide andreference for others third party inspection and certification bodies to developdiversification strategy in China. Also some suggestions would be given for other thirdparty inspection and certification bodies and how to effectively implement, and monitorthe diversification strategy of Chinese third party inspection and certification bodies.
1.2.2 Methodology of Research
In this paper, the research method was based on the combination of theory and caseanalysis, through the typical case of SGS China, the author made in-depth analysis onthe formulation and implementation of diversification strategy for SGS China. Thisarticle mainly used the following research methods in each chapter.
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Chapter 2 Literatures Review
2.1 Concept of Diversification Strategy
With the development of strategic management theory and technology, thediversification was gradually established in the practice of enterprise strategicmanagement. Due to the different angles of observation and understanding, there weredifferent definitions of diversification strategies. Some experts and scholars were alsocontroversial about the diversification effect.
Diversification strategy of enterprise is an operation model. In order to obtain thegreatest economic benefits and long-term stable operation, developing potentialproducts, or through merging and acquiring other enterprises, enterprise itself canenrich its product structure or a products portfolio structure to maintain competitiveadvantage.
Diversification strategy is an important part of product development strategy in thestrategic structure of enterprise. It is also one of the important ways to developenterprise corresponding to enterprise regional development strategy. Enterprise will bebased on their own ability, the existence of risk and its operation performance, they seekthe optimization business portfolio of enterprise capabilities and market opportunities.It will include several patters, for instance, enterprise implemented specialize operationat single product category or business industry in depth development; enterpriseimplemented diversification operation at multiple products categories or variousbusiness field of same time; enterprise chose the main operation classification of singleproduct lines or business-oriented industry, other products and/or services aresupplemented by development, or a variety of product lines or a variety of businessindustries by development; enterprise developed diversification which is related to thedevelopment of business industry, or completely unrelated business development in thefield. Therefore, it is a comprehensive embodiment of operation for enterprises’products and capital, and also a common results of combination of internal managementstrategy and external trading strategy.
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2.2 Classification of Diversification Strategy
The scholars who studied the diversification can be divided into industrial organizationschools and strategic management schools. Industrial organization schools did notclassify diversification strategies, while strategic management schools had moredetailed classification of diversification strategies.
Ansoff (1965) separated corporate diversification strategy to four types in his book"Corporate Strategy". Horizontal diversification, it means that corporates expanded itsbusiness field to horizontal direction by existing market. Vertical diversification, itmeans that enterprises entered into the value chain of the upstream and downstreamindustries, actually this also was vertical integration. Concentric diversification. It alsocalled as coaxial diversification, it means that corporates expanded their business in thesame center by existing technology companies, expertise and resources. Compositiondiversification, it means that corporates entered into irrelative business field withcurrent business, they would try to find growth opportunities in irrelative field oftechnology, market and product.
Wrigley (1970) first proposed a degree of diversity measurement method -Specialization Ratio (SR) in his doctoral thesis "Divisional Autonomy andDiversification". That was occupation ratio of annual sales of the most importantproducts of the enterprise and the total annual sales of the enterprise, and according tothis ratio to classify the diversification. He analyzed the Fortune 500 companies anddivided them into four categories: No diversified enterprises (single productenterprises); Mainly engaged in a single business, but enterprise had implemented moreLow-level diversified operation (leading product-oriented enterprises); widely accessto new fields, but these fields had related activities with existing business in thetechnical and market aspects (related product-oriented enterprises); enterprise did notconsider this relationship with diversification (unrelated diversified enterprises). (Seetable 2-2) He specifically put forward if an enterprise operated sales of leading products,more than 70% pursued business of a single product and/or service field. He took thelargest single business accounted for the proportion of the total annual sales as thespecialization ratio (SR), it means that the largest business revenue per annual salesaccounted for the proportion of total annual sales in enterprises.
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Chapter 3 Case Description ............................19
3.1 Background of SGS China.............................19
3.1.1 SGS Group Profile ...........................19
3.1.2 SGS China Profile................20
Chapter 4 Case Analysis ........................33
4.1 Motivations of Diversification Development for SGS China............................33
4.1.1 Market Power Factor..............34
4.1.2 Avoid Shrinking Industry......................35
Chapter 5 Solution Proposal ............................43
5.1 Overall Ideology of Diversification Strategy for SGS China ............................43
5.1.1 Horizontal Diversification .......................43
5.1.2 Vertical Diversification ...........................44
Chapter 5 Solution Proposal
5.1 Overall Ideology of Diversification Strategy for SGS China
In view of SGS China as an independent, impartial third party, considering its businessshould not include benefit relationship with other value chain, thus, the diversificationstrategy of SGS China should be chosen as related diversification relationship.Otherwise, it will influence its credibility.
5.1.1 Horizontal Diversification
(1) Regional diversification
SGS China can rely on its international market influence, according to the internationaleconomic situation changes, with the trend of market development, SGS China shouldestablish more branches offices and laboratories in China. If SGS China developed itsregional diversification, they can proceed localized office and close to the customerlocation, then they would provide more professional and comprehensive technicalservices. They would quickly get the feedback from its clients and provide “one-stop”services. For example, following the policy of “one belt one road” to establish moreservice centers by regional diversification, the institutions will get more opportunitieswith development of economy.
(2) Service contents diversification
SGS China should develop a variety of new services in the same industry to achieveservice contents diversification strategy. With market competitive was becoming moreand more fierce, product and service quality would become very important to maintainsustainable competitiveness. Regarding to manufactures, they had more strength high quality needs to improve its own production and control. SGS China could providesome customized consultants, guidance and training services to clients, and helpcustomers to save cost, improve quality and develop sustainable competiveness. Forexample, in the service of environment, SGS China might take effort to promote greentesting, energy saving, environmental protection, green energy and other customizedservices to help customers in the shortest possible time, the lowest cost, to achieve thebest results.
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Chapter 6 Conclusions and Suggestions
6.1 Conclusions
Based on the reading and research of a large number of literatures, this paper made adeep research on the diversification strategy of SGS China through the method of caseanalysis and SWOT tools, then proposal the solution of problems of diversificationstrategy development. Finally, it got the conclusion of this paper.
SGS China has developed diversification strategy in Chinese third party inspection andcertification industry. It achieved substantial market share and double-digit annualgrowth rate of performance.
(1) The implementation of the horizontal regional diversification strategy has enabledSGS China to set up branches and laboratories in many industrial clusters of China,maintaining a good customer relationship and achieving localized advantages.
(2) The implementation of horizontal market diversification strategy has enabled SGSChina to develop from single business at the beginning of entering Chinese market tocurrent various industries, like agriculture, food and life; minerals; oil, gas andchemicals; consumer and retail; certification and business enhancement; industrial;environment, health and safety; transportation; governments and institutions of 9 bigcategories industries. It is effectively to resist risks of economic upheaval and impactof their own performance.
(3) The global integrated network has provided effective new specifications andstandards information SGS China, it will rapidly improve technology and equipmentcapabilities of SGS China, and then they will provide quickly services to customers inthe Chinese market.
reference(omitted)