Reference no: EM131374348

For much of its 144-year history, Diebold Inc. did not worry much about international business. As a premier name in bank vaults and then automated teller machines (ATMs), the Ohio-based company found that it had its hands full focusing on U.S. financial institutions. By the 1970s and 1980s, the company's growth was been driven by the rapid acceptance of ATM machines in the United States. The company first started to sell ATM machines in foreign markets in the 1980s. Wary of going it alone, Diebold forged a distribution agreement with the large Dutch multinational electronics company Philips. Under the agreement, Diebold manufactured ATMs in the United States and exported them to foreign customers after Philips had made the sale.

In 1990, Diebold pulled out of the agreement with Philips and established a joint venture with IBM, Interbold, for the research, development, and distribution of ATM machines worldwide. Diebold, which owned a 70 percent stake in the joint venture, supplied the machines, while IBM supplied the global marketing, sales, and service functions. Diebold established a joint venture rather than setting up its own international distribution system because the company believed it lacked the resources to establish an international presence. In essence, Diebold was exporting its machines via IBM's distribution network. Diebold's switch from Philips to IBM as a distribution partner was driven by a belief that IBM would pursue ATM sales more aggressively. By 1997, foreign sales had grown from the single digits to more than 20 percent of Diebold's total revenues.

While sales in the United States were slowing due to a saturated domestic market, Diebold was seeing rapid growth in demand for ATMs in a wide range of developed and developing markets. Particularly enticing were countries such as China, India, and Brazil, where an emerging middle class was starting to use the banking system in large numbers and demand for ATMs was expected to surge. It was at this point that Diebold decided to take the plunge and establish its own foreign distribution network. As a first step, Diebold purchased IBM's 30 percent stake in the Interbold joint venture.

In part, the acquisition was driven by Diebold's dissatisfaction with IBM's sales Gi Cases 519 Sources 1: "Orange Gold," The Economist, March 3, 2007, p. 68; P. Bettis, "Coke Aims to Give Pepsi a Routing in Cold Coffee War," Financial Times, October 17, 2007, p. 16; P. Ghemawat, Redefining Global Strategy (Boston: Harvard Business School Press, 2007); and D. Foust, "Queen of Pop," BusinessWeek, August 7, 2006, pp. 44-47. efforts, which often fell short of quota. Part of the problem was that for IBM's sales force, Diebold's ATMs were just part of their product portfolio and not necessarily their top priority.

Diebold felt that it could attain a greater market share if it gained direct control over distribution. The company also felt that during the prior 15 years it had accumulated enough international business expertise to warrant going it alone. Diebold's managers decided that in addition to local distribution, they would need a local manufacturing presence in a number of regions. Among the reasons for this were local differences in the way ATMs are used, which required customization of the product. In parts of Asia, for example, many customers pay their utility bills with cash via ATMs. To gain market share Diebold had to design ATMs that both accept and count stacks of up to 100 currency notes, and weed out counterfeits.

In other countries, ATMs perform multiple functions from filing tax returns to distributing theater tickets. Diebold believed that locating manufacturing close to key markets would help facilitate local customization and drive forward sales. To jump-start its international expansion, Diebold went on a foreign acquisition binge. In 1999 it acquired Brazil's Procomp Amazonia Industria Electronica, a Latin American electronics company with sales of $400 million and a big presence in ATMs. This was followed in quick succession by the acquisitions of the ATM units of France's Groupe Bull and Holland's Getronics, both major players in Europe, for a combined $160 million.

In China, where no substantial indigenous competitors were open to acquisition, Diebold established a manufacturing and distribution joint venture in which it took a majority ownership position. The result; by 2002 Diebold had a manufacturing presence in Asia, Europe, and Latin America as well as the United States and distribution operations in some 80 nations; the majority of these operations were wholly owned by Diebold. International sales accounted for some 41 percent of the company's $2.11 billion in revenues in 2003 and were forecasted to grow at double-digit rates. Interestingly, the acquisition of Brazil's Procomp also took Diebold into a new and potentially lucrative global business. In addition to its ATM business, Procomp had an electronic voting machine business.

In 1999 Procomp won a $105 million contract, the largest in Diebold's history, to outfit Brazilian polling stations with electronic voting terminals. Diebold's management realized that this might become a large global business. In 2001, Diebold expanded its presence in the electronic voting business by acquiring Global Election Systems Inc., a U.S. company that provides electronic voting technology for states and countries that want to upgrade from traditional voting technology. By 2003, Diebold was the global leader in the emerging global market for electronic voting machines, with sales of over $100 million.

Case Discussion Question

1. Before 1997, Diebold manufactured its ATM machines in the United States and sold them internationally via distribution agreements, first with Philips Electronics NV and then with IBM. Why do you think Diebold choose this mode of expanding internationally? What were the advantages and disadvantages of this arrangement?

2. What do you think prompted Diebold to alter its international expansion strategy in 1997 and start setting up wholly owned subsidiaries in most markets? Why do you think the company favored acquisitions as an entry mode?

3. Diebold entered China via a joint venture, as opposed to a wholly owned subsidiary. Why do you think it did this?

4. Is Diebold pursuing a global standardization strategy or a localization strategy? Do you think this choice of strategy has affected its choice of entry mode?