The phenomenon of globalization

WAL-MART’S FOREIGN ENTRY IN GLOBAL MARKETS

The phenomenon of globalization has determined many firms to spread out to overseas markets. The purpose of this paper is to examine the firm’s strategies for new market entry and the major issues they need to deal with while entering into new foreign markets and Wal-Mart is utilized as an example. During this expansion some firms succeeded and some failed also.

Wal-Mart’s entry in the foreign market and its operations in the China and U.K where it was successful are examined and it can be inferred that the cultural differences and the political influences play a vital role in selecting entry mode and setting operational strategies. Also, In order to understand the failure in German retail market amongst many, the following influential factors will be considered that Germany has different culture and consumer behaviour, oligopoly market environment, unfavorable legislation and influential labour union. Additionally this entry and exit of Wal-mart affected, inevitably, other countries and most of the competitors in many aspects.

In the domestic market of U.S , Wal-Mart has a considerable success. Since Wal-Mart began international operations in Mexico in 1991, it has violently expanded foreign investments all over the world, including Canada, Latin America, Europe, and the Far East. Wal-Mart expanded it’s international operations such as in United Kingdom, South America and China where it’s going highly successful , whereas in South Korea and German markets it’s operations were unsuccessful and it was forced to pull out of these markets mainly due to sustained losses in an incompatible culture and highly competitive market. However, Wal-mart failed to position itself when trying to penetrate the German retail market through replicating its US strategies.

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Initially, firms should have clear purpose for expanding overseas. Firms tend to go international for many different reasons, for example, firms may be interested in structuring a global brand image, the home market may be saturated, external initiatives to spread the product, or grabbing more market share etc. Prior to entering a particular foreign market, firms need to look upon the consumer purchasing power, market size, entry barriers, political stability and cultural and language differences.

Culture plays an essential role in shaping whether a firm can last in a foreign market. . Consumers in different cultures may have different attitudes toward the same product and may value things differently. Therefore, international managers should take into account the cultural factor carefully in decision-making. Furthermore, Psychic distance also requires to be carefully addressed in the market selection stage. Psychic distance is defined as factors precluding or disturbing the flows of information between firms and markets in terms of differences in culture, language, political systems, levels of industrial development, etc (Johanson and Wiedersheim-Paul, 1975). Theoretically firms have a tendency to penetrate psychically close market to moderate risk.

Wal-Mart Stores, Inc. (Wal-Mart) is the world’s biggest American retail corporation in the world. Wal-Mart is a company which is renowned for its influence on US government. Wal-Mart has a friendly legislature and government policy in accordance to its company policies and method which indeed helps them to achieve goal such as restricting tariff protections, limiting port security, the elimination of the estate tax and obtaining lucrative subsidies. According to survey Wal-Mart has received 1.2 billion from US government in form of subsidies, grants and fund. Following are few examples which shows how US government helped Wal-Mart in US:

More Than $1 Billion from tax-payer funded Subsidies. A May 2004 report analyzed how Wal-Mart received more than $1 billion from over 244 taxpayer-funded subsidies status, job training/recruiting funds, and general grants.

Millions To broaden the Street to Its Headquarters. In 2005, a federal highway bill signed by President Bush of $35 million to broaden Eighth Street in Bentonville which goes to Wal-Mart’s corporate headquarters.

Employing Teens in Unsafe Conditions. An agreement was signed by the Wal-Mart with the Department’s Wage and Hours Division about future child labor conditions that the teens aged 16 and 17 are prohibited to participate in activities

Negotiating for Weak Enforcement. An audit by the (OIG) of the child labor found an agreement between Wal-Mart and the Department of Labor which showed serious breakdowns in the WHD [Department of Labor’s Wage and Hour Division] process for developing, negotiating and approving such agreements. These resulted in the WHD entering into an agreement that gave substantial concessions to Wal-Mart.

In the early 1990’s, Wal-Mart was enforced to expand its business into the new foreign market due to critical U.S market conditions. Firstly, In the US it faced market saturation. Wal-Mart comes up with 200 new stores each year and this fast expansion results in the short distance between its old stores and new stores. Further, the retail price difference between Wal-Mart and its key competitors has been lessened so consumers had little incentive to go to Wal-Mart. Therefore, rather than summing up the market share from its competitors, the new stores in fact gained the market share from its old stores. Finally, the progress in demand was declining because of the decreasing family sizes in the U.S. (Kim 2008) . Taking into account, all these factors, the international expansion appears as a prior strategy for Wal-Mart to promote its business growth.

Wal-Mart initiated to expand internationally in 1991 with the creation of a joint venture with Citra, S.A. de C.V, Mexico’s largest retailer. According to the Wal-Mart they promote it’s growth internationally because “We need to be the growth of Wal-Mart some day when the United States slows down” (as cited in Molin, 2004). The company feels the international market as a alternate when there was limited growth in the US. After creating a joint venture in 1991, Wal-Mart came out as a large international player and within one and half decade it expanded its operations in globally in many countries.

Wal-Mart did not use single strategy to enter in different countries. They decide on the basis of the business, competitive and economic environments that exist in. Wal-Mart made its presence in local markets by first considering the uniqueness of each market, and then by altering its business model to suit that market. After choosing the country like China, the management makes the decision after analyzing the environment that seemed to be positive in China.

The China is a country with a history of tremendous level of 1.3 billion population. In China , the government’s liberalization initiative and its open policy increased disposable income of consumers because of limited competition offered by similar business models its high constant economic growth and. The retail sale in China is $1.2 trillion in 2007 and the growth of market is expected $ 2.4 trillion by 2020, which indicates that there is a big opportunity for the company. These factors attracted the Wal-Mart company to research and make their presence in China.

In 1996,Wal-Mart entered China and it grew slowly. Some people pointed out on its slow growth, but according to me, the strategy of slow growth helps the Company to examine the environment in a completely different culture with regard to US. Wal-Mart had taken up those merchandising and store designs that suits the Chinese consumer requirements best. The company also tries to adopt the local culture and sourced the products from local manufactures who are familiar with the local taste of the people. Company also met the government trade and business guidelines, by adopting such type of the environment it helped the company to grow and launch its expansion plans in China.

Wal-Mart is also participating in CSR- corporate social responsibility such as by getting involved in the local community and the society by donating the funds and providing the kind support of $ 8 million over the past 13 years. All such awards achieved by the company itself show its achievement in China. Another issue that contributed to Wal-Mart’s success in China, was labour unionization. At first, Wal-Mart was reluctant to support the idea of unionization, but the constant efforts of All-China Federation of Trade Union led to formation of union amongst Wal-Mart employees, which has contributed positively to its success.

Currently, Wal-Mart carries on 7,873 stores worldwide in 15 countries among which 3,615 stores in the foreign countries and remaining in the US. Moreover its international segment gives 24.6% of the company’s total revenue in 2009 fiscal year. (Global Market Direct, 2009) However, even with such enhanced international sales, Wal-Mart’s international division is still faraway from its one-third of total sales goal, which it was essentially expected to achieve by 2005. (1999 Annual Report) If we analyse Wal-Mart’s international business, we will find out a mixed story. It had substantial success in Canada, China, Mexico and the United Kingdom, but it was unsuccessful to place itself in Germany and South Korea.

Wal-Mart was leading retailer and employer in US for last decade. There were more than 5000 stores in US itself. This made easier for the firm in structuring a good brand image in spite of offering cheap products. Due to its knowledge, low pricing, strategic resources, geographical presence, strategic investment, product differentiation and managerial excellence, the firm constantly had an upper edge on its competitors and generally drives them out of the business. Further reasons for Wal-Mart’s success was its elite relations with bureaucrats and government. Government policies usually were in harmony to Wal-Mart business and strategies.

Wal-Mart had many weaknesses and pit holes also despite of being world’s no. 1 company. Wal-Mart was always criticized for poor labour practices by labour unions. In US the average salary per hour is $ 13 where as in Wal-Mart the lowest salary rate is US$ 9 per hour. Employees have prolonged working hours around ten hours a day. Further Wal-Mart is charged for adopting the tax avoidance schemes. It has also build a great reputation for destroying small and medium business. Therefore it’s never greeted in any society. The main weakness of Wal-Mart has been its international operation. It struggled to create a great mark in international market especially in Germany unlike America. It has been losing money from the year it penetrated German market. It has also been found that in some cases those inferior quality products are being sold because of discounted price. As a result consumers who are not price elastic have a preference over other brands. It also bears the huge labour turnover, about 44% employees leave Wal-Mart every year according to the national survey. These were some major weakness that the firm desires to come up in near future for its survival and sustenance.

A number of factors that resulted Wal-Mart’s failure in Germany are such as different corporate culture, political influence, stiff competition and inefficient management and marketing strategies. Firstly, David Wild CEO in 2004, believed that cultural differences between American and German consumers were considerable challenges to Wal-Mart. Debby CEO in 2006 concluded that German shoppers are accustomed to shop at small scale discount stores such as Aldi and Netto that provides a limited range of products with special offers each week and no customer service, unlike US customers. In addition to different corporate culture, the competition has become gradually more intense between Wal-Mart and domestic retailers. The price difference has so lessened that sometimes even Wal-Mart had a higher price than their competitors. Consequently, consumers had little incentive to visit Wal-Mart Germany because of no obvious price advantage.

Some other factors that lead to Wal-Mart’s failure in Germany were, their strategy of acquiring the top competitor did not work, as the German government did its best to ensure the welfare of the domestic players. Also, due to wage restrictions, Wal-Mart could not practice wage bargaining, as it did back in U.S, this was a huge, uncommon expenditure for the company. Its American strategy of restricting employee freedom and forcing them to work extra hours, brought up problems of high labour turnover and a negative image as an employer. Wal-Mart failed to have an effective management at the top level. It’s CEO’s changed every year,this in an obvious way effected the company’s performance. Wal-Mart constantly ignored the strictness of German laws, and was charged heavy penalties for doing so. One of the most challenging thing for Wal-Mart was capturing the market- share. As per German legislation it was illegal to sell products below cost,because of which Wal-Mart could never achieve the ‘Low price leader’ tag.

It is impossible to smoothly run any organization, until there is co-operation between the employees and the employer. Wal-Mart faced a severe labour unrest,which hampered its brand-image. Kay Hafner,CEO of Wal-Mart reduced the wages to cut cost, this negatively influenced individual behaviour , as an anti-union decision. As suggested by Arndt and Knorr, a firm needs to understand the specifications when indulging in global expansion.Out of all the CEO’s, only David Wild has been sensitive to cultural difference.He did bring about changes based on this understanding,which had some positive results,yet not profitable enough to impress investors for future investments.

Moreover,as per German legislation their were some specific retail related laws,such as, limited legal working hours (80 hours/week) which were way less than the other European countries and had strict rules governing closure on Sunday’s and holidays. Wal-Mart repeatedly infringement German laws but were able to do away with it mainly because of global presence and influence on the government of US which played a major role in global politics. Some of incidences where the company broke few laws and was able to get away are summed up below:-

• ‘unfair trade’ practices such as selling goods below the cost price was prohibited in Germany but Wal-Mart was found violating these laws as it randomly sold some product below cost.
• German law required a company to disclose it financial statements annually, Wal-Mart seldom did that and was spared without any fine or legal proceedings at number of occasions.
• Obligatory Deposit Regulationdings’ law stipulated the retailer to provide deposit-refund-system on few products like metal beverages, cans etc. But Wal-Mart never followed this law.

Thus from the above incidences it can be concluded that Wal-Mart used its global influence to refrain from some of the German laws.

However, because German culture is quite different from American culture and because of unfamiliarity with the legislation, it would be difficult for Wal-Mart to make marketing and promotion right. And in fact these difficulties had been proved in Wal-Mart Germany. Consequently, rather than choosing Germany as the gateway to Europe, virtually after two years of operating in Germany it had entered in U.K .Even though U.K is not in the Euro zone and its geographic location is less favorable than Germany, it has a similar culture and legal environment as U.S. which makes it easier to operate the company’s business and strategies. It has considerable success in the UK market which is called by as a ‘Wal-Mart-ready’ market[palmer 2005] .Therefore, the lessons learned from from Germany has proven useful for U.K.

In the United Kingdom, Wal-Mart operates under its distinct organizational culture ‘the Wal-Mart Way’, where executives act as servants and employees are known as ‘associates’. Associates are empowered to adapt to local culture and are encouraged to try out new ideas. Consequently, associate cohesiveness is strengthened, and they are willing to work hard to achieve the best results. In addition, satisfying customer needs is always placed as main goal of the company. The company aims to offer British families the things they need at affordable prices, as well as providing superior customer service and convenience.

Needless to say, Wal-Mart did face challenges initially even in U.K. The British Planning Policy(PPS6) has clearly limited the construction of huge retail outlets on the outskirts of a town, which was one of its most effective strategy in the U.S According to PPS6,the local governments were required to do so until there was a call for .Wal-Mart responded to this situation by protesting the restrictive policies to the top government officials. Eventually, Wal-Mart acquired an existing retail chain ASDA, and this proved to be fruitful as it served as the best strategic fit between the companies. In the UK, ASDA was the only operator with a consistent non-food offer and Wal-Mart’s organisational culture had already incorporated into ASDA’s management principles before the acquisition taken place.

Based on the above examination of Wal-Mart, it can be concluded that Wal-Mart possessed a great influence on the US government and it used its great influence to get various tax reliefs, subsidies etc and when it entered other countries like UK, China and Germany etc, it followed the same policy to influence the government and capitalize on these relationships. Besides that there were few incidences in which the US government helped Wal-Mart in its international operations and having good relations with the foreign government which brings about the companies involvement in global politics, which is the essence of the report. However,while expanding globally Wal-Mart besides carrying all these good relationships still had to confront with the cultural, political and the other economic factors when it entered in the foreign markets because Wal-Mart to be successful only transports its domestic policy to global markets. No such one strategy or model is applicable which is appropriatefor all the markets. Consequently ,Wal-Mart’s US model can’t be consistently applied in other countries, even in UK whose culture is very alike to that of the US. Hence, adaptation to local culture and familiarity with its legislations is a crucial step for Wal-Mart or any firm while entering to the global markets. Therefore, Firms should always make cultural and political considerations as a part of strategic planning, and locating activities in countries that possess these attributes necessary for competing in these activities of foreign entry.

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