Table of Contents
Changes in economic conditions in various countries and globalisation have shifted the focus of organisations from national to international strategies. Unfavourable economic conditions have prompted corporations to seek competitive advantage in other countries. Additionally, globalisation has opened up international borders for trade, increasing access to international markets for firms regardless of their countries of origin. This paper will answer three questions related to Wal-Mart’s international expansion strategies. The first question relates to the reasons Wal-Mart engaged in internationalisation. The second one is why the corporation failed in Germany and South Korea and the differences between the two nations and Mexico. The third question focuses on the importance of cross-cultural understanding for international businesses.
Corporations pursue strategies that correspond to their objectives and competencies. As such, a market analysis usually precedes decisions on the strategy to use and how to enter various markets. An initial analysis of the market, competition level, available market share, internal capabilities and resources influenced Wal-Mart’s decision to implement internationalisation strategies. It is imperative to analyse the market to understand the reasons for Wal-Mart’s focus on internationalisation strategies.
Wal-Mart’s SWOT analysis identifies several strengths that made the corporation’s leadership focus on internationalisation strategies. The first strength is the company’s financial performance. The company’s sales reached $ 25 billion in 1990, as compared to $ 1 billion in 1980. The net profit for per share increased from $ 1.48 to $ 1.90 between 1989 and 1990. Such a healthy financial performance was one of the strengths that empowered Wal-Mart to pursue its first international strategy by entering the Mexican market in 1991(Wal-Mart 2012). The returns from the venture empowered the retailer to invest in the development of other overseas markets while serving the home market in the United States. The second strength that enabled Wal-Mart to pursue its international strategies is its economies of scale that resulted in the cost leadership strategy. The massive presence of Wal-Mart stores in the United States helped the company to gain economies of scale. The extensive operations reduced the cost of production and increased the company’s ability to negotiate with suppliers on prices. Consequently, it could offer products to customers at reduced prices as compared to other competitors.
In addition to its internal strengths, the retailer identified viable opportunities in the international market. Global expansion opportunities were available in various countries, but Wal-Mart chose Mexico because of its geographical proximity to the United States to act as the pilot project for the international expansion. It is easy to manage the stores in Mexico from the United States because it is near. In addition, barriers to foreign market entry such as legal requirements did not pose a challenge to the company because Cifra was ready for a joint venture. The joint venture with Cifra eliminated any legal and political hurdles that Wal-Mart would have encountered through direct entry into the market. The second opportunity that influenced Wal-Mart to become a global corporation is the emergence of markets with low disposable income (Allen 2014). The company based its business model on low prices. Such markets with little disposable income formed the best chance for the company to pursue its internationalisation strategy. Customers in these markets could be attracted to Wal-Mart’s products because of relatively attractive quality and affordable prices. Wal-Mart could differentiate itself using the cost leadership strategy and gain economies of scale.
The slow growth in the United States due to market saturation was a threat that could limit the performance of the company. The company has established stores in every part of the country, which limited opportunities for further growth. The investors required the company to continue its growth and increase share value continually. Since the domestic market did not have conditions that allowed such growth, it had to venture outside the country.
As globalisation continues to influence the location of organisations or their manufacturing, suppliers relocate to cater for the changing locations (Hooley, Saunders & Piercy 2014). As such, organisations with strong bargaining power in the home country are likely to retain the advantage even when they venture abroad. Wal-Mart had a strong bargaining power for supplies because it purchased products in large quantities. Consequently, they accounted for a large portion of suppliers’ inventories and could influence prices. Additionally, the products that Wal-Mart sold had numerous substitutes and could be obtained from a number of suppliers. Therefore, the switching costs from one supplier to another were low, which empowered Wal-Mart to choose the appropriate suppliers. The bargaining power that Wal-Mart had when it decided to pursue globalisation strategies motivated it because it signalled a possible success in the foreign markets.
One of the major threats that could jeopardize the success of Wal-Mart in its global operations is dealing with customers with high bargaining power. Such powerful customers could place demands on the retailer that could negate the gains of economies of scale. Fortunately, Wal-Mart`s customers were individuals who bought products in small quantities. They did have immense power to place demands on the corporation. As long as the target customers had limited disposable income, they could be attracted using low prices that characterise Wal-Mart’s products. The low power of buyers in the market was, therefore, one of the reasons that Wal-Mart utilised global strategies.
Wal-Mart PESTEL analysis reveals that technological prowess was an aspect that provided the corporation with superiority over others. Its information systems included such features as vendor managed inventories and electronic data interchange. The systems helped suppliers to monitor the levels of inventory at Wal-Mart. When the levels reached a certain predetermined point, the suppliers replenished then automatically. Information sharing was vital to the cost reduction approach that could provide a competitive advantage to the retailer. Companies without effective information technology may incur costs because of overstocking their stores. The longer the inventories remain in store the higher the csts. Moreover, delays in delivering products from the suppliers to the stores could cripple the operations of the stores. Organisations can impede their progress when they have poorly managed supply chains. As such, those with advanced information technologies have a competitive edge over their competitors because they can automate their supply chains and eliminate delays. The automation and excellent supply chain management provided confidence to Wal-Mart that it could survive using global strategies.
The entry of Wal-Mart into China was influenced by the socioeconomic characteristics of Chinese customers. The middle-class customers that the company aimed to attract had inadequate disposable income, which made them attractive to its low prices strategy. Since the middle-class was growing, there was great potential in the Chinese market as long as the company learned the behaviour of the customers and their preferences. In Mexico, Wal-Mart had succeeded in altering the purchasing behaviour of consumers and hoped to achieve the same objective in China. The emerging middle-class customers had buying habits that were similar to those of the Americans and the Europeans, which made it easy for Wal-Mart to serve them. Apart from economies of scale, learning economies are vital to an organisation. They are gained through experience. Since Wal-Mart had learned to serve the American customers successfully, it could transfer its experience to serve the emerging Chinese middle-class that had similar characteristics.
The environmental conditions in Mexico influenced Wal-Mart to conform to international strategies. Wal-Mart failed to understand the local tastes and was unable to gain market share by using its American approach in Mexico. Since the consumers were different in Mexico, the company had to lose control of the operations and delegate the work to Mexican executives who had experience in the market. Additionally, it had to establish small stores that reflected the low economic status of the customers.
The company failed in South Korea and Germany, despite the successful entry into the Mexican market. In Germany, Wal-Mart ignored the cultural attitudes of people. First, Wal-Mart was famous in its home country for restricting its employees from joining unions. Having employees that were unionized increased the cost of production that the company was trying to reduce. In Germany, the strict approach to unions put the company at odds with unions and labour leaders. The Germans interpreted the company’s behaviour as autocracy that eroded their democracy. People in Germany hated corporate rules that interfered with their personal lives. The consequence of Wal-Mart’s stance on unions was a lengthy and expensive lawsuit the outcome of which favoured the employees. Its reputation was destroyed beyond repair and the company had no other option but to exit the market.
Another reason the company failed in Germany was its understanding of customer service. German customers prefer to bag their products after purchases. They feel offended when attendants bag their purchases as they consider them strangers. Wal-Mart assumed that the customer service that worked in the United States would work in Germany. The customers felt that the company did not live up to its promise of great customer service and switched to alternative retailers.
Additionally, Wal-Mart used plastic bags to wrap products for the clients. Germany is so ecologically sensitive that customers carry their bags to stores to avoid the spread of plastic bags. The corporation failed to identify the unique aspect of German clients, which reduced their satisfaction. Consequently, the customers had to buy products from organisations that were socially responsible.
Other German retailers offer low prices as a differentiation strategy, which denied Wal-Mart`s uniqueness. As a result, Wal-Mart could not compete effectively in Germany using the low price strategy alone. Since it had ruined its reputation on quality customer service, it had no other strategy, which could salvage its operations.
In South Korea, Wal-Mart made similar mistakes as in Germany and failed to adapt its strategies to the unique needs of the local consumers. It ignored culture and customer preferences by sticking to its holistic approach to merchandising (Kim 2008). Korean consumers preferred fresh vegetables and food to dry products. However, Wal-Mart stores in Korea mixed the two types of products, which did not please the customers.
Secondly, people in South Korea adore their culture. The cultural influence on people is reflected in their clothing. As such, sellers of clothes in South Korea ought to offer clothes that reinforce Korean culture. Despite such a peculiar nature of the country, Wal-Mart offered clothes that had no significance to the local culture. The people were infuriated by the company’s insensitivity and opted to seek products from its competitors.
Thirdly, the location of Wal-Mart stores was unfavourable to the customers. Most of the stores were located outside cities and the clients had to drive there. The distance created inconvenience because Korean customers felt comfortable shopping without travelling. Driving was difficult to cope with because the customers bought products in small quantities, which created the need for frequent shopping. The number of trips that the customers made to the Wal-Mart location consumed a lot of fuel and eliminated the low price advantage offered by the company.
The marketing strategy in Korea was not consistent with the market trends. The marketing concentrated on electronics, clothing and dry goods, which did not attract clients to hypermarkets (Sang-Hun 2006). The customers mostly visited the hypermarkets for beverages and food. Customers, attracted by beverages and food, could then make other purchases as a result of being in the hypermarket. The failure to identify the products that attracted customers reduced the volumes of clients and consequently the sales volumes.
Finally, the design of the stores did not take into consideration the preferences of Korean customers. Some of the product shelves were tall for Korean customers, who had to stretch or use a ladder to reach the desired products.
The difference between the two countries and Mexico is understanding of the market. Wal-Mart realized the market in Mexico was different and adapted its strategies to the local needs. However, it failed to study the markets in Korea and Germany, hence failed. The company used local managers iin Mexico but used American executives in Germany. The managers in Germany did not understand the market and could not help the company navigate the cultural barriers. Additionally, the products were packaged like in America. While the Germans used to buy meat from butchers, Wal-Mart tried to sell packaged meat to them. The failure to adapt the products was interpreted as American cultural imperialism and was resisted. The Korean market was also culturally sensitive and could not be swayed easily to adapt to foreign shopping habits.
Globalisation has brought together cultures from different countries as people involved in international trade constantly interact. The success of businesses in the international market depends on understanding and cooperation of stakeholders regardless of their countries of origin. Negotiations and mediation in times of conflict depend on people understanding and tolerating each other. According to Kurtz & Boone (2010), culture and communication are closely related because culture determines how people communicate. Both verbal and non-verbal communication relies on cultural symbols, norms and values. Therefore, understanding the impact of cross-cultural communication is critical to building relationships with people from different cultures.
One of the prominent theories on cross-cultural communications was created by Hofstede; it has several dimensions that can highlight the importance of cross-cultural understanding. The theory is based on six dimensions of national cultures that characterise each country. The dimensions include power distance index, uncertainty avoidance index, individualism versus collectivism, long-term versus short term orientations, masculinity versus femininity and indulgence versus restraint. Different scores on each of the dimensions indicate the characteristic of each country as demonstrated using the various countries in which Wal-Mart conducted business.
Understanding the nature of unions in China made Wal-Mart change its perspective and adapt to the Chinese environment. On the individualism versus collectivism dimension, China has a low score of 20, which means that it is a collective society. The collective Chinese culture made unions part of the work environment that could not be avoided. Failure to conform to the cultural expectations led to Wal-Mart’s failure in China. China has a score of 80 on the power distance index. The high score shows that Chinese workers accepted the power disparity between leaders and followers. Such acceptance is evident in the relationship between the government and the unions. In countries with low power distance index, like the United States, workers require the unions and the government to be separated. The significance of this cultural dimension to Wal-Mart is that it could use formal authority and make decisions without consulting the employees. The country’s low score of 24 on indulgence indicates that people do not value leisure as much as work. Such an understanding would be critical to Wal-Mart when choosing the benefit packages for its employees (Czinkota & Ronkainen 2011). It could use their focus on work to maximize working hours. China’s score on long term orientation is 87. The score shows that the Chinese are long term oriented. Such an understanding is critical in negotiations because Chinese negotiators may require a lengthy engagement before striking a deal as they attempt to create a long-term relationship. The understanding would help Wal-Mart to be patient when pursuing joint ventures in the country to attain success.
Germany has a high score of 65 on uncertainty avoidance, which means that the society creates measures to avoid uncertainty at all costs. Wal-Mart failed to understand this cultural dimension and used the American approach in the German market. The country’s low score of 35 on power distance index clearly indicates that employees expected to be consulted when major changes at work are contemplated. Wal-Mart closed down headquarters of some of the companies it acquired in Germany and expected the workers to relocate. The failure to consult them created uncertainty, which made them quit instead of moving to new locations (Landler & Barbaro 2006). The long-term orientation of German culture with a score of 83 expected corporations to established strategic relationships with workers, thus there is need for unions that would protect workers from illegal dismissals. Wal-Mart failed to understand this aspect of German culture and restricted workers from joining unions. Consequently, it ruined its reputation and consequently failed to satisfy clients in the German market. Wal-Mart would have succeeded in Germany if it had researched the market to understand the culture that influenced it.
The high score of 97 on the Mexican indulgence culture indicates the importance of leisure to employees. Such an aspect was essential to Wal-Mart in Mexico because it could help the company balance the working hours with the employees’ need for leisure. Consequently, the workers would be motivated to work hard as the organisation would be perceived as caring for their welfare. The use of local managers in Mexico could have satisfied the indulgence need thus leading to the the success of the company (Das 2011).
Wal-Mart’s understanding of Korean culture would have helped it to use an appropriate marketing strategy. The low score of 18 on individualism versus collectivism shows that the South Koreans are highly collective. The company could create marketing strategies that would be appealing to the collective nature of the people by marketing products such as beverages and foods, which are shared among family and friends. The failure to understand the dynamics of Korean culture led to unfocused marketing strategies and consequently the company’s demise (Gandolfi 2009).
The reasons that motivated Wal-Mart to use globalisation strategies include its internal strengths, opportunities and threats in the market. Wal-Mart’s failure in Germany resulted from its ignorance of cultural attitudes, customer service nature, environmental concerns and competitive advantage. In South Korea, Wal-Mart failed because it did not understand culture and customs, appropriate marketing strategies and location. Additionally, it failed to match the products with customers` requirements such as clothes that reflected South Korean culture. Understanding cross-cultural differences is important because it helps corporations understand customer behaviours, create adequate benefit packages, motivate employees and provide a supportive organisational culture.