Wal-Mart’s Internationalization Strategy

1. Through the use of suitable tools, conduct a foreign market analysis and critically evaluate the strategic and environmental reasons why Wal-Mart engaged in internationalisation strategies?.

2. Analyse why Wal-Mart failed in South Korea and Germany and the differences between these countries and Mexico?.

3. Using appropriate theories critically analyse the importance of a cross-cultural understanding for international businesses success. Support your answer by quoting relevant examples from the case study?.

The globalization has been marked with many organizations that had spread out with a motive to act independently and operate with the local companies. Internationalization strategy is the strategy that operates on the firm’s strategic activities in different country and different location to exploit the synergies that exists across different countries (Cavusgil et al. 2014). Moreover, the strategy is adopted to respond to local business needs based on the product standardization and responsive to local business environment. However, Wal-Mart’s foreign expansion was not only limited to expanding the business but also to capture the local market (Roberts 2015).

In this assignment, Wal-Mart’s internationalization strategies will be evaluated using tools that define the macro as well as micro environment. Nevertheless, the countries will be evaluated and analysed using Wal-Mart’s globalization strategy and the reason of failure in some countries and not in all countries. However, the importance of cross culture international business and their success will be critically examined based on the case study.

1. Wal-Mart known to be the global player in the retail store business operates in more than 50 stores across countries needed to grow to survive the market. However, the company’s growth had started from increase in sales and profits, satisfying the customer expectations and the success it possessed in dedicated and committed workforce. The internationalization strategy that the business used was in collaboration with the local companies. To examine the foreign market, the tools that specify the reasons of Wal-Mart engaging in internationalization strategies are PEST and Porter’s generic strategies for external environment and SWOT and Porter’s Five forces for internal environment (Frynas and Mellahi 2015).

PEST

The PEST factors highlight the global pursuit and the factors that turned out to be relevant in venturing out in the foreign market. Wal-Mart made an attempt to exploit the competitive advantage through a series of stages whether it was through “increasing commitment” for market penetration or the local environment switches that determined various factors. The legal and political factors will be analysed together as they will be based on different trade agreements, laws and regulations. The political factors had on the negative effect on Wal-Mart’s sales as the government could change the regulation in an economy in any time which could directly impact Wal-Mart. However, the issues like tax and lawsuits by other organizations and labour unions could have caused enough damage on the organization. Even more, to increase the profit and to decrease the working expenditure expanded in different countries namely, Mexico, China and India. As a result, political instability caused by any country posed a continuous threat of falling of market share. However, the free trade agreements like NAFTA also impacted immensely on the functioning of the company like Wal-Mart (Harris 2013).

Foreign Market Analysis

The economic factors that were highlighted for the foreign expansion were the fluctuations of the prices of products and services and depending on the purchasing power of the economy. On the whole, the economic factors have not been favourable in expansion whether it is energy cost, fuel price, unemployment rate, higher interest rate, changes in tax, inflation, weak housing market, higher debt and interest rate or changes in tax and selling through Wal-Mart stores. Various other factors that hindered the growth of Wal-Mart at the beginning were foreign exchange rate fluctuation, transportation cost and the cost of administrative expenses (Joseph and Kuby 2015). However, foreign economies also resisted the entering of Wal-Mart based on the modes of entry whether it was through strategic alliance, franchising, exporting or through Greenfield Revenue. The only factor that helped Wal-Mart grow was the cost leadership strategy that ultimately resulted in generation of income.

The social and cultural factors that influenced Wal-Mart were the barriers that it faced in language, culture as well as the trends that impacted the lifestyle of the individual. Moreover, the faster pace of life in countries likes UK and Germany infused other strategies other than internationalization strategies as the people believed that high prices deliver good quality in the market The same was not applied in countries like Mexico and China as cost leadership strategies benefitted in these countries through different merchandising techniques. The technological factors influenced the overall performance due to the prevalence of e-commerce strategy in which online stores helps to connect with the customers that not only helps in analyzing changed demands but also the process of buying and availing the product or service (Frynas and Mellahi 2015).

Figure: Porter’s Generic Strategies

Source: (Tanwar 2013)

SWOT

The strengths that Wal-Mart possessed during foreign expansion were that it was large in size and scale of operations as it had large revenues in 2008 amounting to sales of $400 billion while employing 2.1 billion workers and operating on 3600 stores in the rest of the world. However, as seen the revenue and sales have been more and have been expanding. Moreover, as opined by Mike Duke, “Wal-Mart has been growing tough and unpredictable due to improving returns internationally and leveraging expenses. The growing human resource management and development has been growing and ensuring quality. The strong presence of Wal-Mart in market had gained pricing and cost which had large economies of scale as well. The other strength that Wal-Mart had was cost leadership strategy and due to e-commerce business, it offered one stop shopping experience for the customers (Barberá Marcilla 2014).

Porter’s Generic Strategies

On the other hand, the weaknesses that Wal-Mart hold is the poor public opinion because the ethical standards it had for store associates, factory workers and suppliers were not up to the mark. Moreover, the offering of low prices was based on large costs. Wal-Mart’s venture into countries were need to focused on the customer habits as the organization ascertained itself to market domination which left no room for substitution (Mazvancheryl, Garg and Enahoro 2011). For Example, Mexico did not have the concept of refrigerator such that merchandising strategy was applied. Although, when it comes to China, they believed in fresh meat which was cut in front of them. However, which made frozen meat to be a waste of revenue in China.

Wal-Mart had had opportunities to expand the business globally as they had all the means and resources for the growth at low prices. The other major chance they had in online shopping as no other rival was able to keep up with it. According to facts and figures, the online sales grew to 4.7% in 2011. Wal-Mart was counted in one of the large online retailers as it used to ship to any store depending on the customers preference (Twarowska and KÄ…kol 2013).

Wal-Mart faced threats in the macro environment in political, economical and legal factors where it had to fit against the local competition. The competition that Wal-Mart faced was in South Korea and Germany. Conversely, the threat was mainly concentrated to the labour unions and lawsuits that Wal-Mart experienced in China and Japan and cost effective acquisition that affected due to synergies and the cultural barriers.

The market expansion of Wal-Mart had medium threat of substitutes as the products were already influenced by low prices. However, any threat which is through switching cost can lead to substitute higher. On the contrary, if the customers embraced this strategy of low prices, then the threat of substitute will reduce according to Wal-Mart’s strategy of “Every Day Low Price.” The bargaining power of suppliers is low because the as the switching cost decreases from one supplier to another. Moreover, producers have many substitutes as they are selling goods at low prices. Wal-Mart purchases bulk quantities which helps organization to attain in a good negotiating position. The bargaining power of buyers is considerably low as individuals make small purchases which ultimately make the organization in a competitive position. Conversely, it has considerably high barriers to entry which explains that any large global firm can have high capital requirements (Wild, Wild and Han 2013). Moreover, Wal-Mart lacks in defined distribution system. The potential entrants are high because there are many global firms that can expand like Aldi, Tesco, Coles, Woolworths and Sainsbury. Although, the industrial growth is slow but there is high production capacity with high barriers on exit. Overall, Wal-Mart’s main retailer industry competitors are Target (Wesfarmers) and K-Mart. The supermarket industry competitors of Wal-Mart are Dollar General and Lowe’s Food. According to the strategic group map, Wal-Mart’s competitors are ranged from low to high (Hurd et al. 2014).

SWOT Analysis

Figure: Supermarket Industry Competitors

Source: (Hurd et al. 2014)

2. Wal-Mart’s international expansion became a success story in economically challenging times but being one of the largest retailer and market shares of 20% of US retail markets, it could not make its mark everywhere. However, Wal-Mart had risen from its humble beginnings from a discount store in Arkhansas but eventually had to face failure from the two markets that are Germany and South Korea in 2006. Mexico, on the other hand, was Wal-Mart’s roaring success.

Retail internationalization has been prominent in the current marketing literature but it was failed in South Korea because of four reasons. Firstly, competitive failure that has been due to the poor market performance; secondly, market failure based on foreign market’s risk and stability; thirdly, operational failure that is the inability to adapt and transfer marketing approached to the foreign market; and lastly, a complete business failure due to the problems in the home country (Gandolfi and Strach 2009). On the other hand, Wal-Mart failed in Germany because of the following reasons. Wal-Mart adopted a fundamentally flawed entry-by-acquisition strategy, followed by a management of “hubris and clash of cultures” based on labour relations, its value proposition of “Everyday Low Prices” and “Excellent Service” and at the end, bad publicity due to continuous violation  of German laws and regulations (Hurd et al. 2014).

Wal-Mart had long-term potential in South Korea and Germany but the basic reason that it failed in the operations due to the Wal-Mart’s inability to understand the local customer’s shopping experiences. Moreover, Wal-Mart could not adjust to the business model of the prevailing domestic culture. As a result, Wal-Mart’s financial gains dropped creating a loss of 10 million dollars in 2005 in South Korea and a loss of more than 1 billion pounds in Germany.

The failure in South Korea and Germany resulted basically due to the geographical areas which did not made shopping accessible for people. Moreover, Wal-Mart did not have an localized approach like E-Mart in South Korea or Tesco, Aldi and Metro in Germany. The pricing strategy of low prices did not apply either in South Korea or in Germany due to Wal-Mart’s sales tactics or its business concept that was relentless of market, environment and business pressure (Hurd et al. 2014). Moreover, it backfired in Germany because of aforementioned ignorance, hubris of top management and lack of experience. Nevertheless, law suits as well as violation of laws and regulations like act against competition, commercial act and obligatory deposit regulation did not comply with Germany’s rules and regulations. In South Korea, the product mix also had a problem, as south Koreans were not interested in the same products as North Americans do. As a result, the South Koreans were interested in fresh vegetables and fresh produce than dry products or the clothing that Wal-Mart sells (Gandolfi and Strach 2009).

Porter’s Five Forces Analysis

Wal-Mart’s basic issue was that it lacked in-depth understanding of local customer’s wants and desires. There was no flexibility or adaptability in Wal-Mart’s internationalization strategies (Twarowska and KÄ…kol 2013). However, in this case, Wal-Mart needed strategic thinking which was more operational and competitive that could resonate in cultures while skilfully focusing on local consumers.

Nonetheless, Mexico is considered to be a success for Wal-Mart because although, Mexico had been the first international store of Wal-Mart that was opened with 50-50 joint venture through substantial difference in culture as well as income. Wal-Mart in Mexico started with its conglomerate Cifra which provided a base for Wal-Mart in learning the retail business with the local collaborators (Barstow 2012). The low cost merchandising strategies were adopted in Mexico that mimicked other cultures spending habits. Moreover, being its first venture, Wal-Mart paid utmost attention to the Mexican culture shops as well as purchasing power parity of the country. Although, Mexico was high in proportion of population and low on income, the statement of low price products considered to be a good fit in the country (Herman 2013).

A study conducted recently on the success of Wal-Mart shows that various formats of retail outlets appealed to different types of consumers. Mexico had many consumers that belong to low income group which made a way out for Mexico to expand its market. Wal-Mart even had price leadership strategy, performed excessive negotiation with its suppliers, distribution network that was technology enabled and worldwide discounts were the major reasons for the huge success in Mexico. Moreover, it also had a “first mover advantage” as a foreign retailer under-stored in 1990’s (Chopra and Meindl 2013). The “Everyday Low Prices” also introduced wide range of retail formats even during crisis and economic stagnation which was driving customers to their traditional stores. However, Wal-Mart’s merchandising strategy changed the shopping culture of the economy and made it a huge success as the customers started getting dependent on Wal-Mart for the retail products and services (Chekwa, Martin and Wells, 2014).

3. Organizations have gone global through readily available information like labour cost factor, trade agreements, price strategy, sophisticated distribution, managerial as well as operational innovations, trade agreements, standardization and technology (Dunning 2014). However, the past 20 years have been following the wave of globalisation such that many firms are expanding their business. Out of all those contexts, an organization has to go through different barriers of culture and language as well. Nevertheless, Wal-Mart is pooled in the same scenario where in some countries it trounced the hurdles of culture while in some it faced challenging situations (Haghighi and Salarian 2014).

Importance of Cross-Cultural Understanding for International Business Success

Culture is one barrier that needs to be considered by management in the organization that is generally surfaced over the in-depth analysis of the foreign expansion is taking place (López-Duarte et al. 2016).

Organizations follow different decision making according to the different cultural contexts. However, global firms like Wal-Mart are surfaced to an understanding of culture through different modes of entry in the business where language, knowledge and behaviour were important factors to give efficient quality outlining the consumer preferences (Ulrich and Brockbank 2016). The diagram below will explain the business cultural contexts.

Figure: Business Cultural Contexts

Source: (Ferraro and Brody 2015)

The basic stumbling block highlight the perspective of “ethnocentrism” which depicts that one’s way of doing things is superior to others. However, Wal-Mart suffered from the same phenomenon in the case of South Korea and Germany because it did not recognize the challenging differences from style and approaches with different partnerships in different markets.

However, cross cultural differences in organizations and a country is based on the global business community has been given by two cultural theorists namely Fons Trompenaars and Geert Hofstede. The dimensions can be breakdown into categories namely relations between people, motivation orientation and attitude toward time (Ferraro and Brody 2015). According to cultural practices and theories, the diagram below explains the cultural relativity of the power distance against individualism/collectivism that is supposed to individually independent.

Figure: Cultural Dimensions

Source: (Ferraro and Brody 2015)

The general stereotypes reflects that grouping of Australia and US are highly individualistic but when compared with Mexico, Brazil, China and India, they are less individualistic or hierarchical in nature. The uncertainty avoidance, the third dimension of Hofstede is based on stability and risk which can be seen that is attained by the country Indian and US as these countries emphasize informality and flexibility. The fourth dimension masculinity/femininity which is governed by assertiveness as well as material success is affluent in the countries Japan, Mexico, Germany and UK whereas femininity of modesty and caring is governed by countries like Sweden, Denmark and Netherlands. According to the data it can be seen that the Hofstede cultural dimensions depict that the success of Wal-Mart has been evident in Mexico because it adopted American merchandising strategy whereas in India and China, Wal-Mart applied its merchandising strategy while considering the cultural levels of the countries and turned out to be efficient the most in China and now Wal-Mart plans to apply its growth strategy in China only (Samli 2015).

On the other hand, based on Trompenaars, cultural dimensions are divided on seven categories that are individualism/collectivism, neutral/emotional, specific/diffuse, attitude toward time and environment, achievement/ ascription and universalism/ particularism (Pichler 2015). Out of all, the one which Wal-Mart considered was individualism/ collectivism which depicted that Germany and South Korea are particular countries which are specific, individualistic and achievement based in nature which depicts that these countries work according to their convenience and any company coming for any merger, acquisition or strategic alliance had to work according to their norms whereas the same cannot be said for Mexico. However, China and India because of their attitude towards environment that follows universalism as well as diffuse dimension but their achievement orientation is higher than any other developing countries with some elements of individualism (Pieterse 2015).

Conclusion

To conclude, it can be said that the Wal-Mart has evolved as a business and has resulted in foreign expansion with internationalization strategies. However, to state the firm has been growing but has faced some bottlenecks in the countries like Germany and South Korea. On the contrary, Mexico had been huge success as it was Wal-Mart’s first joint venture with American merchandising strategy which was adopted in the country. Although, Germany and South Korea had been in loss due to pricing strategy which was not accepted and certain factors like distribution and expertise also played an important role. However, on the cultural dimensions, it can be seen that the Mexico had been success due to the strategic alliance done with local companies. However, the merger was a failure in Germany and South Korea due to the more individualistic as well as power distance in the uncertainty avoidance of flexibility and normality.

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