The rapid development of the world economy and the increasing trend of globalization has resulted in several companies moving their operations to a global scale. Multinational corporations may seek international expansion to improve sales and revenues. However, moving to a new country can result in multiple challenges regarding the competition, culture, and a company’s strategy. International operations are not always optimistic and can result in poor performance. Walmart is an example of an international corporation that has always sought to scale its operations internationally. While Walmart experienced success in multiple countries like Mexico, Canada, Japan, Brazil, and China, it experienced a significant failure in the German retail market. This report analyzes the failure of Walmart in the German retail market and considers various international management theories and issues that can ensure a successful future international expansion.
Company Background
Walmart was founded in the year 1962 by Sam Walton. The company operated primarily in the United States, where it experienced massive success and became the world’s largest retail company. By the early 1990s, Walmart had exhausted the United States retail market after establishing hundreds of stores in the country. Walmart sought to expand its international stores, and in 1993 it started with ten stores outside the United States. The company’s international expansion led to massive success where it has approximately 10,500 stores and clubs in 24 countries, employing approximately 2.2 million associates (Kaelberer, 2017). However, such a success came with multiple setbacks in some countries. Walmart entered the European market through the acquisition of 21 Wertkauf stores in Germany in the year 1997. Germany was the largest retail giant in the European market due to its high GDP per capita, and it promised high profitability. Walmart expanded by adding several stores in the years that followed. However, the company went through multiple challenges throughout the eight years of operations in Germany. It had to leave in 2006 and left behind approximately $1 billion in losses (Hunt et al., 2018). The company’s failure can be attributed to a poor local environment climate
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External Environment Factors
The external environmental factors can impact the operation of a business as they can lead to various threats, making it difficult to realize a profit. Some of the external environment factors that Walmart has faced include unfair policies from the government and intense competition. Walmart’s main strategy in beating the competition is its low-cost pricing strategy. When entering a new market, Walmart offers very cheap products to win customers that want to save money. However, such a strategy is not universally accepted in different countries where the government can regulate the prices of some products. Such a situation took place in Germany, where Walmart entered the German market and lowered its prices compared to other German stores. Other German businesses saw the strategy as unfair to their profitability and pushed the matter to court. Walmart was then ordered to raise its prices by German’s high court (Yoder et al., 2016). The result was that Walmart continued to face huge competition. Walmart did not have any other strategy that could be used to outdo them. The government's interference through regulations made Walmart see that the German market could not accept its domination. It would face an increasingly huge amount of regulations if it tried to beat the competition and dominate the market. The interference by German’s legal system made Walmart disadvantaged.
Cultural Dynamics
Walmart operational culture is based on the American market. Cultural dynamics can involve various factors regarding the treatment of customers and employees. One of the key factors of the American culture is that employees are expected to be friendly to customers and greet them. The retail assistants can interact freely and chat with customers. Cashiers are expected to smile at customers to create customer satisfaction. However, these cultural dynamics in the treatment of customers can be different and unacceptable in another country. In case a company expands to another country that does not follow such an approach in the treatment of customers, customers can have a negative experience and stop using the company’s products and services. Walmart can expand to the international German market with the expectation that every country will support the American culture. However, most people found the culture strange as Germans did not behave that way. They found the employees' behaviors unauthentic and did not understand the need to be friendly when one is not their friend. The result was the company’s efforts to improve customer satisfaction created a negative customer experience.
Another cultural dynamic that can impact the operation of Walmart is the treatment of employees. Every company can have a specific culture regarding the treatment of employees. However, such treatment of employees may not apply to different cultures. Walmart outlets expected that its employees chant “Walmart! Walmart! Walmart!” at the beginning of the day when doing light jumping (Okocha & Eletu, 2016). Such a culture aimed to get the employees excited and be proud of being a part of the Walmart family. However, the German employees did not accept the culture and chanting, as they found it somewhat embarrassing. The German culture is rather reserved, and they rarely smile at strangers. While the employees smiled, the customers failed to smile back and were not impressed by the gesture. The company experienced resistance from some of the employees, and the result was that it hurt the company’s image.
A company’s culture can also involve its code of conduct regarding various employee relations. When moving to a new country, a company should strive to ensure that the employees' code of conduct should meet the destination country's expectations and culture. One of Walmart’s codes of conduct involves its employees not being allowed to be romantically involved in each other. Additionally, the company expects employees to report a coworker that has broken one of the company’s rules. Failure to report a coworker can result in one being fired. However, such regulations were not welcomed by the German market. An industrial court ordered Walmart to discontinue the practices at work.
Strategy
A company’s strategy involves a plan that can be used to enter and dominate the market. When moving to a new country, a company can use the strategy that worked in the previous country to enter a new country. However, multiple demographic factors can make a strategy fail in a new country. Walmart experienced such a failure when it moved to the German market. When entering the German market, Walmart’s main strategy was to enhance customer experience and create a new way of shopping for low-cost products. However, the strategy did not turn out as Walmart expected. Walmart’s customer service strategy never gained a strong reputation among German consumers.
Walmart also makes use of a low-price leader strategy in its stores to outdo its competitors. However, Walmart did not attain the image of being a low-price retail store among the Germans. The result was that Walmart’s entry strategy to the German market was not executed successfully (Shurrab, 2014). Other competitors had attained the low-price leader strategy beating Walmart. The result was that Walmart failed to have a strong brand recognition in the German market.
Structure
A company’s operational structure can experience multiple challenges when it enters a new market. The structure of a company that can be analyzed is the business structure and sources of funding. Walmart is an international corporation, and its main sources of funding are from external investors and stockholders. The company thus faces an exceeding amount of pressure to generate profit for its consumers. However, the German retail market was dominated by family-owned businesses that operate as cooperatives. The businesses were not dependent on shareholder expectations for profitability. The result was that Walmart had a small chance to drive these competitors out of business (Christopherson, 2007). Walmart's business structure was based on the constant need to satisfy its shareholders. The effect of the company’s business structure was that it encountered significant competition that made it leave the German market.
Walmart’s operation structure is not based on allowing employees to form unions. The company has primarily used a higher wage policy to break employees from their unions. The company strives to ensure that it has greater control of its employees and does not encounter any interference from labor unions regarding its operations and employee relations. When Walmart entered the German market, the company resisted allowing its employees to enter various labor unions. Walmart voluntarily paid its workers 3 percent above the industry scale, and Walmart workers made slightly more money than other retail chains. However, the increase in the salary did not increase the loyalty of works. Instead, it created a high level of distrust as Walmart was perceived to be trying tried to break the social norms of the German market.
Theories that Apply to International Management
Different theories of international management govern the operation of multinational enterprises. One of the theories is the transaction cost theory and internalization theory. The theory was postulated by Hymer, who observed that multinational corporations could create a benefit by maintaining a monopolistic advantage and reducing competition (Kano & Verbeke, 2019). Transaction costs are the costs incurred in determining whether the individuals in the market have the lowest price. The costs of the multinational corporation have to be implemented in agreement with the other party. The internalization theory observes that companies internationalize in a way that minimizes cross-border transactions to improve efficiency. The analysis of Walmart based on the theory shows that it did not follow the transaction theory approach when entering the German market. Walmart sought to have a low-cost pricing strategy that could outdo all its competitors. Additionally, most of the competing companies did not agree with Walmart regarding its low-price strategy. The result was that the company raised multiple complaints regarding the low-price approach, and Walmart was forced to increase its prices to be similar to that of competitors.
The OLI paradigm is a theory that focuses on ownership advantages, location advantages, and internalization advantages of multinational corporations entering new markets. The ownership-specific advantages (O) observe that a company should possess unique competitive advantages that outweigh the disadvantages (Casson & Wadeson, 2018). For Walmart, the company had the advantages of exploring a new retail market and improving customer service, and providing a low-price strategy. However, the company failed to establish these strategies fully, and it failed to appeal to the market. The location-specific advantage (L) involves the direct investment must be more profitable in the foreign country than in the home country. Walmart had exhausted its expansion in the United States market and sought to expand to the international market to increase its revenues easily. The internationalization advantages (I) are based on whether a company can exploit the advantages or sell the advantages to another company. Walmart is a multinational corporation, and it had the resources that could facilitate expansion to the international market. Based on the OLI paradigm, Walmart had the resources and could be more profitable in Germany. However, the company’s key ownership-specific advantages were missing, and it experienced significant losses.
The globalization theory can also be analyzed to measure the development and survival of companies in the international market. According to Kaelberer (2017), the theory of globalizing the international economy observes that more efficient producers will drive out poorly performing competitors and produce gains for consumers and profit for themselves. The observation is that efficient producers will drive out other poorly performing producers. Walmart's case shows that it was a well-performing company and efficient producer that could be highly successful in the German market. However, the company encountered a significant challenge where pricing and poor employee relations resulted in operational inefficiencies. Walmart’s management failed to address the issues raised adequately, and the result was that it became an inefficient producer-driven out of the market.
The evolutionary perspective of international expansion observes a firm's ability to adapt to a country’s culture. The theory observes that a firm’s longevity and success can be increasingly defined by its ability to promptly adapt and learn to the changing environment (Santangelo & Meyer, 2017). The theory's major focus is on the market environment as a dynamic process and a company's performance as a component of the market structure, competitive conditions, and strategies of the individual firms. The given theory can be applied to Walmart’s case to quickly understand its failure in learning and adapt to a country’s market environment. Walmart expanded to Germany, but it took some time before it learned and adapted to its culture. The company was not flexible to the market needs, and the result was that it experienced multiple challenges and had to leave.
Opinion Regarding the Organization’s Management of the Issue
The observation of Walmart’s management of Germany's issues showed that the company was not flexible in adopting German culture and social norms. Walmart sought to transfer the American culture to the German market, but its efforts were not appreciated. Other foreign companies have established themselves in the German market, such as eBay, IKEA, Amazon, and H&M, by being flexible. Walmart's failure when other multinational corporations succeeded indicates that Walmart had a mismatch between its strategy and the existing market conditions. Walmart’s customer service strategy failed to work in Germany as it was based on American values. However, Walmart was not flexible in understanding the German culture and shifting its policies accordingly. Walmart’s low-price strategy also failed to work, but the company did not formulate any other strategy that could be used to win customers.
When Walmart’s strategy did not work, the company could have sought to reinvent itself and develop a strategy that would appeal to the market. However, Walmart was resistant to its strategy, and the result was multiple conflicts. For instance, when Walmart’s employees sought to join labor relations, the company made a counteroffer by increasing their wages. Instead of Walmart seeking to understand the employee issues and addressing them accordingly, Walmart sought to impose its policies on the market. Walmart could have been flexible and sought to reinvent its approach with dealing with labor relations.
Instead of Walmart leaving the German market, the company could have strived to reinvent its strategy to the extent that it would appeal to the customers. Having stayed in Germany for over eight years, Walmart gained significant experience in handling various legal issues. Additionally, realizing profit in the retail sector could take more years, and Walmart would have been patient. Walmart could have engaged in a complete rebrand of its stores and changed the treatment of employees and customers. A rebranding that focuses on customers' needs could have made Walmart more appealing to the population and improved its operations efficiency.
Recommendations for Future Management in Dealing with the Issue
The analysis of Walmart shows that a company’s management can reconsider engage in the globalization level. Instead of simply entering an international market and seeking to impose its values, a company should seek to position itself based on the local culture and norms. Understanding a country’s culture can be possible by the company finding the right mode of entry. The use of acquisitions is beneficial in a market that is mature and similar to the original country. There is no need for new learning in case there are cultural similarities between the two countries. However, cultural differences would mean that a company should find a different entry (Chang & Hu, 2020). Instead of entering a country with a different culture through acquisitions, Walmart can have a joint venture with other companies through a merger. In such a situation, Walmart could learn from the other company’s culture and tailor its operations to meet the local market requirements. The other company could provide expertise regarding the new market.
Walmart should seek to understand the uniqueness of the local market and its business aspects that could be required to change. In case adaptations are required, Walmart needs to reinvent itself to fit the country’s culture. The understanding of a destination’s culture can be possible by conducting multiple experiments before fully launching. Walmart can experiment with different store formats and identify the one with the greatest customer appeal. One store can use the low-price strategy while the other store can have prices similar to that of the competition. Testing smaller satellite stores is a better approach to understanding customers' buying habits and shopping trends. Apart from testing on different stores, Walmart can test different products to determine the product with the greatest consumer appeal that fits best with the culture.
There is a need for Walmart to change its global expansion strategy. The main strategy predominantly used by Walmart is the low prices strategy to lure customers into purchasing from the company. The company’s policy focuses on “bigger and cheaper” as it strives to have bigger stores in different parts of the world and cheaper by maintaining its low-price leadership. However, such an approach is rigid and unacceptable, as seen in a culture like Germany. According to Hunt et al. (2018), simply exporting the “Everyday Low Price” approach has been one reason why Walmart has failed in international expansion. The authors observe that Walmart can be successful in the long-term if it focuses on understanding its demographics, infrastructure, political and economic systems, and being culturally aware of the shopping practices. Walmart should strive to have a culturally-based approach to expansion. Such an approach will involve critically analyzing and understanding the destination country’s culture before deciding to expand.
Conclusion
The study showed how international management could be applied in the expansion of multinational corporations. A corporation should understand the destination country’s culture, social norms, and business environment. A company's success in international expansion is based on learning and adapting to the new environment. The implication for the study is that Walmart should strive to change its international expansion policy by having one that culture-centered and not reliant on the American culture. Walmart’s success in other countries can also be attributed to being culturally aware of its expansion strategy. Walmart's future in the international business environment will be successful in case it uses a culture-centered strategy.
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