2006-7 Course Work Exemplar
Transcript of 2006-7 Course Work Exemplar
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International Operations (BN3322) 2006/2007International Operations (BN3322) 2006/2007International Operations (BN3322) 2006/2007International Operations (BN3322) 2006/2007Individual Coursework Assignment
SCENARIO:SCENARIO:SCENARIO:SCENARIO: The following excerpt was taken from the Guardian on Friday 28th July2006:
WalWalWalWal----Mart pulls out of GermanyMart pulls out of GermanyMart pulls out of GermanyMart pulls out of Germany
The world's largest retailer, Wal-Mart, has made a rare admission of failure byselling its hypermarket chain in Germany at a loss of $1bn (530m) after failingto convert the country's shoppers and regulators to its low-price, American-styletrading.
Wal-Mart said today it was offloading its 85 German outlets to a local rival, Metro,in a move that calls time on its nine-year struggle to make an impact in thecountry.
Andrew Clark in New York
Friday July 28, 2006
The Guardian
YOUR ASSIGNMENT:YOUR ASSIGNMENT:YOUR ASSIGNMENT:YOUR ASSIGNMENT: Critically examine the strategy and tactics used by Wal-Martto enter into the German market and explain the likely reasons for their failure.Devise an alternative international operations strategy for entry into Germany forWal-Mart that would have met with more success.
LENGTH:LENGTH:LENGTH:LENGTH: 3500 words maximum not including title page or references. (Wordcount to appear on title page.)
SBMISSION DATE:SBMISSION DATE:SBMISSION DATE:SBMISSION DATE: 12 noon Thursday, 22 February 2007.
ASSESSMENT CRITERIAASSESSMENT CRITERIAASSESSMENT CRITERIAASSESSMENT CRITERIA : The assessment of the individual assignment will bebased on:
the ability of the student to apply the concepts, models, tools and techniquescovered by the 'International Operations' module to a 'real-life' scenario
the ability to justify choices made during the application of those concepts,tools and techniques with data and assumptions based on research from adiverse range of sources.
(N.B.N.B.N.B.N.B. The report should be properly referenced.)
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Introduction______________________________________________________________
Wal-Mart Stores INC is the worlds dominating retailer as well as the 2nd
largest corporation
(CNN: Fortune 500, 2007). Their total net sales amounted to $312 million in 2006, which is an
increase of 9.5% when compared to the previous fiscal year and net income rose by 9.4% to
a record $11.2 billion. Wal-Mart was founded in 1962 by Sam Walton in Bentonville,
Arkansas, USA, who believed that discount chains were the wave of the future (Wal-Mart
website, 2007). The company became public in 1970 and until around 2000, the majority of
its income was made on home soil in the USA. In 1992, Wal-Mart entered into the
international market for the first time with the opening of units in Mexico. Wal-Mart currently
operates in over 14 countries with a total of 6,600 units and a workforce of over 1.8 million.
Their international sector consists of eleven wholly owned subsidiaries, two majority-owned
subsidiaries in Japan and Mexico and joint ventures in China. Moreover Chain Stone Age
(Fernie et al, 2006 p.92), anticipated that Wal-Marts revenue would be roughly $700 billion
by 2010.
To meet this anticipated growth, Wal-Mart had to implement a very aggressive strategy to
their expansion plans and with the help of a reduction of cross border barriers during the
1990s, Wal-Mart set their sights outside of the US and into the European retail market,
notably the UK and Germany through horizontal foreign direct investment. On the 14 June
1999 (Competition Commission, 2007), in the UK, Asda PLC was taken over by the American
giant with a $10.87 billion deal (Anon, 2007), which considerably helped Wal-Mart's entranceinto the European market. Wal-Mart then entered Germany during December 1997 through
the acquisition of 21 Wertkauf stores. In 1998, a further 74 Interspar stores were purchased
from Spar Handels AG. Wal-Mart viewed these B-Level store takeovers as a strategy to enter
both the well established Western European markets and the recently emerging Eastern
European markets (Fernie et al, 2006).
Wal-Mart became the 8th
biggest retail specialist in Germany with annual sales revenue of
$1.4 billion (Anon, 2007). Success seemed imminent. However, it had a dormant market
share of 1.1% and its revenue was not great compared to the retailers in higher ranks, such
as Metro AG, Rewe Group and Aldi Group. What made matters worse, was that by the end of
2000, accountants were already estimating losses. By 2005, Germany represented only 4%
of Wal-Mart's international operations. Then, on July 28th
2006, according to Clark (2006)
Wal-Mart declared that it would sell off its stores to the local German rival discounter Metro
AG. Many suggest that the dominance of the American market made Wal-Marts directors
over confident and naive. Beth Keck, an international spokeswoman for Wal-Mart portrayed
this image by saying We literally bought the two chains and said Hey, we are in Germany,
isnt this great? (Montopoli, 2006).
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The purpose of this report therefore is to critically examine the implementation of Wal-Marts
strategy and tactics to enter the German market and explain the likely reasons for their
failure. An alternative and more successful international operations strategy will then be
devised using primary and secondary material, in addition to theories studied over the past
semester.
Wal-Marts strategy and the German market______________________________________________________________
In order to understand the reasons behind Wal-Marts failure in Germany, it is essential to
examine what strategy they used to enter into Germany as well as the characteristics of the
German market.
Wal-Marts main reason for success is their EDLP pricing strategy (Every Day Low Prices).
These low prices are made possible through competitive margins and high stock turnover
whilst the low costs are achieved through various forms including; economies of scale, strong
supplier and buyer relations and their supply chain operations (Fernie et al, 2002 p.92). This
very efficient supply chain, according to Ehring (2006), allows the costs of good for the
company to be 5% to 10% less than the majority of their competitors. This is applied to all of
their retail stores, which includes discount stores, neighbourhood markets and super-centres.
When we first enter new markets, our first priority is to learn more about the customers,
introduce the Wal-Mart concepts and philosophy and prove ourselves1
(Beard et al, 1999 p.109).
Bob Martin, the former CEO of Wal-Mart International displays here the confidence of many
of his staff during Wal-Mart's initial acquisitions.
Germany currently has a GNP of 2.5 trillion and
a population of around 82.4 million citizens
making them one of the wealthiest and most
technologically advanced countries in Europe
(Anon, 2007). Hill (2005) explains that Wal-Mart
faced problems with their information systems in
Mexico. With the presence of more advanced
German systems, room for error was minimised.
Fernie et al (2002) explains that due to the
countrys high labour costs, low unemployment
and low consumer spending, German retailers
minimised costs on the design of the stores and merchandising, which is why it is not
1Bob Martin, former CEO, Wal-Mart International
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surprising to find such a high level, (see figure 1) 40.8% to be precise, of discount stores.
Customers expect no-frills, low-price (Fernie et al, 2005 p.95) products with a minimum
amount of customer service, which fits in with the already successful strategy of Wal-Mart.
Where did Wal-Mart go wrong?
______________________________________________________________
Even before entering Germany, Wal-Mart was faced with a disadvantage of not having any
incentives from the German government. This was due to their acquisition entry strategy and
not entering in the form of a Greenfield investment2, in which case the German government
would have seen new job opportunities and other related benefits with regards to inward FDI.
However, Wal-Mart was unable to take the form of a Greenfield investment due to strict zone
and planning regulations, especially as Wal-Mart stores are so large (Elg et al, 2005).
Having decided to use the same strategy in the U.S, soon after the acquisitions, the
Americans began to face certain problems that had previously not been taken into account.
These mistakes can be separated into 3 broad sections; their acquisition strategy, a bad
approach to the local culture and breach of certain German laws.
Wal-Marts first acquisition as already mentioned, was the 21 Wertkauf stores which was
relatively successful, as the majority of stores were in competitive locations and the
management was effective. However, the acquisition of Interspar stores was badly
undertaken for numerous reasons; According to Knorr et al (2003) Interspars stores were
mostly small, poorly laid out, run down, in less favourable inner city areas and residential
locations. Wal-Marts directors underestimated the German reluctance to drive to and shop in
these areas. On the other hand, the Wertkauf stores were much larger in size, clearly laid out
with much better services. Installing Wal-Marts brand image was never going to be easy here
due to the national loyalties of Germanys 91% (Ehring, 2006) native population but with
these two very inconsistent types of store made the installation even more difficult for Wal-
Mart.
Wal-Mart also heavily underestimated the competition that they would be facing in Germany.
They came here and thought they would just roll up the market, just because theyre the
cheapest (Seith 2006). Wal-Marts downfall could be linked to a bad choice of company to
take over, which in turn disabled possible access to an undervalued firm-specific and capital
asset (Hill 2005) as Spar Group is one of the smaller players in the German retail market
around seventh out of the top ten, which is dominated by Metro AG, Rewe, Edeka, Aldi and
Schwarz Group (Garbato, 2006). Many critics outline that Germany was a good market to
2Greenfield site: Establishing a new operation in a foreign country. (Source: Hill 2006)
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enter, but because it is the third largest retail market after the U.S. and Japan (Edelson et al,
2006), the nature of the market is extremely competitive, making it very hard for any retailer
to succeed, notably, in the case of Wal-Mart nave ones.
According to Bloomberg (2006) the main competitors are the hard discounters with AldiGroup firmly in the lead. Aldi is very well established in Germany with a market share of 19%,
owning 4,000 stores (Seith 2006). Aldis effective strategy is based on 65 head offices which
each incorporate a distribution centre located around Germany. This means that each
distribution centre is responsible for 61 stores (Konrad 2005). According to Seith (2006), Wal-
Mart, with only 85 stores, had 3 distributions centres and 1 head office, signifying that each
distribution centre was responsible for only 28 stores. A researcher claimed that Wal-Mart's
infrastructure was that of an overgrown retail company (Seith 2006). Furthermore, Ewing
(2005) explains that even when Wal-Mart under-cut Aldi on price, which was not very often
the case, customers were not prepared to travel the extra distance to the larger Wal-Mart
stores. This could illustrate bad geographic location and a lack of brand acknowledgment. In
fact, Wal-Mart was no longer competing for the lowest price, as customers predominantly
went there when they required a more diverse range of products. This however digresses
from Wal-Marts principal and effective EDLP strategy in the US.
Wal-Mart tried to expand their market share of around 2% (Fernie et al, 2002 p.97) through
numerous discussions with their competitors, as Wal-Mart not only owned a relatively small;
85 stores but were also only in range of 20% of German citizens (Knorr et al, 2003 p.19).
Nevertheless, due to the economic difficulties in Germany such as the slow 1.8% GDP
growth rate (IGD, 2007),their possible future growth looked bleak. Consequently, when Wal-
Mart encountered resistance from its suppliers delivering the traditional way, which is directly
to the store instead of via distribution centres, the suppliers resistance to change was too
great for a change in their habits. Stock deliveries were therefore often late and stores found
themselves repeatedly out of stock (Fernie, 2002). Moreover, due to these effects, Wal-
Marts maintenance costs for its logistic systems were rising. According to analysts, Wal-Mart
needed sales amounting to 2.5 times greater than what they were already achieving in order
to reach the critical mass3
level in order to be significantly profitable in Germany.
When expanding into a foreign market, one of the most important aspects to take into
account is the understanding of the intercultural differences in order to adapt the entry
strategy accordingly. This is particularly important when a company enters into a new market
via acquisitions as in the case with Wal-Mart.
3 Critical Mass: the minimum amount (of something) required to start or maintain a venture.
(Source: http://www.thefreedictionary.com/critical+mass)
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The complex whole that includes knowledge, belief, art, morals, law custom and other
capabilities acquired by a person as a member of society(Hill, 2006 p.706).
Hills definition of culture above shows that it covers a vast amount of issues and for a
company to enter into a new foreign market and therefore a new foreign culture, it isimperative that the company adapts to their new environment. In the case of Wal-Mart,
evidence is shown that a barrier is formed between the Germans and the Americans due to
lack of cultural understanding.
Geert Hofstede conducted a comprehensive
study of how values in the workplace are
influenced by culture. Analysing his 5D
model (Figure 2), we can see that certain
dissimilarities appear from both American
and German cultures. Firstly, the Americans
are more individualistic (IDV) than the
Germans, showing a 91:67 percentage ratio.
This means the Americans are more
accustomed to people working by
themselves and only looking after their
immediate friends and family, while the
Germans are more collective. Another
interesting point is the uncertainty avoidance
index (UAI), showing a percentage ratio of
46:65. This means the Germans have firmer
laws and rules and a stronger resistance to change. This theory outlines the principal errors
committed by Wal-Mart when it arrived in Germany which will be shown in the subsequent
examples.
The human resource management team decided to use an ethnocentric approach which
means that primary management positions are allocated to parent-country nationals i.e. theAmericans (Hill, 2006 p.707). According to Knorr et al (2003) the first CEO of Wal-Mart
Germany, Rob Tiarks, an American, did not speak German and was very reluctant to learn
the language. He completely disregarded the German legislation as well as advice from
Wertkauf directors. The team of managers main language became English and in turn
created friction between managers and workers via a language barrier. The Americans were
unaware that in Germany, the relationship between managers and workers is very important.
According to Howley (2006), the Germans did not appreciate the hostile and extrovert nature
of the help that the Americans were giving. Nor did the Germans appreciate it when Wal-
Mart imposed different customer service styles such as sales clerks having to always smile
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upon customer entry to the store, which some male customers saw as flirting. Employees
also packed the customers bags at checkouts, which concerned the Germans at the prospect
of having to pay extra (Seith, 2006 and Weismann et al, 2006). Other strange practices that
Wal-Mart imposed on their staff were morning chants! Hans-Martin Proschmann, the
secretary of Verdi union said people found these things strange; Germans just dont behavethis way (Landler et al, 2006).
Another important aspect of culture that Wal-Mart failed to understand was the implication of
German opening hours. American Wal-Mart stores are designed for customers to shop for
several hours, especially on weekends. Knorr et al (2003) explains that in Germany however,
store opening hours are one of the shortest in Europe and stores are even closed on
Sundays as well as public holidays. The Germans having adapted to this environment spend
few hours shopping and are therefore reluctant to spend more time in larger, time consuming
stores.
A final part can be linked to German laws and regulations. Wal-Mart frequently breached
these laws creating considerable negative publicity. Wal-Mart ignored the fact that Germanys
economy pays great attention to its social welfare, particularly labour laws and union rights,
whereas the American economy is based on Common Law which as stated by Cunningham
et al (2006) working definition of individual rights and responsibilities. This relates to
Hofstedes theory of individualism (see figure 3) where the Germans are more collective than
the Americans. In the U.S. Wal-Marts directors forbid any worker to participate in any unions
enabling the company to keep their prices down (Bloomberg, 2006). However, with such a
large presence of trade unions in Germany, Wal-Mart soon fell into trouble. Darsow explains
that during June 2005, Wal-Mart was found to have violated certain labour laws, notably the
Ethics Code. The code of conduct that Wal-Mart dispatched to its customers included the
following clause: You cannot go out or enter a love relationship with someone if this could
influence the working conditions of the person involved (Bloomberg, 2006). This frustrated
the German employees, claiming an infringement on their personal lives. The case was later
ruled in favour of the employees in front of the Labour Court of Wuppertal. This is just one of
many cases where Wal-Mart ran into problems with trade unions.
Other laws that Wal-Mart violated included the antitrust law. According to Ewert et al (2003)
Wal-Mart was taken to the German Federal Court of Justice during 2002, for breaking the
German Act Against Restraints of Competition, which prohibits companies that have
superior market power from selling goods below cost. Furthermore The German Cartel Office
announced guidelines for companies who have significant market power to ensure that their
pricing strategies complied. These changes had a large impact on Wal-Mart as their core
strategy was to be the cheapest.
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To summarise the strategy that Wal-Mart implemented into the German market, the Barlett
and Ghoshals model can be consulted. According to Hill (2006) companies competing on a
global scale face two types of competitive pressures that affect their ability to realize location
economies (Hill, 2006 p.241). Firstly they face pressures for local responsiveness and
secondly pressures for cost reductions. Looking at the Barlett and Ghoshal model (Figure 3)we can see that Wal-Marts strategy has a global standardization strategy which has a low
local responsiveness pressure and a high cost reduction pressure. According to Hill (2006), a
low responsive pressure is when a company does not differentiate its products and strategy
from country to country. This was the fundamental cause of Wal-Marts downfall.
GlobalStandardization
Strategy
PressuresforCostReductions
Pressures for local responsiveness
InternationalStrategy
LocalizationStrategy
TransnationalStrategy
Figure 3: Internationalisation StrategiesBartlett and Ghoshal. Source: Hill 2006 p.431.
Wal-Marts strategy
Wal-Marts
ideal strategy
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Alternative Solutions
After analysing Wal-Marts problems an alternative strategy will now be constructed. Before
entering into a foreign market it is essential to examine it. To do this, Wal-Mart should have
better used the SWOT analysis, to assess the hosts markets strengths and weaknesses as
well as the opportunities and threats facing it. Carrying out this analysis would have helped
them to create a niche in the host nations market (Anon, 2007). If Wal-Mart had carried out
this procedure correctly, it would have seen that Germanys market is very different to that of
the U.S.
Upon entry, Wal-Mart did not take over sufficiently enough stores. Seith (2006) along with
several other reporters, illustrate the point that it simply did not have enough of a market
share to reap sufficient rewards. Anon (2000) speaks of plans that Wal-Mart were to take
over Metro AG. This would have been a much better choice of take over in comparison to
Wertkauf and Interspar, due to its dominating position in Germany and already well
established large network distribution. With such a position, Wal-Mart would have been able
to reach the critical mass that was needed in order to be significantly profitable in Germany.
Using Bartlett and Ghoshals model (see figure 3), Wal-Mart should have adopted the
transnational strategy from the beginning. This would have enabled an adaptation towards
the high pressures of the local culture from the very start. Ewing (2005) explains that the firstsign of this move was made during 2001, when Kay Hafner, the first German CEO of Wal-
Mart arrived and started showing a greater interest towards the local culture. This significant
change enabled the company to improve their structure and develop supplier relationships,
but in fact, proved to be too late.
Wal-Mart was convergent when approaching the culture of Germany. Brookes (2007)
explains that a converging culture identifies the best way of managing operations. Wal-Mart
tried to install their EDLP approach as well as numerous other American work culture
characteristics that were used in the U.S. These clearly didnt work. On the other hand a
divergent culture would have been more appropriate whereby beliefs, attitudes and values
are adapted to meet the characteristics of the host country. This method would have taken
longer to implement, but would have greatly benefited Wal-Marts strategy in the long term.
Wal-Marts adoption of the ethnocentric policy was also a bad approach. The policys
advantages are immediately outweighed as Germany already had very capable managers
with good core competencies and a very good understanding of its culture. Wal-Mart should
have adopted the polycentric policy, allowing the host country nationals to manage local
responsiveness, such as working with the unions, workers and customers. The parent
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company nationals would then be able to overlook the network while working in partnership
with the indigenous nationals (Brookes 2007). This in turn would have prevented the
problems that Wal-Mart faced with German trade unions, law and legislation. Other models
could be applied, such as Trompenaars seven cultural bifurcations, which explain that all
cultures have a different approach to global problems (Hamm, 2004).
Carrying out this alternative solution, would indeed require more time and money but in the
long run, Wal-Mart would possibly have made an impact on the German market and not have
been in a position they are in today.
Conclusion______________________________________________________________
Wal-Mart entered Germany as a stepping stone into the European market as well as
expanding their international operations to meet the anticipated growth. It encountered many
difficulties due to the highly competitive nature of the market and its astonishing naivety,
ignoring fundamental globalisation and intercultural strategies, paying no attention as to how
the Germans operate.
However Wal-Marts problems were not limited to Germany. It is struggling in countries such
as Japan, which is the second largest retail market in the world and South Korea in May
2006. It is discovering more and more that its formula for success doesnt adapt to all markets
with their own discount chains and consumers with different cultures (Landler et al, 2006).
Brookes (2006) showed that the fundamental reasons of foreign direct investment are to take
advantage of the host nations economy through resources, market and efficiency seeking.
However, it seems immediately apparent that the disadvantages outweigh the advantages. If
the Americans had thoroughly researched the German market, it would have been clear to
them that they should enter a market that is closer linked to the U.S. for example the UK,
where Wal-Mart has been successfully incorporated.
Montopoli (2006) explains that Wal-Mart may even look back on its German failure as a
blessing in disguise. The company is now reconsidering its very aggressive corporate
culture and heavily influencing its foreign stores. They no longer appear to assume that Wal-
Mart can set up abroad without thoroughly thinking about how to fit into a particular market.
We will soon see if this blessing in disguise will help them to successfully enter into the
current takeovers of various stores in India and Australia!
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