Wal-Mart: an analysis of factors that influenced failure in Germany and South Korea

Author: Iloka Benneth Chiemelie

Published: 31st of March 2014

Strategic and Environmental reasons why Wal-Mart decided to internationalize

A simple review of literatures will show that numerous studies (see, for examples: Covielo and Munro, 1997: Fleck, and Lloyd-Reason, 2009; Moen and Servais, 200) have been conducted in the area of understanding why firms internationalize and the impact of such strategy on firm’s performance. In accordance with Kuada and Sörensen (2000), the subject on factors that influenced firms’ internationalization has been developed to a great extent with reference to both environmental and strategic decision factors. However, establishing link between such factors and developing countries have not been fully developed as a review of literatures by Coviello and McAuley (1999) reveals that understanding the factors influencing firms’ decision to internationalize into developing countries are not well developed. The reason for such an be reflected on the fact that developing countries have not been accorded high interest in research because the developed nations have been known to play most crucial role in the global economy. However, the 2007-2009 recessions shifted the focus as countries that were not affected by the recession such as China are developing nations.

In terms of defining firm\s internationalization, there are different approaches views developed in line with such (Morgan and Katsikeas, 1997), and they have been researched in numerous cases for the past three decades (Etemad, 2004 a,b) with thee researches leading the way for the development of numerous theories in that field. For instance, the Uppsala model was developed as gradual views on internationalization, while the Finish-POM Models aided support of such of the Uppsala model (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). Besides these two views, other perspectives exist in the form of network approach (Kenny and Fahy, 2004; Majkgård and Sharma, 1998; Welch and Welch, 1998) and International New Venture approach (Oviatt and McDougall, 1994; Zahra, Ireland, and Hitt, 2000). Irrespective of the approach viewed in terms of internationalizing a firm, the reason behind intention to internationalize a firm is based on either strategic (to increase profit) or environmental (to mitigate negative factors). Thus, the case of Wall-mart is analyzed below based on these two factors.

Strategic reasons why Wall-Mart decided to internationalize

Strategic reasons can be grouped into two perspective as proactive (taking advantage of an existing system) or reactive (establishing new grounds of success by aviating a system that is not profitable for a more profitable system). Basically, the main reason why companies engage in strategic decision to internationalize is to capitalize on what they know best (Knight and Cavusgil, 1996; Rennie, 1993) and ensure sustainability through internal decision making tactics. The case study highlighted some strategic reasons behind Wall-Mart’s decision to internationalize and they are as discussed below.

Proactive – in the USA, Wall-Mart already has an established brand system with reliable retailing network that they have used over the years to increase success in the USA market. Thus, the company was very much dependent on this huge experience and management expertise to impact positively towards its growth abroad. Besides that, the company also seeks to take economies of advantage from its wide network of suppliers outside the USA by establishing in the countries of origin of these suppliers.

Reactive: besides the proactive reasons, Wall-Mart has also been reacting to a number of environmental factors. The case made reference to increased competition and saturation of the USA retail market, which forces the company to seek new areas for sales in order to ensure sustainability. Competitive nature of any given market plays important role in determining the extent of success that a company can achieve (Crick and Chaudhry, 1997) with more positivity associated with less congestion of competition and negative effects influenced by high competition. Thus, staying put in a USA market that is congested with retailers will affect the financial performance of Wall-mart in the long-run, which is a justification for the company’s decision to expand into international markets. In terms of comparing the cost of labour, developing countries have been known to have lower labour cost than developed nations. HRM issues such as labour cost have also been linked to increase in internationalization of firms (Czinkota, Johanson, and Ronkainen, 2002). The simple understanding here is that lower labour cost will result in increased profitability and this is another reactive reason why Wall-mart decided to internationalize as the brand seeks to reduce operation cost and increase profitability.

Environmental Reasons

Besides the strategic reason discussed above, earlier discussion did highlight environmental reasons as another factor behind firms’ intention to internationalize. In the case of Wall-Mart, the case study highlighted political reasons behind their decision as increased liberalization of the global market, with numerous countries seeking FDI as a means of increase their GDP, while the USA system increasingly becoming expensive for producers due to increase tax rates.

Referencing economies such as China where the brand has become very successful, Chinese political reforms has been the major factor behind the intention to internationalize into the country, as the reform paved way for international firms to easily and successfully establish themselves. Additionally, increasing tax rate in the USA when compared with earlier years of the country as served as an encouragement because the company clearly understood that they will make more profits by selling outside USA in countries where taxes are relatively low.

Another factor that impacted their decision to internationalize is the economic power of developing countries. Still on China as a reference, the case study noted that there has been an increase in middle-class families with a subsequent increase in purchasing power of the country (Iloka, 2014). The increase in economic power of developing nations is another factor that influenced Wall-mart’s decision to internationalize because they will be able to take advantage of the increasing middle-class and higher purchasing power of the Chinese populace.

Social-wise, most of the people in the developing countries such as Mexico and China where Wall-mart has enjoyed great success are very conscious of price when it comes to decision making as reflected in the case study. Thus, brands such as Wall-mart that are always willing to slash the price down are welcomed. This also influenced their decision to internationalize because they know that they will always have that advantage when it comes to customer loyalty.

The availability of technical support can also be argued as a motivating factor for the internationalization of Wall-mart. The case study made note of the countries that band has internationalized in the past to include some of the most technically advanced nations such as Hong-Kong, South Korea, China, and EU etc. Thus, it can be seen that advanced technical features for their retailing services in these countries influenced decision to internationalize.

For any business, focus on risk is importance as focus on profit. Thus, it is always necessary to take extra time to ensure that the business is protected legally and otherwise. The case also reflected in an indirect form, the company’s decision to penetrate into these countries as being influenced by strong and well-established legal systems. Experimentally, Wall-mart noted from their Mexico experience that they can actually change the environmental habit such as shopping, and these all play crucial role when it comes to their decision to internationalize.

Potential risk that the company might face

As Iloka (2013) noted in his research, companies do face a number of problems when it comes to internationalizing and establishing their business in another country. Most of these issue have been linked to cultural differences, forcing companies to address questions such as where to internationalize, how to internationalize, what to internationalize, and when to internationalize in order to be successful (Anderson and Gatignon, 1986; Agarwal and Ramaswami, 1992; Pan and Tse, 2000). In the case of Wall-mart, the potential risks include;

Differences in shopping pattern – the case of Mexico shows that differences in shopping pattern can affect sales negatively as the sales in Mexico was initially negative until Wall-mart adjusted to the Mexican pattern and influenced the pattern later with American views.

Cultural and consumption differences – just as culture is defined to be people’s way of life, numerous researches validates the idea of culture have strong influence on purchase decision (Anderson and Gatignon, 1986; Agarwal and Ramaswami, 1992; Pan and Tse, 2000). Thus, the products available at Wall-mart can influence sales negatively if they are not in line with what is obtainable in their internationalized country’s culture.

Associating low price with low quality – as is common with consumer psychology, customers can easily associate low price with low quality, and this can influence sales negatively as experienced in Europe where Wall-mart was forced to withdraw due to low demand for their lowly priced goods.

Strategic Human Resource Management: A case of Wal-Mart's recruitment approach

The concept of strategic human resource management has become a thing of great concern to both practitioners and researchers alike as they seek to understand the impact of globalization on strategic global human resource management (SGHRM) (Martin and Beaumont, 1998; Lepak and Snell, 1999; Dowling et al., 1999; Harvey and Novicevic, 2002). The main reason behind such is the increased global competition, which is fast becoming the norm and research have shown that if the present growth rate of globalization is taken into view, trades between nations will exceed those within nations by 2015 (Daft, 1997). The importance of global human resource management is more significant in the retail industry because it is very difficult to survive without scanning the world for cheaper and high quality suppliers, as well as competitors (Gregersen et al., 1998).  In this kind of environment as is presently obtainable, global human resource management has become very crucial for success of any given firm, while also becoming more complicated and difficult to administer (Grant, 1996; Kamoche, 1997; Boxall and Purcell, 2000; Harvey and Novicevic, 2003). Past studies have also supported this idea by identifying human resource as important for organizations seeking to gain strategic competitive advantage on the global scale (Wright et al., 1994; Lepak and Snell, 1999). Thus, managements must now develop pluralistic view of the management scope in order to encourage and maintain multiple views that will be used to solve complex global issues (Aguirre, 1997; Harvey et al., 1999; Reynolds, 1997).

In the case of Wal-Mart as discussed in the case, it was made known that the company recognized importance of expanding its market in order to increase its sales and overall profitability. Thus, the decision was made to internationalize and Mexico became the target country. Although the country maintains boundary with USA, any idea that it would have similar features with the American market in terms of retail purchases was refuted from the first year. for Mexicans, shopping is more towards buying what is needed presently as there is no light to store bulk foods like in the USA, thus Wal-Mart experienced failure within the first period of operation because they entered the market with the American view. However, the company was quick to understand the significance of pluralistic view when operating in a foreign market (Aguirre, 1997; Harvey et al., 1999; Reynolds, 1997) and they easily took cognizance of the differences between the two markets. Such cognizance was featured in the fact that Wal-Mart quickly changes its retail store pattern to that of Mexico by opening small stores across the city and offering fresh products as demanded in the country.

The concept of “glocalization” as featured in the idea of thinking globally while acting locally has been discussed extensively in bout management and human resource literatures (Boyacigiller and Adler, 1991; Brewer, 1992; Daniels, 1991; Parkhe, 1993). The idea presented here is that companies should value globalization and internationalize in order to increase profitability but, such internationalization should be based on meet the needs of local customers. As noted by (Ilinitch et al., 1998), globalization is having the same impact on human resource as it is doing on management. On a general note, cultural differences influence choice of goods and services as well as the demand nature of any given market. For instance, while pastas are for Italians, salads are for Americans and Chinese prefer rice. Additionally, while the Americans are masculine by nature, Swedish are feministic. Thus, the purchase behavior of customers will differ across market, which means that the first step in internationalization should be to study the differences in culture and align products and services with standards obtainable in these cultures. Thus, glocalization is increasingly being adopted in the HRM practices of international brands (Fiol, 1991; Lado et al., 1992; Rumelt et al., 1991) such as Wal-Mart because it is the only way these companies can actually meet their objective of increasing sales without drifting from what is culturally obtainable in these markets.

From all indication, the recruitment approach adapted by Wal-Mart is the glocalization approach (Lado and Wilson, 1994). This is because the company focused more on recruiting local staffs that understood the needs of the market more precisely as well as capable of making decisions that will positively influence growth in that particular market. The significance of glocalization as a HRM strategy has been extensively discussed in literatures ((Baird and Meshoulam, 1988; Lengnick-Hall and Lengnick-Hall, 1988; Milliman et al., 1991) and the importance has been identified to better understanding of the market since the staffs have lived their lives in the market. Such will help companies to better tailor their products towards.

In the case of Wal-Mart, the company understood this importance and the outcome was as projected by past literatures because the company experienced growth immediately they change the shopping style to that of Mexicans as accorded in the case study. Thus, it can be seen that localizing the HRM practices is very important in international markets because this is the only way that companies can better align their objectives with the needs of customers and effectively increase sales.

While localization in international markets is considered important, it should be noted that such approaches will not allow for standardization which means that companies will not take advantage of economies of scale. For multinational retail brands such as Wal-Mart, this is a thing of great concern because success if only measured by the volume of sales generated, and standardization is the only way that such sales volume will continue to rise. Past literatures have also linked standardization to increased profitability in international business (Adler and Ghadar, 1990; Kobrin, 1992; Milliman et al., 1991). Thus, localizing in all the markets will not allow the company to apply similar strategies, which will mean an increase in operation cost as well as training and development programs for the respective HRM practices in all the differing markets.  This understanding is probably the main cause that raised importance of standardization in Wal-Mart Mexico. The brand took notice of the fact that the American market was once like that of Mexico in which goods were purchased at smaller volume until such shopping behavior was changed by the arrival of mega malls like Wal-Mart. Thus, this created the need to standardize the Mexican market with similar shopping behavior as is obtainable in the USA. Slowly but surely, Wal-Mart successfully standardized the Mexican market and this is considered one of their revolutionary market approach as it increase the overall appreciation of Wal-Mart brand in the country as well as sales of goods. Inevitably, Wal-Mart became the major retailer in the Mexican market and the effects of continued innovation in the HRM context is what the company is presently benefiting from.

Factors that influences failure of Wal-Mart in Germany and South Korea

Considering the experienced success of Wal-Mart in Mexico, one could easily understand the decisions of the company to internationalize further into other countries, especially as they have been able to change the purchasing behavior of the Mexican market to match what is obtainable in the USA. However, visualizing the business environment as a common community is a big mistake that any company can make because there will always be differences down to the minute level in terms of how people perceive things and behave.

The case of Wal-Mart’s failure in Germany and South Korea has become a subject of discussion in both the academic and practitioners’ world as people seek to understand reasons behind their failure and solutions for avoiding such cases in the future. In any case, this research will focus primarily on the analysis presented by University of Pavia (2010) in which it was made known that a large number of reasons has been accounted as the factors behind Wal-Mart’s failure in Germany and South Korea and these reasons are as explained below.

Nature of the market – during the time that Wal-Mart entered the German market, retail spending has reached the maturity stage and was about entering the decline stage as influenced by the German economic slow-down of 2000 (University of Pavia, 2010). Besides the product life-cycle experienced by the German retail shopping, it is historically known that the German retail markets is such where huge margins is impossible and the market has already been dominated by other brands such as Metro, Aldi, Rewe and Schwarz. Even with the acquisition of Wertkauf and Interspar, Wal-Mart only had 1.1% of the German retail market and many argued that it was too small for the company to create any critical mass-medium for expansion. Additionally, the further acquisition became very difficult because no other brand where willing to sale. Even these brand (for instance Aldi), also had similar strategy with that of Wal-Mart in the sense that they offered low price goods. This was also a similar case in South Korea where top brands such as Carrefour and other local brands already dominated the market prior to Wal-Mart’s entry and these brands also offered low price strategy. Thus, the market created a really uncomfortable zone for Wal-Mart to gain any grip on the market shares, forcing the brand to exit and focus in other markets where they are sure of maintaining dominance.

The acquisition – one striking discovery pointed out by the analysis presented by University of Pavia (2010), the kind of acquisition made by Wal-Mart played significant role in their failure. For instance, the German brands Wertkauf and Interspar, were considered inferior and second choice in the country and the company only acquired selling rights with buildings but did not acquire the land. Thus, Wal-Mart had issues with meeting up changes in rental demand and this influenced their overall success in the country negatively. Additionally, success was negatively affected because the acquired brands are considered second choice in their respective markets, thus demand for good sold in these brands were very low.

The senior managers – in both Germany and South Korea, Wal-Mart did the mistake of not taking local HRM into consideration and this can be also be linked to their initial fail in Mexico with the outcome of its present success being influenced by the decision to localized its HRM (University of Pavia, 2010). In any case, the senior managers in both countries where mainly Americans that had little knowledge of experience of the German and Korean market; which made decision making process in the company more aligned with the American standards and neglecting the need to function in line with what is locally obtainable. Looking back at their acquisitions mentioned above, it can be seen that the lack of local managers influenced choice of acquisition because the American manager where not much familiar with top retailing brands in these countries. Thus, the management pattern did influence the lack of success in these countries.

Corporate culture – described as one of the reasons why major brands fail, priding one’s culture while in another culture can have significant negative effects and this was the case of Wal-Mart. The company has a well-established culture of customer orientation and having committed staffs that desire to meet the needs of customers (University of Pavia, 2010). However, this was different in the German culture as staffs wanted to be seen as individuals with their own views about things around them. In South Korea, the high level of power distance also meant that staffs do maintain some distance form customers whom they view as being above them in the society. Thus, these differences created a crash in the HRM system and it affected the success negatively because staffs had different views from what their American managers wanted, thus pointing back at the importance of localizing the management system.

Supply chain network – with only few percent of market shared owned by Wal-Mart, supply chain was a very difficult issue for the brand because suppliers were reluctant to move away from the top brands that offered better supply value (University of Pavia, 2010). Additionally, it was made known that Wal-Mart managers were acting in the same way as they do in America by going to the warehouse of their suppliers in order to check if they have enough stocks for supply. Thus, the German and South Korean suppliers were put off by this because it’s not applicable in their own culture. Thus, the lack of supply also influenced their success negatively.

Comparison of Wal-Mart in Germany and South Korea with Mexico

Basically, it can be seen that exactly the fate experienced in South Korea and Germany is what initially befall on Wal-Mart when they entered Mexico. It is still the same issue of understanding the market needs and being pluralistic in nature in terms of identifying differences in cultures and not treating different cultures as if they are the same (Adler and Ghadar, 1990; Kobrin, 1992; Milliman et al., 1991). Standing in the brink of failure, Wal-Mart quickly understood the importance of localizing its operations in Mexico by opening smaller shops in the streets and offering smaller volume of sales as is obtainable within the Mexican setting. The company also employed Mexican managers and allowed aligned their overall services to the taste of the Mexican market.

However, the brand repeated the same mistake in both Germany and South Korea by showcasing so much American influence in these markets. Considering the fact that Mexico was its first international market, one could easily argue that Wal-Mart should have learned their lessons once and for all. However, this was not the case as the brand still faulted in a number of ways when considering the German and Korean markets. Maybe, the brand might have viewed these markets as having the same features with that of the American market because they are advanced countries, but the fact still remains that differences in culture play significant role on how people do things irrespective of the similarities between the countries.

Irrespective of the argument made in this case, one thing that is very striking is differences in terms of zeal and commitment to excel that Wal-Mart had in these countries. While the brand was at the brink of failure in Mexico, it didn’t withdraw from the market but instead sort for new ways to improve its services and this effectively lead to the idea of employing locals and offering smaller stores across Mexico. The outcome is that Wal-Mart is the biggest retailer in Mexico presently but their reason to pull off from Korea and German as opposed to the Mexican decision to stay can also be linked to the fact that the Mexican market is fresh while the German and Korean markets were already congested with other popular brands.

Role of Culture on Wal-Mart's success and failure in international markets

As noted by Bird and Fang (2010), culture does play a significant role in internationalization and management of foreign firms. The authors based such statement on the cultural dimensions created by Hoftstede. Other researchers such as Chevrier (2009) have also made it known that the understanding of cultural features in any given market is the beginning of success for such brand and vice versa. The influence of culture in international business cannot be over emphasized because numerous managers are viewing the world as a simple community where standardized approaches can be adopted in order to rip the benefits of economies of scale, but the fact still remain that even the basic elements of human lives are different as influenced differences in culture. Not just what is consumed, but also how it is consumers, when it is consumers and who consumes it are all part of what managers need to understand when creating new goods and services. This is because what might be welcomed in a given society can be a taboo in another society. For instance, men don’t sale female lingerie in Saudi Arabia as opposed to the American setting where such is possible, majority of Indians are vegetarians are opposed to other countries where consumption of meat is highly welcomed, Muslims don’t eat pork as opposed to the Chinese Buddhists who enjoy such at any given point in time. Therefore, understanding these little but sensitive elements of culture is very important for creating peaceful co-existence as well as ensuring profitability of businesses in international market.

The issue of culture and its influence on international business is not something that kicked pace in the present days as it has been accounted for in previous literatures (for instance Ouchi, 1981; Pascale and Anthony, 1981; Rossi and O’Higgins, 1980; Smircich, 1983). Thus, culture is something that has influenced businesses in the past, presently influencing businesses and will continue to influence businesses in the future. On that accord, understanding how such influence occurs is very important for the success of any given business because it will help managers to align their objectives perfectly with the expectations (needs and wants) of the market.

The case of Wal-Mart is a clear demonstration of the fact that culture can have huge impact in the success of any given firm. At first, the brand was conscious of the need to internationalize but didn’t take time to understand the culture of their first international market. Thus, the starting stage was very difficult for the in Mexico as the Mexican culture is built around smaller quantities of food because of lack of electricity to store large volume of foods. This contradicted with the American culture that Wal-Mart entered into the country with and it inevitably lead to initial failures. However, the brand was quick to identify this issue and subsequently beefed up its system with Mexican employees that better understood the market. Thus, the right solution was provided and Wal-Mart switched from not being welcomed to actually changing the shopping culture of Mexicans.

In Germany, they also has issues as to how to go about the management process, but Wal-Mart was ignorant of their first case in Mexico as the brand hired American managers that were not very much aware of the German business approach. The outcome was acquisition of wrong brands, differences in corporate cultures, lack of effective supply chain system and inevitable failure of the brand in the country. Thus, they were forced to exit Germany with huge losses.

Still high on desire to make more profits through internationalization, Wal-Mart also entered the South Korea market and was also faced with a number of challenges. First, the market has already been dominated by other brands and they also made similar mistake with that of the German market and the brand was also forced to exit the South Korean market as well.

Basically, the above discussions are clear representation of the fact that culture do play significant role in the success or failure of international brands. The significance of such role is reflected in the fact that huge differences exist in terms of what consumers want and how they make their demands.

The concept of glocalization has also been discussed in this research and it was defined internationalizing with focus on the local market. Thus, it is in support of the idea that there is no generalization of the world as occasionally viewed because differences still exist across cultures down to minute elements that managers might view as insignificant but yet having significant impact on consumers’ overall decision making process.

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