Internationalization and firm's performance: a case of Wal-Mart

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

There are various approaches and 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 these researches leading the way for the development of numerous theories in that field.For instance, the Uppsala model was developed as a gradual view of internationalization, while the Finish-POM models assisted in the support of the Uppsala model (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). Besides these two views, other perspectives exist in the form of a network approach (Kenny and Fahy, 2004; Majkgrd and Sharma, 1998; Welch and Welch, 1998) and an international new venture approach (Oviatt and McDougall, 1994; Zahra, Ireland, and Hitt, 2000). Regardless of the approach taken in terms of internationalizing a firm, the motivation for internationalization is 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 for why Wall-Mart decided to internationalize

Strategic reasons can be grouped into two perspectives: proactive (taking advantage of an existing system) or reactive (establishing new grounds for success by abandoning a system that is not profitable for a more profitable system). Basically, the main reason why companies engage in strategic decision-making 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, which are discussed below.

Proactive: Wall-Mart already has an established brand system and reliable retail network in the United States, which they have used to increase their success in the market over the years.Thus, the company was very much dependent on this huge experience and management expertise to positively impact its growth abroad. Besides that, the company also seeks to take advantage of the economies of scale offered by its wide network of suppliers outside the USA by establishing itself 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 US retail market, which forces the company to seek new areas for sales in order to ensure sustainability. The competitive nature of any given market influences the extent of success that a company can achieve (Crick and Chaudhry, 1997), with more positivity associated with less competition congestion and negative effects influenced by high competition.Thus, remaining in a crowded retail market in the United States will have a long-term impact on Wall-Mart's financial performance, justifying the company's decision to expand into international markets.In terms of comparing the cost of labor, developing countries have been known to have lower labor costs than developed nations. HRM issues such as labor costs have also been linked to an increase in the internationalization of firms (Czinkota, Johanson, and Ronkainen, 2002). The simple understanding here is that lower labor costs will result in increased profitability, and this is another reactive reason why Wall-Mart decided to internationalize as the brand seeks to reduce operation costs and increase profitability.

Environmental Reasons

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

Referencing economies such as China, where the brand has become very successful, Chinese political reforms have been the major factor behind the intention to internationalize the country, as the reforms paved the way for international firms to easily and successfully establish themselves. Furthermore, the increased tax rate in the United States when compared to previous years served as an encouragement because the company clearly understood that they would make more profits by selling outside the United States in countries where taxes are relatively low.

Another factor that impacted their decision to internationalize is the economic power of developing countries. Still using China as a reference, the case study noted that there has been an increase in middle-class families with a subsequent increase in the 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.

Socially, most of the people in the developing countries such as Mexico and China, where Wal-Mart has enjoyed great success, are very conscious of price when it comes to making decisions, as reflected in the case study. Thus, brands such as Wal-Mart that are always willing to slash the price are welcomed. This also influenced their decision to internationalize because they knew that they would always have the advantage when it came 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 the band has internationalized in the past to include some of the most technically advanced nations such as Hong Kong, South Korea, China, the EU, etc. Thus, it can be seen that advanced technical features for their retail services in these countries influenced their decision to internationalize.

Focusing on risk is just as important as focusing on profit in any business.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 way, the company’s decision to penetrate 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 an environmental habit, such as shopping, and these all play crucial roles when it comes to their decision to internationalize.

Potential risks 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 businesses in another country. Most of these issues 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 patterns—the case of Mexico shows that differences in shopping patterns can affect sales negatively, as the sales in Mexico were initially negative until Wall-Mart adjusted to the Mexican pattern and influenced the pattern later with American views.

Cultural and consumption differences: While culture is defined as people's way of life, numerous studies have found that culture has a strong influence on purchase decisions (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 available 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 was experienced in Europe, where Wall-Mart was forced to withdraw due to low demand for their lowly priced goods.

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