Fundamental of International Buisness - Essay Example

Fundamental of International Business Established in Arkansas in1962 by Sam Walton ,during the last four decades , Wal-Mart has grown rapidly to become the largest retailer of the world with 2003 sales of $256 billion,1.5 million employees and more than 4500 stores. In 1990, Walmart realized that its opportunities for further growth within the United States was becoming more limited. By 1995,they knew that the company would be active in all 50 US states ,so the management calculated that by the early 2000s domestic growth opportunities would come to a stand still due to market saturation. Moreover it thought it could create value by transferring its core skills to foreign markets where indigenous competitors lacked those skills. Hence the company decided to expand globally It also wanted to get ahead of other retailers who were also heading in the same direction. In addition to greater growth, by gaining international reach, Wal-Mart has been able to demand deeper discounts from the local operations of its global suppliers thus increasing its potential to lower customer prices , gaining market share and ultimately earning greater profits.(Charles W.L.Hill,2006). Walmart is arguably as american a company as it can get.So when the decision was made to expand globally,there was plenty of skepticism to go around.Some of the major management decisions involved questions concerning where to begin , how to go about it and how to customize their products to a foreign clientele. While its retailing practices thrived in America ,there were a multitude of challenges it would have to face in other countries where infrastructure is different, government policies vary, and customer tastes and preferences are “foreign”. Not to mention the competition in the form of established retailers already having the leading edge .After its successful venture into the foreign market in the border and neighboring countries of the United States notably Canada and Mexico(where it’s the biggest private employer),it looked towards Europe for its next move.UK and Germany, countries with the biggest family incomes, became its next targets. By this time it had already developed a strategy of buying a competitor out as a mode of instantly capturing a target country’s market share rather than starting from scratch. This modus operandi of corporate takeover proved advantageous for Wal-Mart in most countries, as in one stroke they succeeded in gaining critical mass(real estate and employees),wiping out its competitor, attaining massive presence in targeted location and avoiding community opposition to construction of huge supermarkets.(Andy Rowell, October 2003).While Wal-Mart met with unprecedented government support, media praise and public fanfare when it opened its first superstore outside of Bristol, UK in 1999,its entry into Germany in the words of Mr. Lee Scott, President of Wal-Mart was “somewhat embarrassing”. Wal-Mart executives held top level personal meet with UK prime minister Tony Blair before they took over ASDA, procuring the government’s green signal for expansion in UK. Even before the acquisition, ASDA was a virtual devotee and ardent follower of Wal-mart’s policies and strategies. It had tried to imitate Wal-Mart’s aggressive price reduction schemes,takeovers of small towns, larger stores than rivals, aggressive price reductions and thrifty employment policies for years and quite successfully so too. So for Wal-Mart, ASDA was a very natural choice for acquisition as both companies were practically the same mind with two bodies. ASDA claims that it has acquired 1 million new customers under the ASDA-Wal-Mart banner. Owned by Wal-Mart, ASDA has become the second biggest supermarket chain in the UK with 17% of the market share. As of June 2004 ASDA operated 259 stores and 19 depots, mainly in Scotland and northern England, and employed 122,000 staff. In the first five years since being bought by Wal-Mart, Asdas grocery market share has increased from 13% to over 16% without acquiring any new stores. Wal-Marts international division contributes 18% to their total sales, with ASDA accounting for nearly half of that .(ASDA/ Wal-Mart corporate profile, November 2004).Institute of Grocery Distribution (IGD) says that the Wal-Mart’s takeover of ASDA, is the most significant entry into the UK by a foreign retailer to date.(Andy Rowell, September 2000).Trying to sooth the public’s concerns about Wal-Mart’s potential domination of small towns and wiping out of traditional businesses, Wal-Mart’s strategy in UK seems to be one of effective communication to reassure that it will not change too much too fast. In spite of its claims that it plans on opening only 10 stores in the next 5 years, skeptics warn that its real aim is to become the largest retailer in UK with more acquisitions and mergers in the future. In spite of opposition from planning laws to develop Wal-Mart style super centers, through their political clout in the government and through legal loopholes, Wal-Mart seems set to dominate the UK retail scene. The Wal-mart German initiative on the other hand was nothing short of a fiasco. Wal-Mart entered Germany, the third-biggest retail market after America and Japan, in 1997-98 by buying two local retail chains, Wertkauf and Interspar, for $1.6 billion. Whereas Wertkauf was well-known and profitable, Interspar was weak and operated mostly run-down stores. Wal-Mart has lost money in Germany ever since. Problems have included price controls, which prevent below-cost selling, rigid labor laws and tough zoning regulations, which make it extremely difficult to build big stores. Wal-Mart also faced well-established rivals in Germany, like Metro, and hard discounters such as Aldi and Lidl, already comfortable with razor-thin profit margins. Many retailers in Germany are owned by wealthy families whose business priorities are not always the maximization of shareholder value.(Economist.com, April 2004).Wal-mart’s notorious “race the bottom” strategy worked in almost every country except Germany.Though Walmart held the advantage on globally sourced products like Chinese made toys and clothes, it had no clue when it came to local food ,preferred beverages ,popular groceries and well-liked local brands. The culture shock proved too much for the Walmart managers who were sent to Germany from home. Their refusal to learn the German language and lack of understanding of the local culture did not help in communicating effectively with local suppliers and clients. An example of their cultural faux-pas was their newly translated code of ethics given to their workers which created a huge furor and was totally ridiculed in the local media. Germans read caution against supervisor-employee relationships as a puritanical ban on interoffice romance, while a call to report improper behavior was taken as an invitation to rat on co-workers. Wal-Mart’s constant clashes with the German unions and persistent refusal to comply with German co-determination rules have only fuelled its already bad reputation. In July 2000, Wal-Mart workers in Germany went on strike to force the company to join the collective agreement for commerce. Union action including strikes continued, and in the summer of 2002, Germanys largest trade union, the Unified Service Sector Union, known as Verdi, once again warned the company that it would not give up before a collective agreement has been signed. In an attempt to salvage the situation , finally in November 2002, in what was seen as a major success for the union, Wal-Mart announced that it would recognize and apply the German collective agreements for commerce. Wal-Mart also decided to appoint a local German chief, Hafner to help with its acclimatization to local tastes. Its also introducing private labels such as Cosies baby products and Equate cosmetics. Company officials say the plan is to concentrate on improving distribution efficiency and building relationships with local suppliers, then to consider expanding. In spite of correctional measures, since entering the country in late 1997, Wal-Mart has captured just 2% of German food sales, or $3.2 billion annually as of April 2005.(Jack Ewing, April 11th 2005). Thus Wal-Mart’s strategy of buying existing chains in foreign countries as a prelude to interjecting their markets has worked admirably in UK but has been a disaster in Germany. While there might not be anything wrong in this tried and well-tested policy of theirs, the manner in which they went about it in Germany certainly left a lot to be desired. First of all Wal-Mart was not able to woo the German government as it was able to do so in the UK . Wal-mart’s bad reputation of mistreating its employees and its lack of respect for traditional businesses and suppliers preceded its arrival in Germany. Absolute lack of understanding of Germans ,their priorities and the importance they place on labor laws and strict price control policies shows an unforgivable lack of market research prior to their German launch. Wal-Mart learnt that all markets are not made equal and what works in one country need not necessarily work in another. Wal-Mart’s desperate attempts to turn the events around have proved to be too little too late .As Wal-Mart looks poised to conquer the rest of the world; the verdict in Germany at least has not been in its favor. Works Cited ASDA/Walmart,A Corporate Profile,Corporate Watch UK,November 2004,December 2005,< http://www.corporatewatch.org.uk/?lid=800>. Economist.com,”Walmart,How big can it grow”,April 15th 2004,December 2005,< http://www.economist.com/printedition/displayStory.cfm?Story_ID=2593089>. Ewing,Jack,”Wal-mart,Struggling in Germany”,Business Week Online,April 11th 2005,December 2005,< http://www.businessweek.com/magazine/content/05_15/b3928086_mz054.htm>. Hill,Charles W.L,”Global Business Today”,4th Edition,Mcgraw-Hill/Irwin Companies,2006. Rowell,Andy,The Ecologist,September 2000,December 2005,< http://www.theexperiment.org/articles.php?news_id=825>. Rowell,Andy,”Welcome to the Wal-World,Wal-mart’s inexhaustible march to conquer the Globe”,October2003,Multinational Monitor Magazine,December 2005,< http://www.thirdworldtraveler.com/Corporations/Welcome_Wal_World.html>. Read More