Accounting Essays - Wal-Mart Germany Expansion

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Wal-Mart Germany Expansion


The company chosen on which to conduct a mini case study for this paper is Wal-Mart, and in particular the paper will attempt to concentrate on a number of issues that Wal-Mart recently faced in regards to Information Technology and Systems, and how, if technology had been correctly implemented and used, could have likely saved Wal-Mart a lot of money, profits and a loss of reputation.

The case study will focus on a deciphering exactly what went wrong with Wal-Mart’s attempt at expansion into Germany, and what role information systems should have, or did have, in the venture. The paper will also attempt to discern whether the prevailing perception that Wal-Mart owns a competitive advantage, in part due to the information system currently in use, is true.

If it is discovered that such perceptions are prevalent then the paper will discuss what will happen to Wal-Mart’s competitive edge if that if the system is not continually upgraded and enhanced.

In order to create a mini case study on a company the size of Wal-Mart it would be especially important to understand the exact issue the study should address. An international company the size of Wal-Mart would be an unlikely candidate for such a study if all the issues a company such as Wal-Mart faces on a daily basis were to be addressed in one paper.

That is not the case of this particular paper, however, what is the case is that Wal-Mart, the behemoth international retailer, believed that expansion into a foreign market such as Germany would immediately lead the company to achieve the same type of success the company has experienced in the United States.

The decision was fraught with peril, and ultimately Wal-Mart suffered defeat. An article in “The Times” on July 29, 2006 stated the following; “Wal-Mart, the world’s largest retailer, abruptly pulled out of Germany yesterday….In a humbling admission of defeat, Wal-Mart said it would sell its eighty (85) German stores to the rival supermarket chain Metro and book a pre-tax loss of about $1 billion on the failed venture” (Wal-Mart, 2006). A one billion dollar loss for any company is huge, even if the company is Wal-Mart.

This scenario could likely have been avoided if certain initial strategies and concepts had been discussed, implemented and adhered to from the beginning. The entire situation leading to Wal-Mart’s demise in Germany cannot be blamed on the lack of a good information technology system, but certainly a strong and viable system could have alleviated some of the problems experienced by Wal-Mart, and in the end could have been a deciding factor on whether the venture would (in the long run) be profitable or not.


A recent article touts the fact that “the development of E-commerce has revolutionized our way of doing business around the globe” (Victor, Jih, 2006, p. 68). Perhaps Wal-Mart could have foreseen the circumstances leading up to the debacle and changed the direction the company was traveling. Another expert in the field of business recently stated, “Learning how to build stronger relationships with customers is often recommended as a way of ensuring the survival of firms in the face of turbulent or highly competitive market conditions (Webster, 1992, p. 1).

Building relationships with existing clients is only part of the puzzle, but it seems to be a part that Wal-Mart did not take seriously enough in Germany. Wal-Mart believed that it could buy its way into a market, instill its program on the citizens in that market and then proceed to dominate market share using the same approach, as well as the same technology, the same information systems and the same style of distribution that led to so much success in the United States and other markets.

In 1997-98 Wal-Mart entered Germany, which is the world’s third- largest retail market by purchasing two discount retail chains. For $1.6 billion dollars Wal-Mart purchased Wertkauf and Interspar. Interspar was not a very strong retailer as their stores were mostly run down and located in areas that were not that great. Wertkauf, on the other hand, was a profitable chain that was well-known and liked in Germany.

A distribution system to deliver product to these stores was already in place, although neither of the chains used an on-time delivery system. What Wal-Mart should have been considering is how to expand its retail business in Germany by using an approach that is both timely, efficient and cost effective, similar to the system currently in use in the U.S., and perhaps initially that is what was intended.

In the states, Wal-Mart epitomizes the excellence of an ‘on-time delivery’ system that is based on tracking the sale(s) of every solitary item at every single store. That information is then electronically transmitted to a home headquarters location. From there the information is transmitted to various locations so that the product can automatically be replaced. One expert states however that, “These days, it's a rare company that isn't worried about how to get its products delivered on time.

According to a new study, businesses are finding it harder and harder to meet on-time delivery promises to customers because of obstacles ranging from truck-driver shortages to soaring fuel prices” (Emigh, 2004). The article went on to espouse the fact that many business leaders are making changes in the technology they use in order to alleviate some of those problems. The article related how studies have shown that, “most current users of transportation management applications plan to extend their existing Transportation Management Systems (TMS)” (Emigh, 2004).

It is reasonable to assume that Wal-Mart may have missed an opportunity in Germany by not having the proper systems in place to take advantage of the business environment they would encounter there. It is also a fairly reasonable bet that Wal-Mart’s competitors are watching as Wal-Mart makes forays into other markets, and most probably cheered the fact that Wal-Mart failed so miserably in Germany.

Many of those competitors are fearful that the competitive advantage that Wal-Mart has so successfully attained in the United States can be extended and enhanced as Wal-Mart grows ever bigger. What the competitors have noticed is that Wal-Mart’s competitive advantage is dwindling, and that may give the competitors hope for the future.

Wal-Mart’s price advantage is one factor in their growth although one retail-marketing consultant recently reported that, “Key competitors are finding ways to narrow the price gaps enough to render them largely unnoticeable, said Chris Hoyt, a Scottsdale, Ariz., retail-marketing consultant” (Neff, 2007, p. 61).

A strong, viable Wal-Mart has been a fact in the business world for a long time, and many of its competitors would love nothing more than a crack in the Wal-Mart’s armor that could be their opening. Normally, Wal-Mart implements a full-scale price war in every competitor market it has entered in order to meet their commitment to its’ consumers and to uphold it’s legendary, “every day low price” pledge to consumers. This formula is extremely successful in the US and in other markets, in Germany this was not the case as most if not all there competitors were able to defend their positions as the cost and price leader in Germany.

From Wal-Mart’s perspective it is likely imperative to discover what went wrong in Germany, what the company could have done to sidestep any mistakes and perhaps, most importantly, if implementing any information systems or technology different than what is currently in use could have alleviated any problems or concerns.

To discover this information, research will have to be conducted that will allow for analyzing a variety of different factors in order to determine how those factors affected Wal-Mart’s objectives and business plan regarding expansion into Germany.

There are a few factors that should have been considered. For example, when expanding your business geographically, as in Wal-Mart’s situation, the following are some of the questions that a company should answer:

  • Does the business operate with strict processes, guidelines and standards which can be replicated easily in a different environment?
  • Will you have to implement major changes to the business in order to be successful in a new environment?
  • Is a physical presence necessary in the new location or can your presence be represented by other means?
  • Is it profitable or feasible to compete with the existing competitors in the geographic region you are considering?

As was mentioned earlier, another factor to consider was perhaps Wal-Mart was unable to coordinate an ‘on-time’ delivery system efficient enough to ensure that the most popular selling items were always on hand, or perhaps there were areas that could have been outsourced that were not. A number of companies have been successful in outsourcing services that can be accomplished in a more cost effective way by doing so. Many of these same companies implement a core team concept.

“The core team concept has been shown to provide significant savings, reduced downtime, increased production and improved efficiency while maintaining high quality and safety standards” (Maintenance 2007 pg 28). A core team concept allows for a small permanent force to handle all problems on-site, including the integration of outsourcing and the technology required, not only by those outsourcing entities but by the various departments as well.

The core team concept can be used to ensure that the IT experts all speak the same technological language while at the same time designating responsibility for the different operations. Using a core team concept also alleviates some of the fears that employees face when learning of potential outsourcing, especially since outsourcing has received so much bad publicity in the media as of late.

One expert said that strategically outsourcing other activities “including many traditionally considered integral to any company – for which the firm has neither a critical strategic need nor special capabilities” (Quinn 1995) was a good idea, and it probably is a concept that Wal-Mart could have used in Germany, and may consider in any future ventures.

There is a prevailing perception that outsourcing is a bad thing and therefore it might behoove Wal-Mart to emphasize to their employees the benefits derived (by the employees) by outsourcing. According to one recent study there is little for the employees to fear concerning outsourcing.

“The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries ‘in sourcing’ of services is greater than outsourcing” (Amiti, 2005, p. 308). The core team concept helps to emphasize the fact that many companies are outsourcing by in sourcing, and therefore alleviates the fears of the employees.

Additionally it must be kept in mind that outsourcing can be a big boon to the company’s bottom line. “A recent article portrayed this situation well, stating, “it is apparent the millions of Indian and Chinese engineers, software developers and service providers can do all this ‘sophisticated stuff’ as well as or better than the Americans at a tenth of the cost” (Prestowicz, 2004, p. 40).

A tenth of the cost can be a huge savings depending on the needs of the company in regards to software and systems maintenance. Whether the information systems have to be totally designed, created and implemented by using outsourcing capabilities is at the behest of the company managers. The decision will have to include not only the internal workings and operations of Wal-Mart, but would also have to take into consideration the external market opportunities available.

Since Wal-Mart, in this case study, is already considering outsourcing a portion of its technology needs and services, the company should probably consider the use of e-commerce as well. Integrating e-commerce possibilities in the informational systems design makes sense. While integrating e-commerce and informational systems into the overall scheme in entering a market, especially a market like Germany which Wal-Mart had initially had such high hopes for, would be a natural extension of the retail market, and one that could have assisted Wal-Mart immensely.

A note of caution in this regard was issued recently by one expert, who stated, “Companies that state they are users of e-commerce may in fact only have a promotional website rather than a fully-fledged, interactive, transaction-based interface” (Fillis, 2007, p. 445).

The question becomes a matter of whether e-commerce would have been an effective and profitable complement to Wal-Mart’s retail business, at least in the sense that would have assisted Wal-Mart’s attempts at gaining a foothold in the Germany market. The answer derived from this case study is that every complementary event may have added up to enough of a profit to at least continue in business, rather than folding the tents and taking a billion dollar loss.

Another consideration for Wal-Mart when implementing informational technology systems that are going to be worked on primarily by outside sources is the privacy issue that can be breached through online sources or nefarious systems developers.

Identity theft is currently a large societal problem, and steps need to be taken by companies to ensure the safety and privacy of the individuals who work for or with the company. There are characters in the world who would like nothing better than to steal personal information from a company’s informational system(s).

One expert speaks of the dissemination of information to those who need to know and those who do not, in the following manner; “information may only surface in a legitimate comprehensive background check, but in a more menacing scenario, it may wind up in the hands of a remotely located identity thief without the consent or control of the person the information identifies” (Ciocchetti, 2007, p. 55).

This type of situation is probably especially worrisome when entering a market in a foreign country. Safeguards can be established that will assist in addressing this issue, including, but certainly not limited to; inserting firewalls into the system that prohibits those without authority from accessing information, as well as implementing procedures that all employees understand the consequences of if they are caught disregarding them. Wal-Mart’s internal operations, due to both their size and complexity, would have to take into consideration the myriad of personalities involved in implementing such procedures, and an example would have to be set from top management all the way down to the local retail manager.

It is especially important to have a standardized program that holds all employees responsible for their own actions. Integrating technology into any business requires that human interactions and choices be as above board as possible, primarily because technology can be manipulated since it knows not the hand that manipulates it.

Integrating technology into almost any business decision can produce benefits the company, employees and consumers. At times those benefits can be the difference between generating a profit, and taking huge losses. Another aspect of competitiveness that the case study will present is the fact that Wal-Mart has been so efficient in delivering the product most desired by the customer at the exact time the customer wishes to purchase it. This has been accomplished in the United States and in other markets by using technology in a very efficient manner.