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There are certain words that have the ability to capture the moment and the very essence of the time in which we live and so it is with "globalisation". Whether we spell it with an s or a z, globalisation is a term that has successfully passed into common currency since Levitt (1983) first used it in and sparked off the present controversy (Paliwoda, 2009). It's very challenging task for any organisation to move from domestic market to international market, especially for those firms which are facing saturated market in their home country (Yip, 2003). In this report operational strategies of Wal-Mart in China and Japan have been compared with the help of Hofstede cultural framework.
At more than 8,416 retail units with 53 different banners in 15 countries, where customers and members are being served by more than 200 million times per week-Wal-Mart, had sales of $401 billion during fiscal year 2009 (Walmart Annual Report, 2009). Founded with 2 just employees, under supervision of Sam Walton in 1962, headquartered in Bentonville, Arkansas, U.S., with a purpose "If we work together, we'll lower the cost of living for everyone, we'll give the world an opportunity to see what it's like to save and have a better life "- Sam Walton (Samwalton, 2009), employs more than 2.1 million associates worldwide now (Walmart About Us, 2009). In the US, the retail formats operated by Wal-Mart include discount stores, supercenters, market side, neighbourhood markets, and Sam's Clubs. Internationally, the company operates in Argentina, Brazil, Canada, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua, Puerto Rico and the UK (Datamonitor, 2009). The Company's foremost strategy is to open massive stores of 100,000-200,000 square foot supercentres, especially (Knowledge@ Wharton, 2003).
The section below analyses the debate between the strategies of Wal-Mart in Japan and China, especially the factors responsible for its poor performance in Japan. In depth analysis of Hofstede cultural framework (2010) has been used to evaluate culture impact in international business and determinants like why cultural factors are important, what is their impact and how their ignorance can result into humongous loss, as big as $ 1 billion, to any organisation; Hofstede theory is very helpful in identifying cultural differences with regard to geographical location however it is only a starting reference and cannot be taken literally (Hill, 2007). Emphasis on cultural significance of "guanxi" has been shown and how Wal-Mart learnt it and became successful rather than imposing management of expatriates, in Japan, as a success formula in an unmodified manner, without the complete analysis of the local culture. Porters (1986) diamond model has been used to identify the competitive advantage between different nations, which is useful for any organisation to gain economies of scale.
Organisations are "competing with everyone from everywhere for everything" (economist.com). Readily available and cheaper technology has made it possible however the confusion still remains as to what the best way to become globally successful? Ghauri and Cateora, (2005) argued that, Is there one set of rules to become successful or do the companies need to adapt according to the place, environment and culture differences. Hofstede (2010) model has been critically analysed to understand the presence of power, individualism, uncertainty avoidance, masculinity versus femininity within China and Japan. A mode of entry and change in strategy, acquisition to joint-venture, for entering into new-markets has been discussed. These frameworks have been analysed in later sections.
Discussion - Why Globalisation?
The expansion of worldwide retailing has driven global retailers to seek to strap up potential markets internationally. According to Dawson et al. (2003), the globalisation of retailing, in particular, is fast in Asia. With retail sales valued at more than US$628 billion and growth of more than 9 per cent per annum, China has become one of the most attractive markets in the world. With an increase in retail sales by 15% annually, during the past 20 years, China has become the third largest market in the world (Hingley et al, 2009). Figure 1 shows the significant growth estimates between the Asian countries (China, India and Japan) and US, which can lure any big-player like Wal-mart to operate within them.
But opportunities remain: "Japan, with the GDP of $ 4,751 billion in 2005 (Fraser et al, 2009), was the world's second-largest economy, having population of 127 million (Holstein, 2007), and its retailing market retains much potential, provided that retailers can tap into rapidly changing consumer lifestyles and align their strategies to meet new demands" (Euromonitor, 2006). For some, it marks the most exciting grocery market and largest emerging opportunity in the World (AT Kearney, 2005). Developing countries like Japan and China are of rising interest to the big players however to the World's single largest retailer in Fortune magazine, 2009 most admired company survey- Wal-Mart (Walmart Stores, 2009), It has become crucial to enter such economies because of its 40 years of explosive growth in the U.S. appears to be slowing (Frazier, 2007).
- Mode of entry
Chang and Smith (1999), states that Entry and exit mode decisions are dependent on different factors. Any company's particular method of entry and exit is directly related to the original mode of entry. Wal-Mart was the only retailer that mainly uses acquisition strategy regardless of the region with no adaptation for the relevant market (Lessassy, 2007)
- Free trade
Franchising & Foreign direct investment
An agreement between countries where no discriminatory tariffs are charged and foreign countries are allowed to determine their own trade policies are known as free trade (Hill, 1998). Developing countries like China and Japan also have free trading policies which invites global companies into their economy. Firms are free to choose their mode of entry as best suits their business. Four main strategies of entering into foreign markets are identified by Lessassy and Jolibert (2007): Self-established subsidiary, through direct acquisition, by franchising, by joint venture.
Franchising is an agreement between two companies to sell product or services. It allows franchisee with right and power to sell but under franchiser's policy and law (Hill, 2007). This mode of entry removes trade barriers, and is a quick way of entering into the market (Ghauri & Cateora, 2005; Park and Sternquist, 2007) which is also geared towards utilising local expertise. Investment in foreign market to produce and sell goods or services is called foreign direct investment (Hill, 2007). Wal-Mart, in addition to acquisition, opted for joint-venture to fix its steps in Japan, where it took over a 51 percent stake in the Seiyu stores in 2005 (Wall-mart "History time line", 2009; Annual Report, 2009). Also Wal-Mart's philosophy is based on careful analysis of the retail value chains which the giant from Bentonville can impose on its suppliers with a single objective in mind: to reduce cost in order to gain competitive advantage. With this in mind, Wal-Mart sees itself purely as a distributor having one key-weapon, i.e. the information revolution (Tibi and du Brusle, 1998).
Indeed Wal-Mart's greatest strength is its sophistication in real time data gathering from its network, acts as a technological driver, which helps it to develop data warehouse tools and exchanging information with its suppliers. According to Colla (2002), some observers are of view that Wal-Mart's information technology investments are even higher than NASA's (Colla, 2002: Dupuis, 2002)! Moreover cheap-labour, High Infrastructure and target population would have provoked Wal-mart to enter Chinese market and to gain competitive advantage. Wal-Mart's approach to achieving this growth goal is based on three strategies ("International operations factsheet", 2007):
- Expanding into new markets with multiple formats;
- Opening new stores in existing markets; and
- Increasing sales at existing international stores.
Identifying nation's competitive advantage
Identifying nations or any geographical area where factors are most favourable for success is essential in a global competition. Factors like cheap labour, increased profit opportunities and availability of suppliers and facilities all give an industry a competitive advantage. The role of government in this model is to push companies to raise their aspirations and increase profitability (Hill, 2007; Liu and Song 1997). Industries adopt Porter's diamond model (Figure 2) to identify competitive advantage. Identifying nations or any geographical area where factors are most favourable for success is essential in a global competition. With the help of this framework, before entering into China and Japan, Wal-Mart could have identified its competitive advantage like cheap labour cost, high infrastructure, target population and government policies. Identifying these factors will facilitate decision to enter a certain market (Liu and Song 1997). Wal-Mart enjoys large economies of scale in China and operates three major formats (supermarket, hypermarket, and convenience-stores, focus on the Sam's Club (cash-and-carry) format provides it with economies of scale (Hingley et al, 2009) however it's difficult for Wal-Mart to achieve competitive advantage in Japan.
Porter's diamond framework identifies the main determinants of national competitiveness and illustrates the relationship between the various determinants.
2 Culture analysis by Hofstede Cultural framework
The problem is no longer deciding if or where one should internationalise, but rather how to succeed in different cultures on different continents (Dupuis and Prime, 1996). Cultural barriers are important in the foreign entry process and firms learn about the barriers through success and failure of earlier expansions (Barkema, 1996). Due to free trading, high population and good economy, companies around the world consider entering into developing economies is highly profitable and furthermore expansion in them is essential to be classed as an international company (Cremer and Ramasamy, 2009).
Problems associated in China include price competition, betrayals, corruptions, negotiations, past cases of messy joint ventures, cultural misunderstandings however depressed market, management and employee conflict, and a restrictive policy environment and the distinctive taste of Japanese consumer are a barrier that prevents foreign retailers from prospering. Global companies entering such markets must be aware of these issues and should have a good understanding of their culture, especially (Taggart, 1996; Mellahi et al, 2002). In Chinese culture sustained relationship with people and company alike is valued. Referrals, references and reputation is critical factors for the business to survive in China whether its small companies or multinationals. The most popular and important network in China is "guanxi" network vis a vis Japanese are inclined towards high-quality products.
Hofstede study of culture impact identifies how the society of any country has certain reaction over power, individualism, uncertainty avoidance, masculinity versus femininity. The theory stipulates that far and south east countries like China fall under large power distance and low individualism and weak uncertainty avoidance and masculine. Although Hofstede theory is very helpful in identifying cultural differences with regard to geographical location but the companies should also keep the other factors in mind while entering into new markets (Hill, 2007; Figures 3 and 4).
Identifies and categorises differences in culture of different countries. For example, US classed as male dominated society with high individualism. Japan if compared to China has very high masculinity and uncertainty avoidance. It allows companies like Wal-Mart to consider these factors when entering into a country for business. Though, Wal-Mart has been able to succeed in close-to-home markets like Canada and Mexico, the company's Asian and European business units have been much more difficult to manage ("International operations factsheet", 2007). The question arises as to what made Wal-Mart's life so difficult in markets especially Japan?
The answer would be the ignorance to the understanding of respective markets culture. In the case of China with low individualism means that a tight framework of relationship between people will have to be taken into account (Hofstede, 2001). Fan 2002 described guanxi as "a potential solution to the obstacles faced when entering and operating in China, where individuals are more powerful than the legal system" (Hill, 2007).
Analysis by Geert Hofstede of China having highest ranking (118) of LTO (Long-term Orientation) among Asian countries, in figure 5, which states that a society's time perspective and an attitude of persevering has been justified by Hingley et al,2009- consumers in Beijing tend to emphasise a LTO, in that they hope to save money for the future. Chinese rank (20) lower in Individualism (IDV) compared to an average of 24, which could be due to the emphasis on collectivist society where loyalty is paramount. Another implication is "Confucianism" which is an ethical code followed by Chinese community that maintains the relationships and loyalty between people (Hill, 2007). Indeed highest level of Power distance ranking (PDI) of 80 compared to an average of 60 clearly reflects Chinese cultural heritage accepted by the society, which means higher levels of inequality of power and wealth within the society. It can be justified by the importance of the "guanxi" network, mentioned above.
In order to succeed in China, Wal-Mart not only needs to understand the importance of 'guanxi' however it had to adapt its merchandising and operations strategy that meshes with Chinese culture. Initially Wal-Mart offended Chinese consumers by trying to sell them dead-fish as well as meat packed in cellophane and Styrofoam though Chinese prefer freshly harvested food or food to be killed even in front of them. However Wal-Mart learned it quickly and installed fish-tanks into which shoppers could pull their evening meal by catching them with the help of fishing nets as well as started displaying uncovered meat, also they began selling live turtles for turtle soup which resulted in unexpected increase in sales. Furthermore Wal-Mart has learned that to excel in China, It must embrace unions though it vigorously resisted unionisation in U.S. Finally in 2006, Wal-mart allowed unions for Chinese employees which fetched it a 35% stake in Trust-mart chain, which has 101 hypermarkets in 34 cities across China (Hill, 2009). There is no such pill as a pill for cultural transformation" (Berggoetz and Laue, 2002).
If Japan being compared with Asian countries, in figure 5, especially China, then Hofstede cultural framework reflects that Japan stands far ahead in masculinity (MAS) and uncertainty avoidance (UAI) i.e. 99 and 96 respectively though it has less LTO (72) which provides an insight that Japanese don't mind in paying higher prices for good quality products and Schmekel and Larke (2002) elaborated on these findings by noting that food quality often takes precedence over price. The Japanese Ministry of Agriculture has also noted significant differences between the European and Japanese consumer in terms of attitudes to food purchase, showing the importance of food quality to the Japanese consumer compared to European and US counterparts (see Table II). There is an attraction to the Japanese consumer of promotions, although every-day (i.e. consistent) low prices are seen as less appealing (Fraser et al, 2009). Noting the importance of product freshness in addition to taste, Sato (2004) outlined the features of Japanese shopping behaviour, he also highlighted the significance of promotions and small package size. Uncertainty avoidance or preference to structural format of Japanese can be further discussed through the structure of their shopping behaviour in the figure 7, which is entirely different from US and European countries:
The other principal factor from the literature that, it is argued, defines consumption patterns, is convenience shopping. The hypothesis of Flath and Nariu (1996) shows that small local-sores have dominated the structure of the Japanese food retail sector, as a result of geography consumption particularly dense urbanisation: there is a dependence on complex but efficient public transport system related to low car ownership; and a relative scarcity of living space making household storage limited and costly. The major question arises here as to whether Japanese attitude towards quality of food could be a concern for the Wal-Mart or not? Sato (2004) argued here by suggesting that the Japanese consumer shops frequently (even daily), as the cost to do so is low, facilitated by the high retail density. However, he suggested that as car use increases and there is greater movement to the suburbs, shopping frequency would reduce. This presents the opportunity for the growth of large-scale grocery retail, suggested by Schmekel and Larke (2002) as being the latest stage in retail internationalisation in Japan.
Factors other than consumer behaviour which contributed to a blow of $ 1 billion to Wal-Mart in Japan are: Wal-Mart's foray into Japan is under pressure on two fronts, one The Japanese and the other American. By acquiring a major stake in a host business and then introducing an essentially American operating model based on ''always low prices'' in order to run the stores doesn't worked for Wal-Mart this time. Knorr and Arndt (2003) attributed Wal-Mart's failure to the company's management, writing that "Wal-Mart's attempt to apply the company's proven US success formula in an unmodified manner to the market turned out to be nothing short of a fiasco". Wal-Mart's strategy of introducing senior management team of Americans, Britons and Canadians has not proved popular in this country. It has been argued also that the Japanese consumer has distinct attitudes toward food purchase that may act as an inhibitor for international food retailers (Fraser, 2009). In Japan, where customers are prepared to pay top prices for exclusive goods of the highest quality; Critics believe that this has worked in price sensitive countries such as China and Mexico. Another area of criticism has been the way in which, prior to taking full control of Seiyu in 2004, Wal-Mart encouraged the company to dismiss 1,500 of its employees. And when the firing is done at the behest of foreigners, it leads to the negative connotations. In a country where social harmony is paramount and mass sackings are rare, the decision did not go down well with the general public of Japan (Holstein, 2007). Tadayuki Suzuki, who worked at Seiyu for 20 years, even states that "They are doing it totally wrong. They should pull out of the country and focus on China".
Pressure was also mounting from the shareholders in U.S. over its Japanese aspirations, eager to see Wal-Mart's long-ailing stock find new legs. Concerned about costs in Japan, those dissident share-holders, have mounted a campaign in the U.S. to have the retailer pull the plug. Nor are Wall Street analysts cheering Wal-Mart on. "Wal-Mart's longer-term success is more likely in China than Japan," Morgan Stanley said in a recent report. It added that there is "little reason to think Wal-Mart is the winning consolidator, unless it can really leverage know-how. Its investment in Seiyu could be another $1-billion-plus mistake" (Holstein, 2007). Though for the first time in fifteen years, Seiyu's total comparable store sales for fiscal 2007 were positive (Wal-Mart Stores, 2007).
Conclusion and Recommendation
To conclude this report, we discussed about the drivers that encouraged Wal-Mart to go for internationalisation. Discussion included the entry strategies of acquisition and joint-venture used by Wal-Mart to fix its steps in China and Japan followed by Porter diamond model in which we have identified the factors to gain competitive advantage. Though Wal-Mart understood the significance of "guanxi" in China, despite the initial hic-cups however failed to take into account the cultural aspect of Japan and due to which it had to suffer a blow of $1 billion, still its future prospects are not clear there. Also using the similar business model of ''always low prices'' doesn't prove to be useful in Japan, where people are ready to give highest prices for good quality. We discussed that single strategy of putting expatriates in every market doesn't hold true all the time. We then concluded with the possible recommendation that Wal-Mart could analyse the cultural factors carefully, as they share equal importance with others. We have seen that companies which have been successful in Japan included Japanese nationals in the senior management which gives a strong indication to Wal-Mart to amend the US proven successful formula of using expatriates within the management in a new country if it wouldn't want to repeat the past-performance of Japan.
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