This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
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 organisations which are facing saturated market in their home country (Yip, 2003). 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 with Wal-Mart Stores, Inc. (NYSE: WMT), legal and official name, had sales of $401 billion during fiscal year 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 (Walmart-ourpurpose, 2009), employs more than 2.1 million associates worldwide now (Walmart, 2009). In the US, the retail formats operated by Wal-Mart include discount stores, supercenters, neighbourhood markets, market side, 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 supercenters, especially (Knowledge@ Wharton, 2003). Initially Wal-Mart concentrated on department store merchandise only however with the introduction of supercenters in the 1980s it started selling groceries as well, with sizes of over 200,000 square feet. Over time, Wal-Mart expanded into larger metropolitan areas with store formats that included both Sam's Club membership stores, selling at a very low-price level with most products sold in bulk, and neighbourhood markets offering about 20,000 products (Halepete et al, 2008).
Fig. 1- Growth of Global Economy 1992-2020 (Zhang, 2010)
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).
But opportunities remain: “Japan, the world's second-largest economy, with a population of 127 million (Holstein, 2007), has the second highest GDP in the world, 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). Indeed Wal-Mart's greatest strength is its sophistication in real time data gathering from its network, 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! 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.
1.1 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)
1.1.1 Free trade
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.
1.1.2 Franchising & Foreign direct investment -
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). Though joint-venture is the quicker way of entering and trading into new markets however Wal-Mart had to bear $1 billion of loss by moving into Japan, there are still question marks about Wal-Mart's success in the Japanese market.
Moreover 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. On the contrary, Fortune magazine observes, the US companies that do well in Japan understand the need for autonomy and have therefore appointed a number of Japanese senior management.
Identifying nation's competitive advantage:
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. 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). Using this framework before entering into China identifies its competitive advantage like their labour extensive manufacturing, 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). Because of above mentioned factors, Wal-Mart enjoys large economies of scale in China and operates three major formats (supermarket, hypermarket, and convenience), with a focus on the Sam's Club (cash-and-carry) format (Hingley et al, 2009) however it's difficult for Wal-Mart to achieve this advantage in Japan.
Figure 2: Porter's diamond framework (Value based management).
Porter's diamond framework illustrates the relationship between the various determinants and identifies the main determinants of nation-competitiveness.
1.2 Culture adaptation
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.
Culture analysis by Hofstede Cultural framework -
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 Hong Kong 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).
This diagram 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). On top of that 2 senior managers have quoted: “Corporate culture not only requires supportive action (intercultural training, coaching) but also time and patience in order to grow within a place with a cultural history of its own”.
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 later on Wal-Mart have 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).
The major question arises as to what are the factors which lead to such a blow to Wal-Mart in Japan though the company has established well in country like China, after initial hic-cups? 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. 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. May be Wal-Mart tried to impose the strategy of imposing expatriates, which worked in European countries, to Japan as well. 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).
Analysis by Geert Hofstede of China having highest ranking (118) of LTO (Long-term Orientation) among Asian countries 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.
Wal-Mart's marketing strategy for Asia, especially, China and Japan would seem to entail what made the discounter a behemoth on its home turf-offering value, variety and low prices to middle-class consumers. In the U.S., Wal-Mart's future success doesn't involve “trying to emulate Target,” JPMorgan analyst Charles Grom said (Frazier, 2007). Americans are already aware of the fact that they can turn to Wal-Mart for low prices on food, detergent and underwear however its executives are convinced that if the behemoth is to sustain the impetus that Wall Street expects, it will have to sell more profitable goods like stylish apparel, home fashion, and electronics especially in the new markets in which Wal-Mart is trying to establish, If it aims to repeat the success history of U.S. (Lavelle, 2005).