July 20, 2022
The prominent feature of the modern stage of market development is its integration into the international economy on the basis of cooperation between countries and businesses. In fact, the uniqueness of global markets imposes specific requirements for the development of international marketing, which should be considered in the international expansion of business. The following paper, based on the foreign market analysis, evaluates the strategic and environmental reasons of why Wal-Mart, the world’s largest retailer, is engaged in internationalization strategies. Taking into consideration the importance of cross-cultural understanding for international business success, the paper provides an analysis of Wal-Mart’s failure in South Korea and Germany.
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Nowadays, more and more companies decide to enter the international market. However, it should be mentioned that prior to the mid-1980s the abovementioned was true for the production companies. Since the end of the 1980s, a growing number of retail companies have decided to transfer their business beyond national borders. Wal-Mart was no exception.
Based on the foreign market analysis, the following paper defines and evaluates the internationalization strategies of Wal-Mart, the world’s largest retailer, proving the importance of cross-cultural understanding for international businesses’ success.
Strategic & Environmental Reasons of Why Wal-Mart is Engaged in Internationalization Strategies.
The world economy is a complex and flexible system, which is in constant change. However, it should be mentioned that major changes have occurred over the last quarter of the century. Internationalization and globalization of productive forces, based on the interaction of the business capital, reached a completely new level (Dunn 2006).
In fact, progressive globalization is considered to be one of the key processes in the global economy of the 21st century, bringing the internationalization of economic life to a qualitatively new stage of development. Although, it should be mentioned that the attitude to globalization is ambiguous and sometimes it is even extremely hostile. Some see it as a threat to the global economy, while others view it as a tool for further economic progress.
Despite the fact that the terms globalization and internationalization have similar meanings, they both have some unique features (Walmart Canada announces its next Quebec supercenters2011). Globalization implies a process of interdependence between national production and finances due to an increase in the number of external transactions. As the result, there is a new international division of labor in which the creation of national wealth depends on economic agents in other countries. Internationalization implies the sequential process, which in turn is the result of the mutual influence of two distinct but closely related processes, the development of knowledge and the international market involvement process. The process of internationalization of economic life is one of the major trends in the formation and development of the modern world economy, which significantly influences businesses. Internationalization means a sustainable development of economic ties between countries, i.e. the output of the process of reproduction beyond national borders. The background for internationalization arises in conditions of the transition to large-scale industrial production, where national boundaries can hinder the development of the productive forces (Walmart Canada announces its next Quebec supercenters 2011).
The internationalization of business can take many forms, i.e. export trade, the creation of offices, trading companies, international joint ventures, the transfer of production, R & D, development, marketing mix in other countries, etc. The development of transport and communication recedes from the distance between the regions. The items produced in different countries become popular all over the world. The choice of business internationalization depends on the strategic goals of the company and the specific operating conditions in the home country and abroad.
The main reason for the business expansion into the international market is its desire to reduce costs and gain access to unique resources. In addition, the entrance into the international market means an increase in the scale of production. On the one hand, it reduces the proportion of fixed costs in the cost of production, leads to more rapid improvement of the production process, and acceleration of progress. The abovementioned facilitates the cost reduction of the enterprise.
The reasons that stimulate the company to expand into the foreign market can be viewed at three levels, i.e. global (current trends in international economic relations), national (the country’s place in the international division of labor), and local (the level of the particular company) (Frazier 2007).
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Under the globalization and internalization conditions, each individual firm makes its own decision to enter the foreign market. In fact, the following considerations may serve as the motives for coming into the international market:
The main reasons for the fact that a growing number of companies choose the foreign market as one of the directions of their growth can be the slowdown in domestic markets, increased competition as well as the consolidation and strengthening of the position of retail companies in domestic markets.
In the case of Wal-Mart, the key reason implied the expansion of areas of sales with the subsequent increase in sales and gross margin profits due to the slowdown in growth in the United States. The other reason that affected Wal-Mart in its decision was the desire to reduce costs throughout the transfer of distribution to foreign countries. Some of them, such as Mexico, Korea, and China, had cheap and unique industrial resources. However, the main reason for the access to foreign markets was the desire to get closer to consumers and markets, reduce costs and get more responsiveness to changes in demand. If the company is no longer able to expand in the domestic market, further growth can be achieved through internationalization. Moreover, most companies access international markets long before the saturation of the domestic market.
The choice of the global market expansion strategy for retail companies depends on many factors, one of which includes the format of the company’s operation in the domestic market and the ability to save this format or certain competitive advantages while entering the foreign market. National borders stifle the opportunities for effective management, leading to a slowdown in growth and budget deficit even in the most highly developed countries. This encourages entrepreneurs to go abroad in order to expand the sale of goods into foreign markets as well as participate in the international division of labor.
Why Wal-Mart Failed in South Korea and Germany and the Differences between these Countries and Mexico.
Wal-Mart Stores Inc. is a leading US retailer. In 1997, it decided to enter the German market with its successful business model. At that period, Wal-Mart Stores Inc. was estimated at $ 100 billion and had 750,000 employees in eight countries, including the United States. The company supposed that their business model and customer service system were acceptable in any state so Germany with the desire of its citizens to make purchases at a discount was considered as the right choice (Sternquist 2011).
Nevertheless, while entering German market, the company’s management, marketing, and customer service philosophy was based on the American style, i.e. informality, friendliness, and egalitarianism. It was a formula that had made the company the largest international retailer. Every day, low prices, inventory control, and effective distribution gave the reason to conclude that the corporate culture should be successfully rooted in Germany. Wal-Mart Stores Inc. bought bankrupted Wertkauf and Interspar, including staff and operating equipment, and created a chain of 85 stores (Business Daily 2012).
However, less than in a decade the company started to curtail business in Germany as it brought huge losses. Two months before the same situation happened in South Korea, while in Mexico and the UK the company prospered. The key reason was ethnocentrism and cultural ignorance, including a centralized distribution system. In Germany, the company did not have the power to maintain low prices of purchases from suppliers. Additionally, the prohibition of direct competition with German shops and the reduction in staff’s working hours resulted in the inability of the company to work in accordance with the US business model, as product prices were higher by several points in comparison with local competitors. Also, the Germans, similarly to the South Koreans, had a preference for higher quality merchandise and were not as attracted to Walmart’s discount strategy as consumers in the US and Mexico (Barkema & Vermeulen 2008).
The cross-cultural differences had negative influences on Wal-Mart’s development in Germany and South Korea. The corporate culture of the company included the duty of employees to continuously smile. The Germans could not accept such behavior as they are by nature very formal people, smiling is just for their loved ones. Later, there was discovered the intricacies of the Germans’ purchasing behavior, i.e. they preferred walking from one store to another, hoping to buy cheaper, while the US consumers preferred to buy everything in one place. This contradicted the business model. Furthermore, German buyers remained loyal to German retailers such as Metro, Aldi, and Rewe.
The Importance of Cross-Cultural Understanding for International Businesses Success.
Although the internationalization of business and the economy provide a lot of benefits for business development, it can bring a lot of difficulties during the international expansion of the company. As enterprises are increasingly becoming international, business schools are emphasizing the requirement to internationalize the views of managers. This means that the understanding of cross-cultural differences is the key factor for international businesses’ success. Nowadays, business goes far beyond the national boundaries, involving more and more people with different cultural outlooks (Jackson, Houdard & Highfield, 2008). As a result, cultural differences are beginning to play an important role in organizations, making a strong impact on the marginal efficiency of business activities. Hence, there are cross-cultural issues in international business, i.e. the contradictions occurring during the work in new social and cultural conditions due to differences in thinking patterns. From the very beginning, the human mind is influenced by knowledge, beliefs, art, morals, laws, customs, and any other factors and habits acquired by the particular society in its development process, just the native carrier of the culture can feel these differences. That is why the correct assessment of the differences of national cultures and adequate records are of great importance. The complex and multi-level structure of a culture that defines the functional diversity of every society makes it vital to regard the factors of the cultural environment as the prior characteristics of business development in the international market (MMR 2011).
The national business culture significantly affects different aspects of the organization’s life, i.e. the approaches and attitude to the management, the negotiation style, perception and law enforcement, planning, forms and methods of control, personal and group relations among people, etc. A large number of different national business cultures, increasing openness of markets as well as the globalization trends in the world economy necessitate the diversity of research in the cross-cultural specifics of the business.
The knowledge of value systems, conduct, and stereotypes, understanding of national and international features of behavior in different countries significantly improve management efficiency, allow to reach understanding during business meetings and negotiations, resolve conflicts and prevent new ones. That is why, the management of the companies operating at the boundary of two or more different cultures, as well as those trying to expend into the international markets, attracts considerable interest among scholars and practitioners. In fact, cultural differences manifest themselves in all areas of organizational activity. So, to succeed in other countries, managers must develop tactics to conduct business by respecting the cultural sensitivity of the local population, making business communication mutually beneficial. Cross-cultural management is a vital element of business development success in the modern world (Akehurst & Alexander 2005).
The Wal-Mart Stores Inc. case study demonstrates the importance of global thinking in conducting international business. Cultural characteristics can be the major obstacle to the development of global business so they should not be underestimated. The significant factor for the company’s success implies the ability to adapt to the cultural context of international society. Although Wal-Mart failed to create an efficient business in South Korea and Germany, the company’s ability to adjust to the cross-cultural differences can be proved by the sample of Mexico, China, and other countries where Wal-Mart operates. For instance, the company’s agreement to create unions in the Chinese stores led to an increase in the level of trust among Chinese consumers (Asia’s Media & Marketing Newspaper 2006). The proclamation of China as the center of Wal-Mart’s growth strategy as well as the creation of more than 243 stores there proves the company’s success in business development in the country.
Each company’s strategy is aimed at providing constant development of the business to be able to reach a decision to expand into new markets. However, hasty and ill-conceived expansion can not only lead to success but also jeopardize the profitability of the business as a whole. The Wal-Mart Stores Inc. case study demonstrates the importance of global thinking as well as an understanding of cross-cultural differences in the conduct of international business. Furthermore, the modern realities prove that cross-cultural differences are the key factors for international businesses’ success and efficiency.