business and its environment

••
NEEDLE, DAVID
BUSINESS IN CONTEXT : an introduction to
business and its environment.
pp. 183-186
NEEDLE, DAVID, (2019) BUSINESS IN CONTEXT : an introduction to business and its
environment. CENGAGE LEARNING EMEA
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Course of Study: MBS0005 – Academic Writing and Research Skills for Business
Title: BUSINESS IN CONTEXT : an introduction to business and its environment.
Name of Author: NEEDLE, DAVID
Name of Publisher: CENGAGE LEARNING EMEA
CASE 5.1 WALMART IN GERMANY
The first Walmart store was established by Sam Walton in 1962 in Rogers, Arkansas. At first expansion
was steady with 24 stores by 1967. The initial focus for
Walmart operations was small town, rural America. The
company growth has been close to exponential and it
currently has around 4700 stores in the USA. It was also
the world’s largest employer with 2.3 million employed
worldwide in 2017. Walmart is ranked as the world’s
third largest company by revenue in the Fortune 500.
Walmart is noted for its large and diverse product
range, which includes food, clothing, electrical gods,
homeware, pharmaceuticals and so on. The USA business comprised four types of operation: supercenters,
discount stores, Sam’sCluband a small number of convenience stores. The supercenters carry the full range
of goods, including food and a large variety of other
types of merchandise. The discount stores are like
the supercenters without the food and Sam’s Club is a
membership discount warehouse for bulk purchases.
According to Knorr and Arndt (2003) the success
of Walmart is based on four factors:
• low prices
• a focus on customer service
• IT driven logistics and inventory management
involving large centralized warehouses
• a strong corporate culture and employee
commitment.
The 2017 company website describes its core
values as, ‘Around the world, we help families save
money so they can live better. We use our size and
scale to provide access to high-quality goods and
fresh, nutritious food at everyday low prices.’ The
company also prides itself on its service orientation.
Staff are expected to be committed to the organization and all are expected to be positive and cheerful
in their dealings with customers. The US operation
developed a specific approach to customer service
and staff were employed to greet customers on entry
to the store, to assist them with packing their purchases into bags and to be proactive in assisting
customers anywhere in the store.
Going international
A number of factors influenced Walmart management to expand outside the USA. The company had
perhaps reached the limits of expansion in the USA.
JAPAN:CONVERGENCE AND DIVERSITY 183
There was strong competition from such as Target and
K-Mart, both with similar strategies to Walmart and
both also started in 1962. Furthermore, management
believed that the success formula of the US operation
could be replicated elsewhere. The first international
store was opened in 1991 in a suburb of Mexico City
and the company developed rapidly in both Mexico,
initially in a joint venture with the local firm Cifra, and
in Canada, largely through the acquisition of Woolco.
Mexico remains Walmart’s biggest international operation with over 900 stores. The company also opened
stores in Puerto Rico, Argentina, Brazil, Japan, South
Korea and Indonesia, and in Europe, in Germany and
the UK. With the purchase of Asda, Walmart owns
over around 630 stores in the UK by 2017, its largest
European operation. A merger has been proposed
between Walmart/Asda and Sainsbury’s in the UK
(2018). This is however currently being subjected to
Competition and Markets Authority scrutiny, consequently it is not currently known whether the deal will
proceed. The most recent developments have been
in Central America with stores opening in Costa Rica,
Guatemala, El Salvador, Nicaragua and Honduras,
all in 2005. Walmart opened its first store in India in
2010. The major international operations are listed
in Table 5.2.
TABLE 5.2 Wolmarl stores outside
the USA, October 2017
Country Stores Frst opened
Mexico 2 412 1991
Japan 340 2002
UK 631 1999
Brazil 498 1995
Canada 410 1994
China 433 1996
Costa Rica 235 2005
In 1993 Walmart established a division to develop
and manage its international operations, with the
anticipation that these would soon contribute over a
third of the company’s profits. By 2007, the overseas
operations contributed around 20 per cent.
(Continued)
184 CHAPTERS CULTURAL AND INSTITUTIONAL FRAMEWORKS
CASE 5.1 {Continued)
Entry into the German market
Some analysts believed that Walmart’s decision to
expand into Europe via Germany instead of the UK was
a strange one given the cultural links between the USA
and the UK. However, the German market was attractive as the world’s third largest economy, with 80 million
people who were Europe’s largest retail spenders. Furthermore, management saw Germany ideally located
at the heart of Europe, and an important member of the
EU. Unlike the UK, Germany is part of the euro zone.
Walmart entered the German market at the end
of 1997 with the purchase of 21 stores from Wertkauf
and added to this in 1998 with the purchase of 74
lnterspar stores from the French company, lntermarche. After only four years of operation in Germany
it was clear that Walmart was struggling with estimated accumulated losses at around €1 billion,
although only estimates were available because the
company published no accounts. The estimated
losses continued at the same rate and by 2005 the
company had cancelled its expansion plans, closed
two stores and laid off 1350 staff. The failure was not
unique to Germany. In Indonesia and South Korea all
Walmart stores had either been closed or sold. The
company was not doing particularly well in Japan and
Brazil, countries where it had large numbers of stores.
The problems
Many reasons have beengivenfor the failure of Walmart
to establish itself in Germany. The main ones are:
• The natur of the German market. When
Walmart entered the German market, retail
spending had stagnated and was about to enter
a period of decline as the German economy
slowed down in 2000. In any case the German
retail market was historically one where only low
_ margins were possible. It was dominated by a
small group of retailers notably Metro, Aldi, Rewe
and Schwarz (with the brand Lidl). The acquisition of Wertkauf and lnterspar gave Walmart only
a 1.1 per cent share, which many argued was
too small to create a critical mass for expansion.
Furthermore, acquisitions were difficult as no
other firm wanted to sell. Some of the competitors,
notably Aldi, had strategies and styles very similar
to Walmart with discounted goods, low prices,
own brands and a diverse range of products.
• The acquisitions. Both Wertkauf and lnterspar
were generally regarded as second class operators in the German retail market and both had
relatively poor reputations. Walmart bought
the stores, but not the land on which they were
located, giving the new company problems with
leases and imposing limits on alteration and
expansion. In any case, Walmart was prevented
from building big stores by German regulations
which favoured small to medium stores such as
Aldi and Lidl. The stores that were purchased
varied in size, and layout and rarely were they
in prime locations. As a result, the company
had difficulty upgrading the stores to match
Walmart brand expectations. Wertkauf presented
an additional problem in that all its stores were
located in the south-west, hardly giving Walmart
national coverage.
• The senior managers. The company employed
four different chief executives in the first four
years of its German operation; three American
and one Englishman. None spoke German
and Allan Leighton, formerly of Asda, preferred
to conduct the German operations from a UK
base. Although German CEOs were appointed
later, the main language of business was initially
English. Senior managers from Wertkauf and
lnterspar who transferred to Walmart found the
level of expenses cut and some were even asked
to share rooms on overnight stays for company
meetings. In general, middle and lower level managers felt that their pay was lower than average
for Germany. Walmart on the other hand was concerned about the high labour costs in Germany.
• Corporate cultur. Walmart USA prides itself
on its strong corporate culture across all locations. The culture stresses customer orientation
through a friendly, proactive and committed
staff. This clashed with German expectations. As
Jurgen Glaubitz of the HBV trade union stated,
‘German workers do not like to be regarded
as cheerleaders but as personalities with their
own ideas and rights’ (Knorr and Arndt, 2003).
In addition, the German operation was operating with three corporate cultures: the Wertkauf
culture, the lnterspar culture and that of Walmart.
Senior management had failed to integrate the
three cultures.
CASE 5.1 (Continued)
• Supply chain Issues. Walmart USA was used to
wielding considerable power over its suppliers.
With only a 1.1 per cent share of the German
market, the company found suppliers unwilling to
tow the line. Nonetheless, the senior managers
behaved as in the USA and demanded access to
suppliers’ premises to check their operations and
the quality of the products. This did not go down
well with German suppliers. As a consequence,
Walmart failed to build good relationships and
never established the supply and logistics network it wanted. Walmart’s US buyers made classic errors in Germany such as stocking US pillow
cases that did not fit German pillows.
• Employee relations. In the USA, Walmart is a
traditional non-union employer and senior US
managers failed to appreciate the role of trade
unions in German business. The company failed
to join the Employers Association, a key body in
Germany, and refused to enter into industry wide
collective agreements. There was a failure to
consult with the works council, as required under
German law, and the union received no financial
data such as profit and loss accounts and balance sheets. This led to strikes over pay and
legal battles with the union over recognition and
information disclosure. Walmart was frequently in
the courts and frequently fined.
• In February 2005, Walmart issued employees
with a code of ethics. The code forbade them
from accepting gifts from suppliers and barred
them from having relationships with colleagues in
a position of influence over them. All employees
were asked to report immediately any transgression of the code via an anonymous hotline. The
company argued that its stance was ethical and
protected employees from sexual harassment.
However, employees were annoyed, the unions
and the works council objected and ultimately
the German courts ruled that it was illegal for a
company to impose restrictions on the nature of
relationships.
• Pricing issues. Walmart’s simple strategy was
to enter a new market and undercut all its competitors to build market share. In Germany, the
competition, especially Aldi and Lid!, retaliated
with their own price cuts and consumers felt that
Walmart was not offering the best deal. As one
JAPAN: CONVERGENCE AND DIVERSITY 185
New York analyst put it, ‘The competition essentially out-Walmarted Walmart’ (Knorr and Arndt,
2003). A tactic frequently used in the USA was
the use of loss leaders, selling below cost price
on a limited range of goods to attract people into
the store. Such a tactic was contrary to German
fair trading and anti-trust laws to protect smaller
firms from unfair competition.
• Customr relations Issues. In the USA, Walmart
stores open round the clok, every day. German
law forbids shop opening beyond 80 hours a week
and there is no opening on Sundays and public
holidays. Germany has the most restrictive opening times in Europe; stores in the UK are allowed
to open for 168 hours and those in France, for
144 hours. Walmart’s marketing strategy is based
on the concept of customer service as a competitive edge. In a number of independent surveys
Walmart Germany was rated below average by
its customers. Three related practices illustrate
the problem Walmart had with its German customers. Walmart has always employed greeters
and baggers. The greeters engage customers
as they enter the store and the baggers help
customers by putting their purchases into bags at
the checkout. Throughout the store there is also
a 10 foot (3-metre) rule, whereby employees are
required to offer direct assistance to anyone within
this distance from them. German customers saw
greeters as a form of harassment and did not like
anyone else handling their purchases, especially
where food was involved. Germans typically do
not smile at strangers, so the Walmart demand
that staff smile at customers was an uncomfortable
experience. In general, customers wanted to be
left alone to get on with their shopping and saw
the intervention of Walmart staff as an imposition.
In addition, some customers believed that these
extra personnel added unnecessarily to the cost of
products in the store.
• Financial reporting. The company was fined
repeatedly for failing to comply with German regulations on the disclosure of financial information
and it was pursued by the unions through the
courts, resulting in well publicized legal battles
including, in 2005, banning Walmarts ethical
code for employees.
(Continued)
186 CHAPTER 5 CULURAL AND INSTITUTIONAL FRAMEWORKS
CASE 5.1 (Continued)
• Image and publicity. All the above contributed
to a generally bad press for Walmart throughout
its time in Germany. The national trade union
organization issued warnings to all union members about the failure of Walmart to comply with
the law. In 2006 at the Berlin Film Festival, Germans watched the premier of a US film, Walmart:
The High Cost of Low Price, released in the USA
the previous year. The film exposed Walmart for
behaving unethically towards employees and
suppliers and for its corrupt dealings with local
politicians. The film became a success in Germany. The operation of Walmart in the German
market coincided with widespread anti-US sentiments within Germany over the invasion of Iraq.
Walmar pulls out
By 2006, Walmart had 85 stores remaining in Germany.
In July that year these were sold to a rival company,
Metro. In typical fashion, no financial details were disclosed but the deal is estimated to have been concluded at less than the value of the assets with a loss
to Walmart of US$1 billion. Just afer the conclusion of
the deal in Germany, Walmart sold all its stores in South
Korea and by 2007 operated in only 13 countries. Its
international rival Carrefour operates in 29 countries.
Historically, Walmart has always done best in markets
closest to the USA, namely Mexico and Canada. In the
SUMMARY
UK, Walmart trades as Asda, which is a rare success
contributing 43 per cent of Walmart’s international revenue. A merger has been proposed between WalmarV
Asda andSainsburys in the UK (2018). This is however
currently being subjected to Competition and Markets
Authority scrutiny, consequently it is not currently
known whether the deal will proceed.
The failure in Germany is summed up by two academics thus:
Walmart’ attempts to apply the company’
proven US success formula in an unmodified
manner to the German market, however
tured out to be nothing short ofa fiasco.
(Knorr and Arndt, 2003, p. i)
Sources: A variety of media and internet sources;
Knorr and Arndt (2003).
Questions
1 To what extent can the failure of Walmart in
Germany be attributed to differences in cultural
values between Germany and the USA?
2 To what extent can the failure be attributed to
the institutional and regulatory framework of
Germany?
3 What other factors might have contributed to the
failure of Walmart in the German market?
• This chapter develops themes introduced in Chapters 2 and 3, namely the view that national
cultures, national economic systems and business practices are converging as a consequence of
globalization. In this chapter we offer a different view, which stresses the influence on business and
management policies and practices of cultural and institutional diversity.
• Convergence is explored as a product of globalization in general and as a product of technology
transfer and the activities of multinational firms in particular. We conclude that convergence may be
limited by cultural and institutional diversity.
• We acknowledge that culture is a wide ranging topic and define it as a set of values, norms and
beliefs that enable societies to cope with their environment and groups to integrate. As such it influences business policies and practices. We view culture and its effect on business through the work
of contributors such as Hall, Hofstede, Trompenaars and the researchers of the GLOBE project. We
reveal also the limitations of the use of culture as an analytical tool.
• We examine the significance of variations in social and state institutions and how these can influence business. At the same time we acknowledge the influence of culture on institutions.