Multinational corporations are the driving force of globalization. In a world with fast technological advances and high competition, companies must learn to conduct business outside of their home country to become more efficient. Unfortunately, different cultural practices have made it difficult for even the biggest corporations to be successful in certain countries.
The complexity of globalization has shaped many national and international laws. Companies like Walmart and Nike have had to adjust their business models to comply with not only laws but the different cultures in which they do business in. Multinational corporations are praised with increasing consumer choice and increasing product quality while keeping prices low. However, there are critics that argue the negative impacts of globalization.
In 1962 two brothers named Sam and Bud Walton opened Walmart Discount City in Rogers, Arkansas. This was the beginning of what would become the largest (by revenue) multinational corporation in the world. Walmart owns a private satellite system and uses technological advances like electronic data interchange (EDI) and an advanced POS system (Retail Link).
Currently Walmart has 10,130 retail stores worldwide with 5,651 being outside the United States. It employs 2.2 million employees with 780, 000 being in 26 other countries besides the US. Walmart Stores, Inc. serves customers under 69 different banners and had sales revenue of approximately $444 billion for fiscal year 2012 (investors.walmart.com). Traded on the New York Stock Exchange (WMT) it stock is valued at approximately $59 per share.
Sam Walton focused his attention on small rural communities, a notion that was unpopular with larger corporations at the time. His ability to tightly control its operating costs, superior customer service and a culture of employee well being were the major elements in the company’s success. Sam Walton emphasized the importance of customer relations with two company priorities.
Rule number 1: The customer is always right. Rule number 2: If the customer happens to be wrong, refer back to rule number one. Throughout his career Sam Walton acknowledged the importance of all Walmart employees. Their culture consists of an open-door policy. The policy shaped a notion of one big family-the Walmart family. Sam Walton summed up his beliefs in an acceptance speech for the Gold Medal Award from the National Retail Merchants Association (Abraham, 2006):
“We believe in people. We have involved our folks in running the company. We've developed a partnership through the years and it's our basic philosophy. This is an approach whose time has come for retailers and manufacturers. Walmart employees…from senior management to part-time floor personnel are informed about gross margins, rent bills and other operating expenses - they also share in store profits.” These are just some of the practices that contributed to Walmart’s success on becoming dominant in the national discount retail industry. However, would these same attributes be sufficient to dominate in other cultures?
Sam Walton realized that employees played a major role in the success of a business in the retail industry. He instilled a spirit of well being and created a company where 70% of its managerial staff was recruited from hourly workers in the stores (ICMR 2003). Transferring this particular work culture to foreign countries has been a struggle for local employees. Walmart Stores, Inc. has had to adjust their company culture to transition more smoothly into certain markets. Walmart’s rapid international growth created a lack of quality management. Managers in foreign countries were unable to speak the language of that particular country, therefore creating a swarm of problems.
The language barrier was not the only issue, cultural differences accounted for the majority of the issues. It wasn’t until the company chose to decentralize management authority from their headquarters to their International division that each leader of their market was able to freely manage their operations and merchandising (Zellner, Schidt, 2001).
Walmart has attempted to recruit top management for each market from the host country. For example, Rai Jain the Managing Director and CEO of Walmart India is a native of India. However not all of the market leaders are from the host country. An example would be Steve Dacus, an American who is the President and CEO of Walmart Japan (Walmart.com).
In order to understand the success and failure of Walmart Stores, Inc. in markets other than the United States, we must first explore the corporation’s organizational structure. In the United States., Walmart’s management was able to identify the most effective method to categorize their departments in order to attain the highest levels of production. Walmart was categorized into three different divisions.
The first being Walmart Stores US, the second being Sam’s Club US and the third being their International division. This divisional structure has allowed Walmart to grow not only in the US, but also globally. It allows each division to focus on particular goals pertaining to that division. That in turn allows Walmart to perform more efficiently due to the ability to identify areas of needed change and therefore they are able to adjust properly.
Walmart’s International division is the fastest growing part of their overall operations. With 5,651 stores in 26 different countries other than the US, the division has had its share of success and failures. All 26 international markets consist of their own president and CEO of that market. Walmart became a multinational corporation in 1991 with the opening of a Sam’s Club outside of Mexico City. In 1993 the company created its International division.
It has had great success in its neighboring countries as well as countries in Central and South America, the United Kingdom and Japan; however, it has also failed in countries like Korea, Indonesia and Germany. Much of their success has been partially due to having 90% of their stores operating under different banners other than Walmart. Regardless of the country, their common goal is to “save people money, so they can live better” (walmart.com).
The company’s lean retailing method which consists of cost effective relationships has been very successful in the United States, however it has been a key aspect of their success and failure in other markets. Walmart’s factory direct model is the key aspect of their corporate identity. They have been able to create an oligopolistic power in their home country; however they have been unsuccessful in most foreign countries (ex. Germany and China).
With out oligopolistic power they are not able to enforce standardization, which they have done so well in the United States and neighboring countries. Their failure of standardization can be accredited to the host countries regulations and laws as well as cross-cultural characteristics, such as guanxi in China (Tseng & Foster 2006). The failure to embrace cross-cultural characteristics has led Walmart to mismanage its relationships with authorities and its people in markets like China.
Supply Chain Management
An efficient supply chain is a key attribute to the success of Walmart in the United States. Their method of lean retailing has changed the way many businesses now do business. Sam Walton was known as a “penny pincher”, and that was very much evident in the Walmart’s supply chain management. However, as mentioned earlier, what method worked in one market did not and does not work in certain markets.
Walmart who has high centralized operations has had to re-adjust their business strategy in international markets in order to be efficient. In the US, Walmart has the luxury of owning the largest fleet for deliveries. Walmart stores receive two shipments a week from distribution centers strategically placed throughout the country. Most of their products are negotiated to come directly from the manufactures allowing for lower costs. Their factory direct model has shaped the way for large retailers to do business in the US.
Walmart was unsuccessful in achieving their effective supply chain management in certain countries for many reasons. The most evident reason was the infrastructure in developing countries. More frequent deliveries were not plausible. Their model of offering a wide range of products at a low cost to communities in small rural areas would have to be discarded in developing countries.
They had to rely on local manufacturers and a reduced amount of deliveries. Walmart was used to cutting out the ‘middle-man” in the US. In certain countries like Korea and Indonesia, the middle man is part of their culture and Walmart failed to accept the cultural difference and therefore was unsuccessful in their business model.
Many problems arose from dealing with local manufacturers. Some local suppliers blatantly rejected Walmart’s delivery system, while others refused to give “special” discounts or to even sell products to Walmart. Walmart had clearly failed in Germany, Korea and Indonesia to gain the proper partnership alliance. The under-developed infrastructure only made success more difficult.
Mode of Entry
A key aspect for a multinational corporation to be successful is their mode of entry into foreign markets. Walmart’s equity entry modes have depended on the market they are penetrating. Some of the methods have proven to be successful while others have not.
Their first mode of entry was a joint venture with Cifra in Mexico. This allowed Walmart to learn more about the culture they were embarking on as well as the ability to localize with the host countries largest retailer. They continued with joint ventures in most of their Central and South American markets in order to create the right amount of localization.
In 1995 Walmart entered the Chinese market through a joint venture. Their success was not as evident as it was in the Central and South American markets. They had partnered with SZITIC a state owned company that would hold the majority of the shares (51%). The Chinese government initially only allowed foreign companies in tier one cities (Ex. Beijing, Shanghai) and restricted the amount of stores opened and the amount of capital invested. Walmart initially struggled to adapt to the Chinese laws; however in 2004 the restrictions ended, allowing Walmart to expand.
Argentina would be the first country that Walmart would enter through a wholly owned subsidiary. In August of 1995, a Sam’s Club was opened in Avellaneda, Argentina. The entry into Brazil had given Walmart the experience they had needed to be successful through wholly owned subsidiary in Argentina. Currently, Walmart’s mode of entry into Argentina has been through acquiring Argentinean owned companies and converting them into Walmart Supercenters (Walmart.com).
Acquisitions have recently been the mode of entry for Walmart into existing markets, due to the ability to create localization in those current markets. That has not always been the case, as Walmart entered the Canadian market in 1994 by acquiring 122 Woolco stores. The success in Canada was evident. Walmart entered Germany in 1997 by acquiring 21 Wertkauf stores. Nine years later, Walmart would pull out of Germany, failing to become a “market spoiler” (Fernie, 2002).
Walmart had hoped to create the right amount of localization in Germany; however what had made the Canadian and Argentinean markets successful did not work in the German market. Walmart failed to identify the markets high competitive retail culture and were not prepared to be a competitor against Germany’s cost and price leader Aldi. What had made matters worst was accusations of breaching several German laws and regulations.
One of them being the “Act Against Restraints and Competition”, an antitrust law that “bans all undertakings with superior market power from selling a range of goods not merely occasionally below its cost price, unless there is an objective justification for this” (Knorr and Arndt, 2003). Walmart had unashamedly failed to deliver on its trademark, “everyday low prices” (Walmart.com).
Walmart has been able to adapt its product accordingly in its markets where they have been successful. In the United States they offer a wide range of products to those in rural communities. The products are appealing, have a low cost and therefore have been a recipe for success. Furthermore, in countries where they have been successful, Walmart has been able to adapt its product to what is appealing to its local market.
Offering local products and slightly changing their business model of offering products in large quantities. China and Brazil for example are populations of consumers who tend to purchase in small quantities, therefore Walmart began to carry products that fit the Chinese and Brazilian culture. Another example of Walmart adapting its product was offering perishable goods that appealed to the Chinese market.
Unfortunately, Walmart has not been successful in certain markets in product adaptation. In fact, certain products did not work well in the initial launch of the Mexican market due to its high altitude. Another key example would be its failure in Germany. Certain regions of Germany preferred certain products, especially local products; products that came from manufactures where Walmart was not able to create a cost effective relationship. The ability to adapt locally to certain markets was a challenge due to Walmart attempting to mirror their US business model. Walmart’s efficient supply chain model would not be effective in Germany and other countries.
The issue of whether Walmart is an ethical company is on going debate. Walmart has however had it shares of issues related to ethics. Many of the issues that may be considered unethical in the United States are not considered unethical in the host countries were the issue has occurred. Coincidently other cultures have felt as though Walmart’s rules and regulations violate their beliefs. In 2005 the German works council filed a lawsuit against Walmart Germany, claiming that Walmart’s code of conduct regarding sexual relationships with co-workers was a violation of their personal rights, mainly the personal freedom guaranteed in the Basic Law of the Grundgesetz (German Constitution).
A lawsuit that would have been overturned in the United States was ruled in favor of the Walmart employees. This prompted Walmart to carefully construct a code of ethics for each country with regards to its host countries laws and beliefs (Darsow, 2005).
Recently (April 2012) Walmart has been involved in a bribery scandal that claims Walmart’s Mexico subsidiary has paid $24 million in bribes to officials to bypass regulations and obtain construction permits for new stores. In countries like Mexico and China, bribes are seen as a way of doing business, and not as a serious crime. Ironically, Walmart has a strict policy in its code of ethics that employees are not even allowed to accept anything from its suppliers. (Walmart.com).
According to the Transparency International, an anticorruption NG, Mexico and China are considered to be in the top three of countries where firms are most likely to have to pay bribes. (Foroohar, 2012). The scandal continues with allegations from an investigation from the New York Times that top executives were aware of what was going on and attempted to conceal the allegations. Furthermore, the New York Times claims that Walmart had received 31 similar reports of potential crimes in the year 2006 alone (Foroohar, 2012).
In many foreign countries were Walmart does businesses in, the issue of ethics will always arise. Regardless of the local custom, bribery is illegal when it comes to an American company. The Foreign Corrupt Practices Act attempts to deter American companies from participating in what may seem like a cultural norm, nonetheless it remains a crime in the view of the Justice Department.
Walmart Stores Inc. has grown to become the largest (by revenue) corporation globally. The multinational corporation has had its struggles when it comes to doing business globally. Nonetheless they are the poster child of success. The ability for Walmart to enter an international market and succeed has become a major role in the company’s profits. Their strategy of entering a new international market had been to create a cost leadership position and to capture a significant amount of market share.
They believed this would create network domination as it has in the United States. However, what they have realized is that what may be a successful business model in one market, may not be successful in another market. Walmart continues to grow internationally, with lessons they have learned from markets that have failed in Korea, Germany and Indonesia.
They continue to adjust there business plan and learn the cultures of other markets in order to enter when the markets are “Walmart ready”. We live in an era where globalization is present all around us. Companies are challenged with ever changing laws and customs that they must adjust to in order to be competitive. The late Sam Walton was quoted as saying, “You can’t just keep doing what works one time. Everything around you is always changing. To succeed, stay out in front of that change.”
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