International expansion poses risks and concerns for companies regardless of their size and experience. Wal-Mart is a large, US-based retailer that has been experiencing significant struggles in Germany following its expansion. Based on the case study, the most critical cause of the failure was the lack of thorough understanding of the target market, including its culture and shopping habits (Subhadra, 2004). Still, some other problems affected the company’s performance in this part of Europe. Analysing the case in greater depth can help to understand the causes and consequences of Wal-Mart’s negative experience and identify the lessons that could help the company to succeed in other international markets.
Challenges of International Expansion
Entering new international markets can be a highly promising strategy since it enables companies to access more customers and enhance financial performance. However, the process of global expansion is associated with a significant number of challenges that might impair the results, causing economic losses. In order to better understand the causes of failure in Wal-Mart’s case, it is essential to outline the main theoretical perspectives on international expansion challenges. Based on the review of the literature, there are four critical perspectives on the topic: cultural, operational, management, and regulatory.
The broad diversity of cultures globally means that companies entering a new international market face the challenge of serving customers who have different values, habits and traditions. According to Meyer, Mudambi and Narula (2011), the distinctive differences between local contexts remain a significant factor influencing multinational companies’ performance. Based on the theoretical framework offered by the authors’, companies facing an international expansion need to have in-depth knowledge and understanding of the new contexts and apply it to exploit any similarities and differences to their benefit (Meyer, Mudambi and Narula, 2011).
This, in turn, enables them to make necessary amendments to the strategies and techniques used to attract and retain customers, thus overcoming the cultural distance (Mohr and Batsakis, 2018). Having poor knowledge of the target market or failing to alter strategies effectively, in turn, leads to losses and impairs market growth.
Operational issues are also significant during internationalisation since a company undergoing expansion usually needs to establish a full range of operations in a new location. This is particularly true for retail and service companies, since they need direct access to customers, while manufacturing companies might simply export goods (Abdelzaher, 2012; Mohr and Batsakis, 2018). Research by Yoder, Visich and Rustambekov (2016) showed that supply chain issues are among the leading causes of international expansion failures. Distribution and logistics issues can also impede performance in new markets, particularly if firms fail to develop cost-effective operational strategies suitable for the new context.
Management and Strategy Issues
Strategy and management problems are also among the most frequent topics considered in relation to international expansions. Poor strategic decision-making has a significant influence on a firm’s performance in new markets. For example, poor choice of locations or underestimation of competitors has led multiple international expansions to fail (Yoder, Visich and Rustambekov, 2016). Furthermore, operating in new cultural contexts requires companies to balance internal culture with the needs of new workers and customers (Meyer, Mudambi and Narula, 2011). Developing and implementing new management strategies while ensuring their accordance with internal corporate culture may be challenging for many companies.
Finally, regulatory issues have a significant effect on companies’ performance in new international markets. Differences in the legal environments may impair companies’ application of particular strategies and cause severe repercussions. According to Cardoza et al. (2016), adjusting operations to local regulations can be expensive, and failure to do so may lead to regulatory issues that could force a company out of the new market entirely. Hence, it is crucial for companies to understand the regulatory environment of the selected new market and adjust their strategies and operations accordingly.
Wal-Mart’s Failure in Germany
Wal-Mart’s case presents evidence of most of the problems identified in the previous section, which contributed to its failure in the German market. First of all, it is possible to question the company’s strategic decision to gain entry into the European market through Germany. Although success in the German market would grant Wal-Mart access to other European countries, rigorous competition in the retail sector, along with high costs and slow growth rates impaired the business environment for new entrants (Subhadra, 2004). Furthermore, using acquisitions as the primary strategy for expansion proved to be challenging. The purchase of Wertkauf did not offer the desired level of market penetration, whereas Interspar’s reputation stained Wal-Mart’s newly formed image (Subhadra, 2004). These strategic decisions had a significant impact on the company’s development in the German market as they affected its popularity among customers and made the expansion riskier.
Secondly, it is clear that the company had a poor understanding of the target market, including German people’s shopping habits and preferences. The acquisition of Interspar caused immediate problems with Wal-Mart’s image and reputation in the target market (Subhadra, 2004).
Because of the chain’s poor reputation among German consumers, most people found other convenient shopping locations, which means that Wal-Mart needed to redeem its reputation while also winning customers back from Interspar’s competitors. Completing this twofold challenge was impossible without having a solid understanding of the target customer. However, in regards to this aspect, Wal-Mart also showed some crucial miscalculations. German customers did not enjoy the American-style customer service offered in Wal-Mart stores, including bagging assistance and greetings (Hunt, Watts and Bryant, 2018). Instead of finding other ways to leverage customer service in Germany through utilising the local cultural context, Wal-Mart refused some of its service strategies altogether, thus failing to distinguish itself from other low-price retailers.
Cultural issues also had a significant effect on the management of Wal-Mart stores in Germany. As explained by Subhadra (2004), the work cultures of the two acquired German companies were very different, and the new management of Wal-Mart Germany did not speak German. This impacted employees’ morale, motivation and commitment, which play a significant role in the success of a firm in any context. Additionally, the case suggests that Wal-Mart managers had a poor understanding of Germans’ work culture and failed to make adjustments where necessary, instead trying to implant American working culture and values.
This had a substantial negative effect on the company since it created distance between the management and employees, thus making the latter feel misunderstood and alienated (Hunt, Watts and Bryant, 2018). Wal-Mart’s rejection of German collective agreements and industry labour policies contributed to the problem, causing dissatisfaction among the workers (Christopherson, 2007). Hence, management-related issues prevented Wal-Mart from operating effectively in the new market environment.
Another vital problem evident in the case concerns Wal-Mart’s operations. As explained by Christopherson (2007), the strategy that ensured Wal-Mart’s success in the US was mostly reliant on the superstore format, which was not an option in Germany due to local land use regulations. As a result, the first operational problem encountered by Wal-Mart was downsizing its operations to smaller shop while remaining cost-effective. The retailer did not succeed in this area, and its German operations proved to be a source of considerable losses because “Wal-Mart Germany had difficulty keeping its networks of stores adequately supplied, especially with fresh produce” (Christopherson, 2007).
There were also issues associated with Wal-Mart’s supply chain management in Germany. The company failed to develop successful relationships with suppliers since German vendors were dissatisfied with its distribution system (Subhadra, 2004). Both problems had a significant effect on Wal-Mart’s operational performance in Germany.
Lastly, Wal-Mart has also experienced a number of regulatory challenges in the German market. The company has been accused of breaching commercial laws with regard to product prices and financial reporting (Subhadra, 2004). These challenges affected Wal-Mart’s price strategy in Germany, and thus prevented it from obtaining a price-based competitive advantage over its local competitors. Wal-Mart has also struggled with various labour force regulations that existed in the German retail markets, such as participating in collective agreements and respecting labour unions (Christopherson, 2007). While these were not the critical reason for Wal-Mart’s failure in Germany, they contributed to its poor reputation in the industry and the workers’ dissatisfaction.
There are many lessons that can be learned from Wal-Mart’s expansion efforts in Germany. First and foremost, the case should help Wal-Mart to choose new markets for expansion more carefully and based on considerable volumes of market data. In Germany, Wal-Mart misestimated the level of competition, leading to significant problems in implementing its strategy (Christopherson, 2007; Hunt, Watts and Bryant, 2018). Moreover, the company had a poor understanding of the regulatory factors shaping the retail environment in Germany, such as land use laws and price competition regulations. Ensuring that the management has a solid understanding of these characteristics prior to expansion is crucial to be able to tailor strategic plans to the new market.
The second lesson that Wal-Mart should have learned from its experience in Germany is that cultural differences have a pivotal influence on the market and the organisation. The case indicates that Wal-Mart failed to connect with both customers and employees, which played a crucial role in its’ failure (Subhadra, 2004). One of the reasons for this was Wal-Mart’s lack of cultural sensitivity and the desire to continue its ‘American ways’ in Germany (Durand and Wrigley, 2009).
Poor knowledge of and the lack of cultural sensitivity increases cultural distance between managers and employees, as well as between the company and its customers, leading to poor results in the market (Ojala, 2015). Having learned this lesson, Wal-Mart will most likely change its expansion practices in the future by hiring more local managers, maintaining local organisational standards and studying customers’ preferences to amend strategies and tools used to penetrate the market.
Finally, the third lesson for Wal-Mart is that operations in new markets should be flexible to adjust to local regulatory, environmental and market characteristics. In Germany, Wal-Mart’s centralised distribution prevented it from collaborating with German suppliers effectively (Christopherson, 2007).
The company also struggled with downscaling its operations to comply with land use laws. Failure to adjust services to the needs and requirements of the new market prevented Wal-Mart’s success in Germany, but the experience might help it to avoid the same outcome in other locations. Based on research, supply chain establishment and logistics planning should be among the primary activities in considering an international expansion (Yoder, Visich and Rustambekov, 2016). A cluster-based approach to supply chain establishment and management could be beneficial for Wal-Mart in the future since it takes into account target market characteristics and local considerations affecting vendor relations (Park, Oh and Fujimoto, 2012). Learning from its mistakes in Germany could thus help Wal-Mart to establish more efficient operations in other countries.
Overall, the case of Wal-Mart’s expansion to Germany highlights the potential challenges and risks that almost every company faces during international development. The case adheres to the key theoretical perspectives on challenges during international expansions by showing evidence of operational, cultural, regulatory, and management problems that affected Wal-Mart’s performance. Failure to connect with customers and local workers, ineffective operations and poor strategic decision-making shaped Wal-Mart’s existence in Germany and its potential in this market. Still, learning lessons from this case can help the company to be more successful in its future expansion efforts. The key lessons discussed in the final section of the paper can also serve as recommendations for other companies planning international expansions.