Globalization is defined as "A social process in which the constraints of geography on economic, political, social and cultural arrangements recede, in which people become increasingly aware that they are receding and in which people act accordingly" (Malcolm Waters 2001, 4-5). Now day's people around the world are more connected to each other. They can travel from one country to the other country with ease. Communication between people from different parts of the world is also very common these days. Goods and Services are easily available from one part to all the parts of the world. And even doing business in some other part of the world and money flow has become much easier and faster than earlier days. Due to all of these things happening, it is termed as "Globalization". And this is what Wal-Mart (US based & world's largest retailing company) decided to do in early 1990's; they declared that they are going Global.
No firm can be globalized without marketing its product or brand around the world (globally). Therefore Global Marketing is necessary for any firm or organisation who wants to expand its business, depending upon which part of the world they are going. Global Marketing refers to marketing activities coordinated and integrated across multiple country markets (Johny K. Johansson 2003, 9).
This report includes the Market and Industry factors to be kept in mind when company decides to go global, the environmental factors which are to be considered before going global (PEST analysis) and the reason why Wal-Mart was failure in Germany with the help of porters 5 forces.
It was in the year 1997 when Wal-Mart decided to step into German Market. In December 1997, they took over 21 store Wertkauf chain for almost $1.04 billion and one year later, they acquired Interspar's 74 hypermarkets for about 560 million Euros. After all this acquiring Wal-Mart immediately became 4th biggest operator of hyper markets. But all this investment did not pay off as the company started incurring huge losses of more than 1 billion Euros annually. The highest Revenues in Germany was by Metro AG with 32.0 billion Euros as shown in the table below whereas Wal-Mart was ranked 13th with approximately 2.9 billion Euros (Andreas Knorr, Andreas Arndt,24th June,2003, Why Did Wal-Mart Fail In Germany).
Micro Environmental Analysis
Porter's Five Forces Model
In 1980 Porter developed a framework which helps to identify the sources of competition in an industry or sector. He said that there are five competitive forces which determine the nature of competition within an industry. These 5 forces further help the mangers to develop competitive strategies. (Campbell David, Stonehouse George and Houston Bill 2003).
1. Competition between the rival companies: -
German retail Industry is very competitive and in past few years major acquisitions have taken place. The few top retailers in German market are ALDI, EDEKA /AVA group, METRO AG, REWE Group etc. But the no. 1 retailer in German market is Metro AG with revenues of 32 billion Euros(2002). This company is also ranked 4th best retailing company in the world (2004 Retail Forward Analysis) and this company was & still is one of the main rivals of Wal-Mart.
It was on 25th July, 1996 when Metro was listed on DAX German stock index. With a market capitalization of 12.07 billion German marks, Metro AG ended the year 1996 as one of the 20 largest publicly listed companies in Germany. In 1997 when Wal-Mart decided to come in, Metro AG had settled down, had a firm hold in German Market and had even started to expand in Czech Republic. 1998 was the most successful year in the company's history as their earnings before Interest & Taxes grew 63.5% to 1.6 billion German marks. Progress was also made internationally as business contributed 35.2% of the total turnover. Now The Metro Group operates in around 30 countries. Business in Eastern Europe and Asia makes strong contribution to its sales (Metro AG history, Available from www.metrogroup.de).
2. Threat to new entrants: -
In 1997, when Wal-Mart entered German market it was not considered as the ideal time to do so. This was because during that time Germany's economy was not stable. They had high real estate prices, high labour costs and very inflexible business environment. And moreover German market is also considered as price sensitive (leads to price wars between retailers).
For a company it is a very attractive place to be in as it is the central base and can later be expanded anywhere in the continent. But at the same time the entry and exit levels are high and have low profit margins.
3. Substitutes goods: -
Retail industry sells products which are of common or daily use. So there are no direct substitutes. But if substitute industry is taken rather than goods then a local market can be threat because people can opt to go to local market which is closer to their place. Travel agencies can also be threat to the retail store as people sometimes prefer to spend money on holiday tours rather than buying a luxury item. And lastly gray market can also harm the sales of branded products.
4. Buyers: -
Now day's consumers are more aware of the quality of the product and services. This makes suppliers more conscious to provide them with best quality and service. Consumers have wide variety of choice of products which in turn increases price competition. Wal-Mart tried the same thing in Germany, that is to deliver high quality goods in low prices but they failed because of the competition they faced. Therefore it is not wrong to say that consumers have more power then suppliers.
The other view point could be when a company (Wal-Mart, Tesco's etc.) is taken as a buyer to buy raw materials or other finished goods from its suppliers.
5. Suppliers: -
Due to different types of products sold by retailers, there are many different suppliers. Suppliers are said to have more power if:-
- Brand of the supplier is very powerful that it is a must buy for a buyer.
- When a company is new. For example when Wal-Mart just entered into the German market it had bend to its supplier's to certain extent.
- And lastly when cost of switching from one supplier to another is high (Johnson Gerry and Scholes Kevan, 2002, Exploring Corporate Strategy).
Macro Environmental Analysis
PEST analysis is nothing but the host of different Environmental forces/factors which have impact on global marketing strategy. These Environmental forces can be categorized as:
- Socio Cultural
Managers need to understand the differential impact of these forces on particular Industry. All the factors are not important to a particular industry, it differentiates with every industry. And these forces are not independent, but they are rather interlinked. That means change in one factor can lead to change in the other. It is further explained with reference to Wal-Mart in Germany (Douglas P. Susan, Craig C. Samuel, 1996).
1. Political Factors: -
These factors include that how stable is the government, the taxation policies, foreign trade regulations and social welfare policies etc. Political factors may be helpful for the companies to expand business in the market or they may restrict companies to exploit these opportunities and operate freely with in the world markets. But when Wal-Mart when to Germany, the political problems they faced were: -
- Act against Restraints of Competition
According to this act in Germany no superior company like Wal-Mart is allowed to sell certain quality goods lower than the cost price. Until or unless there is a proper justification for this and this is exactly what Wal-Mart did and then they were taken to court and were penalised.
- Commercial Act
This law states that all the corporations have to disclose their basic financial information including balance sheet and income statement. But Wal-Mart never showed the information and they were taken to court by trade union and the senior executives were fined for not providing the financial data.
- Obligatory Deposit Regulation
This was recently changed in 2003. As per this regulation Wal-Mart or any company is not allowed to sell any product bottled or canned in container.
- Labour Laws
Wal-Mart in US use to hire labour on daily bases, it means they use to pay them per day/hour. But there was a law in Germany for the labours to have wage contract with the company.
2. Economic Factors: -
Before a company steps into foreign market, it should start by evaluating economic variables according to the size and nature of the market. Because of large number of alternatives, initial screening of markets should be done efficiently and effectively, with a wide array of economic criteria, to establish a preliminary estimate of market potential (Czinkota R. Michael, Ronkainen A. Ilkka, 2004, Pg 90). Economic factors include rate of inflation, unemployment, interest rate, business cycles etc.
In 1997 when Wal-Mart entered the German market, the economy was unstable. Retailers were in a price war and had a slow growth rate. The cost of setting up business was also very high with high real estate prices and high labour cost. German currency was also low and it was under process to change in to Euros.
3. Socio Cultural Factors: -
Every person has his/her own particular culture and learning the way of doing things. Problem comes up when a person of a particular culture has to adjust to another one. The process of adjusting and adapting to other's culture is the key to success in international operations. For Example: - Mc Donald's in India, before they entered Indian market a research was conducted to see the likes and dislikes of the people. India is a country with a wide variety of cultures, so it was a daunting task for Mc Donald. But unlike Wal-Mart Germany, the success of Mc Donald could be seen. This was because they changed their menu according to Indian culture, pricing and even the employees which were kept were from India. Hence there were no language issues between the staff and customers.
Socio Cultural factors include life style changes, social mobility, income distribution etc (Usunier Jean Claude, 2000, Marketing Across Cultures Ch-1, pg 5).
Wal-Mart failed to adjust to the German cultural attitudes, especially in the matter of labour unions. In Germany, a company generally has a close relation with labour unions unlike US, as they do not have any culture of labour unions. So when Wal-Mart came to Germany, they exported their staff which labour union dint like and it spread negative image of the company. Employees/Labour was also given very low wages and very poor working conditions.
- Consumer Habits
What Wal-Mart failed to understand was that consumer habits differ from one country to another. Therefore when Wal-Mart introduced American concept of greeting people and when one of the employee helps customer to decide, what to buy it was hated by German customers. They always prefer to do their work by themselves and not by strangers. And Wal-Mart was even wrong in selling packaged meat to Germans as they prefer buying meat from the butcher. (Landler Mark, Barbaro Michael,1st Aug 2006, Wal-Mart Finds That Its Formula Doesn't Work in All Cultures, The New York Times).
But Selfridges a retail store in London is a good example of understanding consumer habits. Self ridges is owned by American entrepreneur and undertook a seven year makeover of its Oxford Street flagship store when he came to know that young fashion people have abandoned the store. It resorted its interiors and added high fashion labels like Prada and Valentino etc. And because of this it had increase of sales by 11% in 2001 (Kotler Philip, 2004, Marketing Management. Pg 255).
Initially when Wal-Mart appointed higher level staff from US, there were many communication problems between the staff. This was because US staff never knew German and they never made any effort to learn it. So slowly Wal-Mart store was dominated by English language and German employees started feeling like outsiders and were frustrated.
4. Technological Factors: -
Technology is one of the most dramatic forcing shaping people's lives. The economy's growth rate is also affected, depending upon development of new technologies. But unfortunately development which takes place is not always in a good pace. Development in technology is generally good for a company as then the work is done more effectively and efficiently.(Kotler Philip, 2004, Marketing Management, Pg 170) Wal-Mart did exactly the same thing they had a new computerised system of keeping inventories which was much more quick and efficient. But everyone was not aware of that system in Germany. And secondly internet, the positive point was that it became very easy for the customers to buy products online. But on the other hand the disadvantage was that consumers could directly get their product without searching for it in the store which could have made them buy something else as well. Therefore it can be said development in technology is not always good but it can be a force for creative destruction.
Wal-Mart, the world's biggest retailers has finally pulled out of Germany. After 9 years of losses they agreed, it is not easy to crack local discount retailers like Aldi and Metro AG (BBC News, 28th July 2006, Wall-Mart abandons Germany venture www.bbc.co.uk).
As demonstrated above, Wal-Mart's failure in German market was due to the lack of knowledge of the culture and government laws associated with them. And also because they simply copied their domestic operations to the international market without amending it, depending upon where are they going.
Therefore, before entering international market Wal-Mart should have done a research to find out the best international market to enter. This can be done by analysing cost of production, constructing a business, labour cost and most importantly profits. After deciding which market or country to go then it should have a department assigned to do pest analysis. This analysis would tell how the country is doing politically and economically that is how the government policies, laws and rules are for retail industry and even how stable is the economy of the country. It would also tell about the culture in that area. It means company has to see the likes and dislikes of different people so that necessary changes can be made for that particular segment of the market. To keep up with the technologic development, a company should make user friendly and customer service capable web site where customers can access it anywhere at anytime.
And finally, a company should analyse what the current competition has done, is doing and will do to gain market share. If all these factors were actually followed by Wal-Mart then they could have avoided this day, to leave Germany.