Critical Evaluation - Case Study Example

Critical evaluation of the costs and benefits resulting from Wal-Mart’s takeover of Asda Critical evaluationof the costs and benefits resulting from Wal-Mart’s takeover of Asda 1. Introduction In the 21st century, one conspicuous trend amongst companies is gaining global presence. Global presence refers to the act of well-established firms’ risking getting into foreign business environments and decides to take international approach to business. Consequently, such firms become multinational enterprises MNEs. There are numerous reasons why domestic businesses decide to become multinationals while retaining the company headquarters in the domestic country. According to Alkhafaji1, the reasons for going multinatinal are classified as aggressive or defensive. Aggressive reasons include opening up new markets, increasing profitability, obtain products for company’s home market, and suit the desire to expand. Defensive reasons include protecting markets at home, securign foreign markets, guarantee raw materials supply, technology and management expertiese acquisition, and political stability. These among other reasons triggered Wal-Mart’s takeover over of Asda to acquire UK market presence. However, the focus of this paper is to evaluate cost and benefits of by Wal-Mart over of Asda. Wal-Mart’s vision was guided by an aggressive vision coupled with courage and commitment. 2. What are the benefits of the takeover When Wal-Mart took over Asda, Asda had about 229 chains. After the takeover in 1999, Asda-Wal-Mart supercenters were opened adding the number of stores to 259 with 19 stores by 2004 and operating under the US model. In addition, the takeover introduced new marketing approaches to Asda including Asda Price Campaign and smiling face “rollback” campaign. This campaign borrowed heavily from Wal-Mart’s business strategy. As a result, Asda gained recognition as one of UK’s most affordable supermarkets. In terms of grocery, Asda benefited heavily as evidenced it increased market share from 13 to 16%. This increase was tremendous given that Asda did not engage in any acquisition and translated Asda’s position as the second largest UK supermarket chain. Further, the takeover introduced the strategy of increasing sales space as practiced by Wal-Mart stores. The strategy successfully saw the company reducing its backroom areas while committing such space to areas of sales for non-foods2. One of the non-foods heavily invested in was George line of clothing. With time, the non-food sales grew by 25% mostly due to joint sourcing with Wal-Mart and non-matched prices within the UK market. Today, Asda’s strategy to invest in non-food areas include ‘Specialty Division’ that focuses more on hotel, holidays, photographic and pharmacy services, and car rentals3. Asda-Wal-Mart has also taken up a strategy intended at adopting an out of town retail development. Despite competition, Asda has prospered in small community discount stores that provide most of Asda products in varying names. 3. Who were the benefits for: Asda, Wal-Mart, Wal-Mart/Asda combined or other stakeholder From the acquisition, Wal-Mart benefited from Asda’s already existing skilled and well-trained employees. In addition, Wal-Mart benefited from gained from the fact that it always pays its employees below industry standards and Asda employees were being paid low wages hence low costs. Further, taking over a well-established retailer also meant that Wal-Mart’s global expansion into the UK was not facing any form of expense for being based in the UK. Conversely, the acquisition led to avoidance of tariffs thereby resulting to savings. Exercising economies of scale was possible through exploitation of economies of scale in relation to transportation, procurement, and advertising as was possible from the already existing company network4. While in the UK, Wal-Mart benefited from operating in an attractive market characterized by numerous UK government incentives particularly financial and cost reducing incentives. Being a leading retailing multinational, the incentives worked towards reducing investment risks in order to create employment and encourage investment. Wal-Mart also gained from value-proposition given that the retailer is known for its low prices and its warehouse-oriented stores that enabled it to sell diverse products ranging from food to furniture to computers. For Wal-Mart this made it hard to be driven out of business a hence upgrading the standards of living. For the local population, the provision of employment opportunities led to improvement of the UK population’s skill level5. Through necessary training, Wal-mart has continuously taken advantage of increased competition, elevated profits and exports, and technological gains that have led to improved management and control of stock. For Asda, the takeover led to increased market share, profitability, and raise in rank as the most preferred store in the UK. As of 2010, Asda ran 377 stores and 19 depots all of which deployed about 165,000 associates. 4. What were the costs of the takeover Despite the numerous benefits arising from the takeover, numerous costs have been experienced. First, Asda has had accusations of lack of transparency in its advertising information. According to the Advertising standard s Agency or ASA, the claims in Asda’s advertisements were founded on inadequate and misleading surveys that were not inclusive of low cost supermarkets like Aldi and Lidl6 in the year 2005. As a result, Asda claimed that such information was misleading. Besides unrepresentative advertisement information, fluctuations in food prices did not spare Asda’s efforts to rise above competition. In year 2005, Asda’s food market share reduced drastically by 1-2% subject to the country’s deflation in food prices. The implication was reduction in retailer’s food annual growth rate to 2%, which was way below the market growth rates of 3%. This decline also brought about rise of competitor retailers like Sainsbury and other retail market competitors who wished to have Asda fall from the leader position. In Germany, Asda-Wal-Mart retail stores faced challenges ranging from staff displeasure, customers’ conservative culture, and Germany government regulations and rules. Staff demoralization resulted from the introduction of Wal-Mart culture of morning cheer and other rules and regulations. In addition, Germany staff was demoralized by the fact that Wal-Mart’s official communication language remained English while no manager of US origin dared to learn Germany resulting to serious communication issues arose resulting to poor relationships with the staff of Germany origin7. Customer displeasure coupled with competition underestimation led to narrowed market share. For Asda-Wal-Mart, low-priced market leading retail stores posed tough competition8. Additionally, Wal-Mart in Germany conflicted with the nation’s laws of labor and other legislation particularly German trade union that forced the organization to have all its employees enrolled in Unions and enroll in collective wage agreements. Wal-Mart’s non-adherence to labor laws triggered numerous strikes that damaged its publicity. In addition, Wal-Mart’s failure to adhere to commercial laws that required publication of financial statement saw Wal-Mart sued in German courts ruining its reputation. 5. Who were the costs for: Asda, Wal-Mart, Wal-Mart/Asda combined or other stakeholder For Asda/Wal-Mart, the costs involved legal action due to gender discrimination and violation of employee rights. Gender discrimination results mostly due to the tendency to hire women in part time jobs that are low paying9. Additionally, Asda/Wal-Mart takeover led to employees’ denial to join any labor union. Additionally, the firm has been accused of falsification, destruction, and withholding of documents resulting to suspicions of fraudulent commitments, high probability of selling counterfeit products, illegal firing of workers, and facilitating gender discrimination. For UK and other suppliers, the supremacy in retail business results to exploitation due to its purchasing power and this tends to reduce competition. Consequently, suppliers find themselves selling their commodities at low prices that reduce their profitability. Due to economies of scale, Asda-Wal-Mart destroys local area economies by establishing supercenters at the edge of towns thus resulting to the consolidation of the previously existing stores. The result is the reduction in the number of jobs, as local stores close subject to competition. For the consumer, the presence of a single superstore in the neighborhood means increased distance of travel to purchase any household item. Further, as an employer, Asda-Wal-Mart is viewed as exercising strategic assault in relation to employees’ working surroundings to reduce costs and improve productivity. 6. Did a given stakeholder benefit more than others did? which one The customer is the stakeholder that benefited more is Wal-Mart. By acquiring Asda, Wal-Mart’s intentions were to establish a strong global presence in the UK at the least possible price and as part of its global strategy. Wal-Mart succeeded in its plans by not only gaining presence in the UK but also in all stores affiliated to Asda in Germany and other nations. 7. What was the overall impact of the takeover on the host economy For the UK government, the takeover resulted into creation of employment opportunities, improving living standards, technological skills acquisition, increased government revenue, and improvement in the skills levels of the population10. Tax revenues increase due to materials importation, finished products exportation, and workers’ employment. With the revenues, the host nations manage to commence community programs and establish physical infrastructures like hospitals, schools, and roads. Conversely, the takeover is seen as resulting to some degree of loss of sovereignty and independence by host governments where management of fiscal and social policies becomes impossible without reference to the MNC. Consequently, the MNC renders the host economy as lacking control of its products, technology, and marketing decisions. Bibliography Alkhafaji, Abbass. Competitive Global Management - Principles and Strategies. London: CRC Press, 1994. book, resource. n.d. Read More