Divestment in Emerging Economies - Term Paper Example

Divestment in Emerging Economies Table of Contents Internationalization and the Global Market 3 2 Wal-Mart 32.1 Intentions by Wal-Mart 4 Case: eBay 5 Case: Best Buy 5 The General Trend 6 3 The National Conditions of Emerging Market 7 3.1 Culture of the Target Market 8 4 Investment Affects Divestment 9 5 Summary 10 6 Recommendation to Wal-Mart 10 1 Internationalization and the Global Market Globalization has led to more opportunities for both small and large firms to be able to access the international market (Klein & Wöcke, 2007, P.320). With this opportunity knocking on the door, many firms have tried to venture into emerging markets. However, recently, there has been a trend where most of these firms end up having to close their businesses in these emerging markets and thus shutting their dream of expansion. This is because globalization of markets, as Czinkota, et al (2010) says, has also led to the globalization of business risk. Divestment: Definitions The most generic definitions of divestment is a situation where a business willingly sells off some of its assets as a result of a discontinuation of part of it operations (Nees, 1978). Divestments can therefore happen locally or in a situation where a firm requires divesting from a one of its overseas branch (Davis, 1974, p. 16). There are some generic reasons why a firm may opt to divest. These include raising funds, need to focus on core business, specialization, asset consolidation and cleansing (removing dysfunctional parts of the firm) etc (Hamilton & Chow, 1993, p.479). The current trend to divest from international markets may indicate that none of these may be involved and therefore there is a need to investigate the real dynamics behind multinational divestments from emerging markets. 2 Wal-Mart This study is aimed at giving Wal-Mart a dissection of the merging market and the strategies it can use to ensure continued success in the market. Wal-Mart is one of the oldest and victorious retail chains in the US. The firm runs hundreds of stores in America and across a number of other countries across the world (Wall Mart, 2013). Wal-Mart has shown positive performance in the past few years. For instance, the firm’s revenue from its American market has seen an exponential growth since 2011 and grew by over 8.9 % from $408,085,000 to $446,950,000 (Wall Mart, 2013). This kind of growth, especially at a time when the economy had just emerged from the economic recession can be seen as a positive indicator that the organisation is in a position to venture in emerging markets to expand its business. Wal-Marts sales in china accounts for about 2% of the firm’s total revenue ($7.5), and these Chinese revues are growing at 18% annually in the last decade (Schell, 2012). This report will help Wal-Mart to be able to plan its expansion in the Chinese market by applying strategies which can be used to counter the issues identified in the report. Wal-Mart is one of world’s leading retail chain and this means that the resources necessary for the development of a successful firm. If Wal-Mart uses these resources, especially the managerial experience that the firm has, it can take advantage of the market in emerging economies such as china. China is not only an emerging economy but it is one with the biggest market among the five global emerging economies called the BRICS. China has a market of over one billion people and taking advantage of this market can lead to a brighter future for firms like Wal-Mart. At the same time, the retail market has not been exploited wholly and this is a good opportunity for Wal-Mart to be able to take advantage of the market and make itself the dominant player. 2.1 Intentions by Wal-Mart Wal-Mart has shown interests in emerging economies and especially in China. With this regard, the firm has already established a number of stores in China as a way to take advantage of the fast growing market. Wal-Mart should use the hybrid system to execute its retail market strategy. The hybrid system involves using both the online retail websites and the brick-and-mortar physical shops. Wal-Mart should use this system as a way to access the expanding Chinese retail market in china. While Wal-Mart has used this in the American market, it needs to identify the issues that may be important in having a successful online retail store in China and apply them. This is why Wal-Mart should learn from EBay’s failure in the Chinese market and this case introduce the case of EBay’s failure. The study looks at two case studies. One is from eBay and the other is from best Buy. The EBay cases will provide the information necessary to identify the challenges that a business may have in China in trying to get into the Chinese online market. Best Buy is one of the western firms that has tried to take advantage of the Chinese market and its failure in China the first when it first went into the Chinese market is the fact that. The Best Buy case study will provide information about the retail market in China and this information is important to. Case: eBay EBay is one firm that failed to hold its ground in china after it tried to penetrate the market. Like Google, eBay’s divestiture from the Chinese market was riddled with accusations of government interference (eBay, 2013). There were accusations that the government was cracking down in foreign firms in order to reduce completion for local internet markets. Case: Best Buy Best buy failed to capture the market in china because they refused to change their consumer psychology. Best buy failed to understand consumer needs in China. Instead of giving the consumers more promotional sales and discounts that the consumers are used to from the local retailers such as GOME, it concentrated on increasing consumer experience by expanding spaces between the shelves (Business Focus China, 2011). GOME is one of the local Home Appliances retailer that sells home appliances to consumers in China. GOME uses a market strategy of giving discounts and offering promotional sales in order to increase its sales ns market share in China. Best buy failed to understand that a majority of Chinese consumers. Best buy thought that they could lure the local middle class by giving them the shelf arrangements to give the best shopping experience. The customers complained that they did not feel any experience difference between best buy and the other local retailers and that the only difference was that the other retailers gave them more promotional sales and discounts. The firm also failed to understand that the majority of Chinese market is made of middle class people who are more concerned about the price of goods rather than shopping experience. At the same time, Best Buy failed to understand the fact the consumer culture is not yet mature in China unlike in the west. The General Trend One of the principal reasons that were identified was the fact that these western firms failed o be able to align with the local culture and therefore were not accepted (Amit & Wernerfelt, 1990, p.530). With regard to emerging markets, one key and crucial issue is to be able to comprehend the local culture and therefore design the products of the firm to meet the local culture. Failure to align the business to the local culture will mean that the business will not fit in the local market. A god example is eBay that failed to take into consideration the local culture and therefore found itself in trouble both with the local authorities as well as the market. EBay’s problems were not with the market alone but also with the government. In fact, the main issues that faced eBay were from fights with the governments (Wang, 2010). Best buy is also another foreign investor that fell victim of the same market misunderstandings. Its failure to understand the local culture as well as the purchasing behavior of the local people led to concentrate of applying marketing strategies that are only applicable in the west but not in China. This cost Best Buy the market in china and despite is world class stores, it was unable to compete with the local retailers. Wal-Mart can learn a lesson in this and try to focus on the needs of the local market instead of assuming that the market will respond to the same incentives as the American market. It should focus on giving more promotional sales and discounts and other customer loyalty programs, 3 The National Conditions of Emerging Market The above businesses that failed in these emerging economies have one thing in common. They failed to be able to differentiate the economics of their home economy from the economics of the foreign countries where they go to invest. Going into a foreign market brings a new set of market entry issues (Peng, et al, 2008). To be able to benefit from the emerging economies, extreme receptiveness to the desires of the home market is utterly necessary (Luo, 2003, p.295). A good example of a multinational firm that has been able to align itself with the local culture of the emerging markets is the German car manufacturer, BMW. BMW was able to recognize one notable purchasing factor in china (BMW, 2013). While all other western car manufacturers were still stuck in assuming that the emerging markets will work for them just like in their homes, BMW realized that it would be useful for them in order to look into the purchasing patterns of the local market. This kind of thing also happened to Procter and Gamble, the American manufacturer of home products. P&G was able to realize that the Brazilian market was different in a number of ways (P&G, 2013). To begin with, the firm realized that the local people were more willing to buy products in smaller affordable quantities as opposed to buying in larger qualities. The per capita income in Brazil is much smaller and most people only earn enough to spend for the day. As a result, P&G responded by changing their packaging to have smaller packets of such products as washing soaps. 3.1 Culture of the Target Market Most firms have failed in the emerging market as a result of failing to be able to understand the local attitudes. Most of the emerging economies such as China, India, and Brazil are countries with a truly unique code of culture, especially with regard to their moral beliefs. Failing to understand this code of culture is a significant hindrance and it is able to flush a business out of the market. While there is a cultural change that is happening in these nations as people change into a more westernized culture, it is also apparent that they are extremely far with regard to their cultural revolution (Peng & Heath, 1996 p.493). This cultural orientation is also held up even at the governmental level (Peng, 2002, p.257). For instance, in china, the main reason why there was a row between the Google search engine company and the government was the fact that the government was accusing Google of promoting unhealthy western culture. While many authors have reported that the exit of coca cola from India in the early seventies was due to the harsh government policies (Gopinath, 2012, p.14) argues that the main problem was that coca cola failed to have flexible corporate strategy. As a result, being able to survive in the emerging economies would require one to be able to not only understand the local market but to also adhere to the agreed standards. Failing to do this will lead to fights with the government and at the same time deny the firms market. A good example of cultural misunderstands between western firms and local firms can be seen in what happened to one advertisement made my Motorola, the technology from America (Motorola, 2013). The advertisement featured people wearing funky hairstyles and funky clothing. After watching the advertisement, most of the local Chinese people did not like the advert because they wondered why anyone would like such looks. Obviously, if the target market does not like the advertisement, it is obvious they will not be in a position to associate well with the product being advertised. Simple misunderstandings like this one about the cultural attitudes of the local people can spell failure to a business and the business will be flushed out of the market (Arthur, 2009, p.251). 4 Investment Affects Divestment According to Yiu (2010, p.251) when organizations seek to go to foreign markets, the assumption is that they will take with them an inherent advantage that the mother firm has. However, Yiu’s analysis may not necessarily be correct especially where cultural differences existing between the home and the foreign market. The reason for older business failing are different from those of a new business failing (Thornhill & Amit, 2003 p. 500). The way the business invests and the investment strategy that a business uses in the emerging market will determine whether the business will succeed the local market or not. With regard to the kind of investment used, the main idea here is the amount of investment and whether the business uses such strategies as joint venture in its investments (Welch, & Welch, 2009, p.570). Maxwell (2009, p.290) also had this view and argues that each business should analyze the market and understand its position in the market rather than assuming a generic market view. Joint venture with local firms can be extremely beneficial because the foreign firm will not need to understand the local culture as the local firm will help in that through its management (Ahlstrom, Bruton, & Kuang, 2008, p. 395). Smaller investments are useful in that the firm has enough time to learn about the market and the firm will not have an enormous burden of investment. This will help in making sure that the firm will be in position to take its weight in the foreign and emerging market and that the firm will be able to withstand any pressure in the market. Smaller investments will also mean that the firm will be able identify more prominent areas of investment as time goes by. For instance, if the firm has a $100 million to invest in the emerging market, instead of investing the whole amount at the same time, the firm can choose to invest smaller quantities in order to wait and identify which are the most critical areas to invest in. 5 Summary The main reasons for divestment in the emerging markets my western firms can be summarized as lack of cultural understanding, failing to align with the local culture and falling to adopt investment strategies that suit the local emerging markets. Firm that wants to move from the west and be successful in the upcoming economies like China and India will, therefore, need to have a better thoughtfulness of the local cultures in the emerging economies. The cultures to be understood include the social culture as well economic cultures which involve the purchasing habits and purchasing power of the people. Failing to understand and adopt these cultures in the business strategy will only lead to failure and eventual divestment. However his come be overcome by creating mergers with the local businesses and also by having an appropriate investment strategy that suits the local market. 6 Recommendation to Wal-Mart It is crucial for Wal-Mart to understand that if it is to succeed in the emerging market, it will need to work in conjunction with local businesses so as to be safe. The good thing with most of the emerging markets is that they have many businesses that would be willing to create mergers with western firms. Any merger between a local firm and a western firm can only be seen as symbiotic because each of the firm will be able to bring some form of advantage into the association. For instance, if Wal-Mart joins with a Chinese retailer, the Chinese retailer will help Wal-Mart to understand the culture and the local market and Wal-Mart will help the firm to be able to have quality management. If Wal-Mart uses mergers instead of investing as a sole business, it will require fewer funds for investment and it can invest more gradually in order to avoid overloading its cash flow. Wal-Mart can also use a hybrid system where it uses both online stores and brick and mortar stores in order to increase the sales. Using online shopping to reach the customers will help in making sure that the firm reaches out to a wide market and also that it gives its online stores more exposure and visibility. This hybrid system has been successfully used by local retailers such as GOME to increase their revenues as well as increase their market visibility. According Reuters (2011) GOME has been very successful in online retail and intends to increase the contribution of this niche to the total revenue by over ten percent. However, as seen in EBay’s failure; going into the internet market niche can be a dangerous. To get into online retailing, Wal-Mart should avoid the mistakes that EBay made by failing take heed of government control and involvement in regulating internet use. Wal-Mart should also avis Best Buy’s mistake and look into specific needs of the local market. Instead of focusing on giving the customers shopping experience, Wal-Mart should find ways to offer promotional sales. Wal-Mart should also take into consideration that the nature of the local market and understand that Chinese people don’t have a consumerism as the American market. Reference List: Ahlstrom, D. B. (2008). 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