International Business - The Entry of a Powerful Multinational in China - Case Study Example

International business – Wal-Mart in China Table of contents List of figures/ tables 3 0 Introduction 4 2.0 Literature Review & Critical Analysis 2.1 Wal-Mart in China 5 2.1.1 Company Overview 5 2.1.2 Strengths and weaknesses of the market entry strategy chosen by the company in regard to its entry in China 5 2.1.3 Environmental challenges that Wal-Mart faced in regard to its entry in China – PESTEL analysis 7 2.2 Political and Economic risks that need to be understood on entering the global marketplace for the first time 10 3.0 Conclusion 11 4.0 References 12 5.0 Bibliography 14 6.0 Appendices 15 List of figures/ tables Table 1 – SWOT analysis of Wal-Mart 6 Table 2 – PESTEL analysis of Wal-Mart 9 Table 3 – Statistics on Wal-Mart 15 Graph 1 – Factors that can influence the market entry mode selection 16 Figure 1 – Photo of Beijing in January of 2012 16 Figure 2 – Ten key characteristics of Chinese economy 17 Graph 2 – Number of firms that have entered the Chinese market from 1985 to 2005, as compared to the GDP of China 18 Graph 3 – Corruption as part of the international market 18 1.0 Introduction The potential of large firms to secure their market position is highly related to their presence in the global market. However, the identification of markets that can offer high profitability is considered as a challenging task: economies worldwide are not stable while consumer trends tend to change continuously. In this context, a firm that aims to expand globally has to review carefully the challenges related to various markets and to choose the market that has less disadvantages, taking into consideration the firm’s existing resources and objectives. Also, it has been proved that the performance of a foreign firm in a new market may not be high since the beginning of the relevant project. This means that when expanding globally firms should set as a priority the gradual growth in the foreign market allowing a period for aligning business strategies with the local culture and business trends. Current paper explores the entry of Wal-Mart, a powerful multinational, in China. Wal-Mart is one of the most powerful competitors in the global retail industry. The firm’s growth has been based on continuous expansion in new markets, a practice which is a core part of the firm’s strategy, as also explained below. In China Wal-Mart has faced a series of challenges due to which the firm had to close certain of its stores in the specific country. The challenges that Wal-Mart faced in the Chinese market are presented in this paper. It is proved that such challenges are unavoidable in internationalization plans. However, there are certain techniques that can help international businesses to control the risks involved and to secure continuous growth, even at lower speed that initially estimated. Addressing Chinese consumers in the same ways as American consumers has been proved as the major mistake that Wal-Mart made when entering the Chinese market. 2.0 Literature Review & Critical Analysis 2.1 Wal-Mart in China 2.1.1 Company Overview Wal-Mart was first established in Arkansas in 1962 (Wal-Mart, organizational website, History). Since then the growth of the company has been significant: today the firm operates in about 27 countries while its customers are estimated to 245 million worldwide (Wal-Mart, organizational website, Our Story). The firm’s employees in the global market reach the 2 million (Statistic Brain 2013). The firm has become popular worldwide mostly for the following facts: the high range of products and the low prices (Wal-Mart, Organizational Website, Our Story). The figures related to the performance of Wal-Mart in the global market are presented in Table 3 (Appendices). 2.1.2 Strengths and weaknesses of the market entry strategy chosen by the company in regard to its entry in China The entry of Wal-Mart in China, as took place in 1996, can be characterized as quite successful (Cohan 2012). The strategy that Wal-Mart chose for entering the Chinese market has been the joint venture, being considered as more appropriate for Chinese market compared to other market entry strategies, such as ‘direct sales or strategic alliances’ (Gutterman 2011, p.36). The potential factors that can influence a firm’s decision in regard to its entry in a foreign market are presented in Graph 1 (Appendices). Wal-Mart kept the control of the 65% of the specific joint venture (Cohan 2012). Today, the stores of Wal-Mart in China are estimated to 370 while the firm’s sales in the Chinese market are high, reaching the $7.5 billion, as in 2011 (Cohan 2012). Despite the success of the firm in China problems have not been avoided. The effectiveness of the market entry strategy of Wal-Mart in China could be evaluated using the SWOT analysis, a technique commonly used for assessing the quality of business strategies. In practice, the SWOT analysis is developed by a firm before entering a foreign market, so that the exposure to risks is minimized (Dlabay and Scott 2010). In regard to Wal-Mart, the elements of SWOT analysis are presented in the Table 1 below. Strengths Weaknesses Opportunities Threats Extremely popular brand name – high variety of brands, about 27 in total (Cohan 2012, Statistic Brain 2013) Standard mode of operations globally; this practice cannot be applied in markets that are highly influenced by local culture (Bose and Rose 2014) Chinese market is extensive; the chances for continuous expansion are significant High competition in the retail industry of China Range of products Lack of effective mechanisms for controlling quality of products; in 2014 Wal-Mart had to recall important amount of its products based on monkey meat, which is consumed in China, after warnings on quality (BBC News 2014) Innovation is highly appreciated Quality failures are not accepted by consumers Low prices In local stores, employee motivation is low after complaints for violations of employees’ rights (Schmitz 2014) Chinese government has stated its intention to introduce a more flexible framework for foreign firms (Bloomberg 2013) Government’s control on foreign firms is extensive Table 1 – SWOT analysis of Wal-Mart in China The SWOT analysis presented above reveals important weaknesses in regard to the Wal-Mart’s strategy in China. In the past, this strategy was proved quite effective allowing the firm to achieve significant profits in China (Loeb 2014); however, due to failures in understanding the buying behaviour of local people, the decrease in profits could not be avoided. Particular attention should be paid at the firm’s weaknesses: the lack of aligning business strategy with local culture, the low quality of certain food products and the conflicts with local employees (Table 1). The specific weaknesses are severe and highly threaten the firm’s survival in the local market; the closure of 29 stores of Wal-Mart in China during 2013 has been an indicator of the inappropriateness of the strategy that Wal-Mart has applied in China. Therefore, this strategy should be thoroughly reviewed and updated, using the findings from the PESTEL analysis and the risk analysis, as presented below. 2.1.3 Environmental challenges that Wal-Mart faced in regard to its entry in China – PESTEL analysis In China, Wal-Mart had to face a series of important challenges. These challenges can be described using the PESTEL analysis technique. The PESTEL analysis is used for presenting a firm’s environment, focusing on the elements of this environment that can influence the operation of the firm (Harrison 2013). In other words, the PESTEL analysis explains the macro-environment of a business and not the close business environment, i.e. the micro-environment, also known as internal environment (Hamilton and Webster 2012). In the context of PESTEL analysis the particular challenges can be described as follows: a) Political; the Chinese government has to face a series of problems, in regard to the country’s social and economic life: primarily, the pollution across the country is extensive, threatening the public health; in image in Figure 1 (Appendices) a photo of Beijing in January of 2012 is presented. It is possible due to the expansion of the air pollution that people in China seek for quality in their food, a fact that has been ignored by the managers of Wal-Mart in China (Loeb 2014). It is implied from the above that the luck of effective governmental measures for controlling pollution has made Chinese consumers more demanding in regard to the quality of food products. At the next level, the government of China ignores the need of people for fairness; as a result social conflicts have expanded across China (The Guardian 2012), a trend that should be taken into consideration by Wal-Mart in regard to the place and level of the firm’s operations in China. b) Economic, the economy of China is considered as the second most powerful worldwide, reaching, in terms of GDP value, the $ 9 trillion (The Economist 2014); recently, delays were identified in regard to the growth of Chinese economy (The Economist 2014). Despite its decline, the Chinese economy is considered as quite dynamic, offering significant prospects for foreign investors (The Economist 2014, Figure 2, Appendices); c) Social; Chinese consumers have been proved different from American consumers in regard to their shopping criteria; for Chinese, quality of food is a priority, more than price, in order to decide to buy a food product (Bose and Rose 2014); managers of Wal-Mart had not identify the specific characteristic of Chinese consumers, a fact that led to the closure of about 29 stores of Wal-Mart in 2013 (Business Standard 2014). Indeed, Chinese do not buy high volumes of food products preferring ‘small quantity but of high quality’ (Loeb 2014, par.2); Moreover, it has been proved that for Chinese consumers local products can be of higher value compared to products of popular foreign brands (Loeb 2014); d) Technological, in China, the use of technology in all business processes is highly appreciated by consumers. Moreover, the Chinese government has set technological development as one of the key priorities for China’s industries and sciences in the next decade (Stockholm International Peace Research Institute, 2014). In this context, Wal-Mart would not face difficulties in supporting its operations in China as of their technological needs; e) Environmental; the environment in China is highly polluted (Figure 1, Appendices), a fact that increases the responsibility for businesses in all sectors to promote sustainability; still, the Chinese government has not introduced laws that can ensure the protection of the environment from business activities (The Guardian 2012); and f) Legal; Several complaints have been developed by the firm’s employees in China in regard to the violation of employees’ rights, a fact that has led to severe tension between local employees and the firm’s top management team (Schmitz 2014). The existing labor law of China, as changed in 2008, secures the protection of employees’ rights; this means that Wal-Mart should change its existing employment schemes accordingly. On the 24th of December of 2013 the Chinese government promised to introduce laws more favourable for foreign businesses (Bloomberg 2013). The elements of Wal-Mart’s PESTEL analysis are summarized in Table 2 below. Political Economic Social Technological Environmental Legal Ineffectiveness of governmental measures in regard to air pollution China’s economy is at the second position globally with a value of GDP about $9 trillion Chinese consumers prefer quality than quantity in regard to food products For the Chinese government, technology is a key factor for industrial and scientific growth In China environment is highly affected by business activities (Figure 1, Appendices) Current labor law of China emphasizes on the protection of employees’ rights (Phillips 2008) Lack of willingness to secure fairness for population A decline in the Chinese’s economy growth has appeared recently (The Economist 2014) Chinese consumers highly value local products Chinese consumers highly value the use of advanced technology in business processes Existing governmental policies for the protection of environment are not adequate (The Guardian 2012) Existing Chinese law for foreign business will be changed (Bloomberg 2013) Table 2 – PESTEL analysis of Wal-Mart in China 2.2 Political and Economic risks that need to be understood on entering the global marketplace for the first time The entry of a firm in the global marketplace for the first time is related to a series of risks. These risks should be taken into consideration also by firms that are well established in the global market. Country risk analysis is a technique used for evaluating the risks related to the entry of a firm in the global market (Jarvis 2003). The above analysis is developed using various tools; the ‘leading risks indices’ (Jarvis 2003, p.109) is an example of such tool. The above indices refer to specific characteristics of a country, such as ‘corruption, governance and stability’ (Jarvis 2003, p.109). Two major risks that should be assessed by a firm before entering the international market are the political risks and the economic risks. The political risks refer: a) to the appropriateness of a country as a place ‘for conducting business’ (Cool and Goddard 2006, p.234) and b) to the risk involved in the investment of a specific company in the particular country (Cool and Goddard 2006, p.234). Specifically in regard to the second element of political risks, as presented above, reference should be made to the cultural differences between the country of origin and the host country; these differences can be high leading to the need for major transformations in a firm’s existing operational rules (Wu 2008). Teixeira and Grande (2012) highlight an important issue in regard to a country’s appropriateness as a place for conducting business: the level of corruption. In certain countries corruption can be extremely high, making business operations quite difficult (Teixeira and Grande 2012). Corruption, as a political risk related to the internationalization of a firm, can have various modes, as explained in Graph 3 (Appendices). The economic risks related to the international market can include the condition/ performance of the local economy and the position of the economy in the international market, as this position can affect the country’s attractiveness in regard to foreign investment (Katsioloudes and Hadjidakis, 2007, p.187). At this point, the following fact should be made clear: there are certain countries worldwide that are highly attractive as business destination. China is a key example. Graph 2 (Appendices) shows the number of foreign firms that have entered the Chinese market between 1985 and 2005; the significant increase in the rate of entry of these firms in China cannot be doubted. The attractiveness of a country in terms of business operations is a key criterion for a firm to enter a specific country, even if the findings of the relevant risk analysis, as explained above, are not quite encouraging. Of course, assessing the risk involved in a particular country in regard to business operations is a critical practice for avoiding severe damages at a later stage, i.e. after entering the target market. 3.0 Conclusion Wal-Mart has entered the Chinese market in order to secure its competitiveness in the global market. Wal-Mart had already experience in such projects – the firm, as explained earlier, operates in many countries worldwide. Thus, the success of the firm in the Chinese market would be expected as secured. Still, the review of the firm’s performance in China has revealed a series of issues: a) the managers of Wal-Mart have not checked carefully the buying behaviour of Chinese consumers; otherwise, they would be aware of the emphasis that these consumers give on quality, b) Wal-Mart has a mode of operations which is standardized in the firm’s stores globally; however, in China a different approach should be used. As revealed through the literature review developed for this paper culture can highly affect business performance, especially if the culture of the host country is unique, such as in the case of China. In China, Wal-Mart should focus on quality rather than on the competitiveness of its prices; c) expanding in a foreign market can hide many risks; for example, in China the existing legal framework for foreign firms needs major changes, a fact that has been highlighted also by the Chinese government. In other words, the strategy followed by Wal-Mart in China has been characterized by many gaps and failures. If the external and the internal environment had been appropriately assessed in advance, using the methods presented in this paper then the firm’s exposure to risks would have been reduced. 4.0 References BBC News, 2014. “Wal-Mart recalls donkey meat in China.” Jan. 2, 2014. Available at http://www.bbc.com/news/business-25573471 Bloomberg, 2013. “China Promise Clashes With Clampdown on Foreign Business .” Dec. 24, 2013. Available at http://www.bloomberg.com/news/2013-12-24/starbucks-to-audi-face-china-clampdown-on-foreign-firms.html Bose, N. and Rose, A., 2014. “Wal-Marts China syndrome a symptom of international woes.” Feb 21, 2014. Reuters. Available at http://www.reuters.com/article/2014/02/21/us-walmart-emerging-idUSBREA1K08220140221 Business Standard, 2014. “Walmart closes store in China.” March 5, 2014. Available at http://www.business-standard.com/article/international/walmart-closes-store-in-china-114030500491_1.html Cohan, P., 2012. “How Did Wal-Mart Crack Open China?” May 18, 2012. Forbes. Available at http://www.forbes.com/sites/petercohan/2012/05/18/how-did-wal-mart-crack-open-china/ Cool, K. and Goddard, J., 2006. International Business: Theory and Practice. New York: M.E. Sharpe Dlabay, L. and Scott, J., 2010. International Business. 4th ed. Belmont: Cengage Learning. Gutterman, A., 2011. A Short Course in International Business Plans. California: World Trade Press Hamilton, L. and Webster, P., 2012. The International Business Environment. Oxford: Oxford University Press. Harrison, A., 2013. Business Environment in a Global Context. Oxford: Oxford University Press. Jarvis, D., 2003. International Business Risk: A Handbook for the Asia-Pacific Region. Cambridge: Cambridge University Press Katsioloudes, M. and Hadjidakis, S., 2007. International Business. London: Routledge. Koch, A., 2001. “Factors influencing market and entry mode selection: developing the MEMS model.” Marketing Intelligence & Planning, 19(5): 351-361 Loeb, W., 2014. “Walmarts International Challenge: Trying To Understand Local Shoppers.” Mar. 26, 2014. Forbes. Available at http://www.forbes.com/sites/walterloeb/2014/03/26/walmarts-international-challenge-trying-to-understand-local-shoppers/ Phillips, I., 2008. “China’s new labor law: A view from Foreign Business.” China Research Center. Available at http://www.chinacenter.net/chinas-new-labor-law-a-view-from-foreign-business/ Schmitz, R., 2014. “Chinese workers fight Wal-Mart for better wages.” Jan. 22, 2014. Marketplace. Available at http://www.marketplace.org/topics/world/chinese-workers-fight-wal-mart-better-wages Statistic Brain, 2013. ‘Wal-Mart Company statistics.” Available at http://www.statisticbrain.com/wal-mart-company-statistics/ Stockholm International Peace Research Institute, 2014. “Chinas technological development and the implications for the rest of the world.” Available at http://www.sipri.org/research/security/china/research/technology Teixeira, A. and Grande, M., 2012. “Entry mode choices of multinational companies (MNCs) and host countries’ corruption: A review.” African Journal of Business Management, 6(1): 1-17 The Economist, 2014. “On Cloud Nine Trillion.” Mar. 29, 2014. Available at http://www.economist.com/news/china/21599806-our-asia-economics-editor-takes-his-leave-less-worried-many-his-peers-about-frailties The Guardian, 2012. “Chinas challenges: political change, pollution and protest.” March 18, 2012. Available at http://www.theguardian.com/world/series/china-the-next-generation Wal-Mart, 2014. Organizational website. Available at http://www.walmart.com/ Wu, J., 2008. “An Analysis of Business Challenges Faced by Foreign Multinationals Operating the Chinese Market.” International Journal of Business and Management, 3(12): 169-174 Zhu, M., Wang, Z. and Quan, H., 2011. “A Study on the Key Factors Influencing International Franchisors’ Choice of Entry Modes into China.” Frontiers of Business Research in China, 5(1): 3-22 5.0 Bibliography Gil, E. and Reyes, A., 2012. International Business Research: Strategies and Resources. Lanham: Scarecrow Press. Crawley, E., Swailes, S. and Walsh, D., 2013. Introduction to International Human Resource Management. Oxford: Oxford University Press. Gonzalez-Perez, M. and Liam, L., 2013. International Business, Sustainability and Corporate Social Responsibility. International Business, Sustainability and Corporate Social Responsibility. 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Hoboken: John Wiley & Sons Wan, S. and Lowe, J., 2007. “Market Entry Strategy into China by Entrepreneurial New Venture Firms.” AGSE, 1195-1205 6.0 Appendices Wal-Mart Statistics Data Total amount of money spent at Wal-Mart every hour of every day $36,000,000 Total amount of profit Wal-Mart makes every minute $34,880 Total number of employees 2,000,000 Total number of stores 4,253 Percentage of Americans that live within 15 minutes of Wal-Mart 90% Total sales annually $405 Billion Total number of Wal-Mart Brands 27 Average amount of square feet per Wal-Mart Supercenter 197,000 square feet Amount per every U.S. dollar spent at Wal-Mart 8 cents Total number of customers per week 100,000,000 World Rank by economy if Wal-Mart were a country 19th Percent of Wal-Mart cashiers that are women 72% Percent of purchases made by families making less than $40,000 annually 42% Percent of Wal-Mart suppliers located in China 80% Table 3 – Statistics on Wal-Mart (source: Statistic Brain 2013) Graph 1 – Factors that can influence the market entry mode selection (source: Koch 2001, p.353) Figure 1 – Photo of Beijing in January of 2012 (source: The Guardian 2012) Figure 2 – Ten key characteristics of Chinese economy (source: The Economist 2014) Graph 2 – Number of firms that have entered the Chinese market from 1985 to 2005, as compared to the GDP of China (source: Zhu et al. 2011, p.13) Graph 3 – Corruption as part of the international market (source: Teixeira and Grande 2012, p.3) Read More