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The Reasons Of An Organization’s International Setback

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Globalization tends to standardize all countries, which causes the differential elements to be lost and every individual end up being part of the American “empire” thanks to the economic globalization; however, it does not seem always like that. Some American companies have suffered defeats in several countries, while others could not make it work in very specific markets. Not knowing the competitors, the tastes of the national consumers, not having an outstanding marketing plan, or that the prices they impose do not adjust to the local market are just some of the reasons that have led to the international setback.

Walmart is one of the most famous companies of the United States with presence in 27 countries, but it is also unknown in many places of the world. Moreover, it has around 6,500 markets worldwide, with more than 2.3 million employees and according to recent statistics, it receives nearly 270 million customers per week. Despite the fact that the retail giant has made progress in several countries, Walmart had some downfalls in its road.

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Its international expansion began in 1990, starting in all of North America, Mexico and Canada, buying companies of the same category and replicating in all those companies the same operational model that had been implemented from the beginning. After having expanded throughout North America it focused on Asia and Europe managing to buy different retails which were very successful, opening the possibility of new markets in those continents; however, not all the Walmart’s ventures were successful in the European continent. When it arrived in Germany and implemented its operational policies, it found a society of different customs which did not adapt to the Walmart model, causing its failure in the German market.

Not knowing how to attract the local culture led them to close their stores in countries such as South Korea. Its formula “low prices every day” did not fit with the Asian mentality that thinks that a low price is not linked to the quality of the product. Therefore, in Germany the company had to leave after trying for 10 years and investing hundreds of millions of dollars. They did not know how to get into the habits of the buyers.

Walmart’s strategic expansion in other markets is very aggressive and that allows it to have a great power of acquisition of stores; however, the German legal restrictions are greater and Walmart found it impossible to achieve this growth rate. In 1997, it purchased 21 subsidiaries of the Verkauf consortium. It is a chain of stores with important profits; however, the German legal restrictions stopped that expansion and in 1998 only managed to acquire a place. Walmart acquired 85 Interspar supermarkets for which it paid 560 million euros (How to Germany). In addition to the high price, these stores were poorly located or in places of difficult access. In this way Walmart accumulated losses of millions of dollars.

The experience of Wal-Mart in Germany shows that each market has its differential elements that must be taken into account if a business wants to succeed in them. When Wal-Mart announced its implementation plans in Germany, it never took into account the cultural barriers. Thinking that Wal-Mart could buy a store, change the sign, and transform the entire organizational culture and customer relationship dynamics to the “Wal-Mart style” was naïve, but it seems that this has been one of the key points to explain the failure harvested.

The Wal-Mart strategists showed little knowledge and respect for the rules of the commercial game in Germany and were wrong to believe that American marketing could simply be extrapolated to the European country. The company was also wrong in its policy of acquiring places and also in the personnel policy. In addition, the great success of Wal-Mart in the United States and other markets is the constant expansion allowed by its enormous acquisition power; however, in Germany is very difficult to achieve that rate of expansion due to a series of legal restrictions.

For instance, dumping is the long-term supply of merchandise below its purchase price. Walmart uses dumping in its pricing strategy, but in Germany this strategy is heavily regulated. This prohibition prevented Wal-Mart and its enormous financial power from “stealing” customers from existing retailers. It is a very common practice that collects all these savings from the promotions and discounts to the suppliers, taking them on occasion to put aside their profits with such as sell. For the German clients, the good thing costs and if it is very good, it costs a lot. This encourages people to do good things because they know that their work will be valued by others.

Moreover, Wal-Mart would have relentlessly affected many small local businesses. For Germans, the local is better and must be of quality, which gives so much value to the home-made products. They trust their products and their people, without preferring what is coming from outside. In case that a local product fails, they energetically demand the owners better quality since “made in Germany” is a matter of pride and patriotism.

On the other hand, the policies of the multinational were not accepted. For instance, it was not well seen the line of anonymous complaints against those who betray the rules. In Germany, the work system is based on trust and results. The superior is not aware of what the employee does, he/she only expects that the task entrusted to the employee is done in a timely and professional manner. Everyone knows that they have to do their job in the best possible way because it is a matter of honesty and professional prestige. Therefore, the snitches are not welcome, the honesty is based on prestige and image. In addition, German companies do not care about the sentimental and/or sexual life of their employees. Instead of worrying about that, they only take into account the productivity and performance of their employees. Thus, this rule that prohibits two employees from having close relationships was also rejected by the court. The courts prohibited the implementation of this code for violating the individual liberty of the employees.

Moreover, Walmart usually hires elder employees to perform certain activities. For instance, greeting customers at the entrance of the store, help put the purchase in bags, or give information about the location of a product in the store. This was taken as an offense to German society, which treats its elders with great respect for their knowledge and experience.

Despite not having the success expected in some countries, Walmart continued to expand. First, through Asia, arriving in Japan in 2002, and after to Chile in 2009, managing to obtain very successful businesses in those countries. Having expanded across all of these continents and already in control of the U.S. market, Walmart felt the necessity to continue establishing overseas, and found a promising opportunity in South Africa.

South Africa is the financial and business center of Africa, its government is open to foreign investment, so it does not have strict restrictions. Considering it as an opportunity to stimulate growth, improve the competitiveness of the national companies and gain access to foreign markets. The fusion of the American company with African companies could be justified on the basis of public interest. It was expected to affect the employment and competitive ability of small businesses of non-white people who were excluded from business opportunities during apartheid.

In South Africa, around 36% of the labor force belongs to a union. The Congress of South African Trade Unions (COSATU) was the largest in the country and in Africa. The power of these is exemplified in a strike in which COSATU demanded a salary increase being accepted by the Ministry of Labor. The wages of most occupations are established by collective agreement and South Africa had no official minimum wage. The Ministry of Labor established a minimum wage for certain occupations, including employees in the retail sector.

South Africa is one of the largest retail markets in Africa. Therefore, speculation of Walmart’s interest in entering the consumer goods industry in this nation emerged in 2007, followed in 2010 by rumors of meetings between Walmart and Shoprite, Pick n Pay and Massmart. Of these companies, Shoprite was the largest. It was the largest grocery store on the continent and had the largest customer base of all food retailers, consolidating a strong market position in South Africa, largely due to its price leadership and reputation for offering a better value merchandise for consumers. On the other hand, Massmart was a retail company that sells products ranging from food, electronics and home accessories, which together with Walmart had many similarities, including their missions, gain price leadership through high volumes of consumer products at competitive prices and operational excellence.

In September of 2010, Walmart made a $4.6 billion offer to acquire the South African retail chain, Massmart Holdings which is equal to 32 billion Rands. Thus, in October of the same year, Massmart confirmed the acquisition with Walmart. Walmart made an offer of $ 16.5 billion rand for 51% of the company’s ownership; however, COSATU’s (Congress of South African Unions) response was rapid and aggressive. It threatened a strike if Walmart started operating in Africa.

Moreover, South Africa is a member of the group called BRICS (Brazil, Russia, India, China, South Africa), which brings together the five most emerging economies in the world. It also has a large infrastructure and a well-developed economic sector with all the qualities for a large company like Walmart to see the opportunity to expand, not only for South Africa but also for the entire African continent. Its financial sector is so solid that it includes relatively well-developed money markets, currency markets and capital markets.

In contradiction to Germany, Walmart has been adopting “a very deliberate strategy” in the African country which is slowing down. This does not mean that Walmart has already lost interest in expanding within the African nation. According to Guy Hayward who became the Massmart’s CEO, Walmart has decided to slow down its plan on expanding into Africa, thanks to the costly mistakes in other developing markets. Therefore, the company has been taking into account the cultural, geographical, economic, and administrative differences into consideration to succeed in South Africa.

The Walmart market is a business with an absolutely powerful potential, but its biggest challenge was to enter a new world where the black race has a totally different culture. The communication between Walmart’s headquarters and its new destination was difficult, since South Africa is multilingual, possessing more than a dozen different languages. There are 11 official languages and 7 native languages of indigenous people, and the majority of its inhabitants are bilingual. On the other hand, the United States has only one official language, which is English. By having this great contrast, connectivity for business is far away.

The cultural distance in this market does not end yet. The differences of thoughts are multiple, the ethnic groups are striking due to an immense variety of these, the black race in South Africa is the majority since the “whites” have emigrated, the discrimination is constant and insecurities were present in them, so they decided to settle in much of Europe and Oceania. The attachment to the “Protestant” religions in both markets is the majority; however, the diversity of nations and ethnic groups means that many of the religions that exist in the world are practiced.

Therefore, Walmart entered with a market stereotype that is not striking for the acquisition of merchandise. This was not only a barrier to negotiation, but Walmart had known and heard that corruption was another dilemma that it would have to deal at the gates of its new venture.

Even though United States and South Africa were colonized by England in the past, at present they do not possess any type of ties that link them because they are very different countries, having dissimilar currencies and being part of different political unions. The United States belonging to APEC (Asia-Pacific Economic Cooperation) and South Africa is part of the SACU (South African Customs Union), which is the economic grouping of the 4 countries of the South African area; however, despite the differences, it must be emphasized that there is no kind of enmity between these two nations. In addition, a free trade agreement was signed back in 2008, which became a great advantage for Walmart.

At the administrative level, it can be pointed out that unlike the United States, the levels of corruption and social conflict in post-apartheid South Africa continue to exist to a lesser extent, which is a problem for Walmart, since, in order to succeed, a strong institutional framework is necessary. At an industrial level, we can point out that the South African government imposed certain rules on Walmart before allowing its acquisition with Massmart, knowing that the association of these entities could create a dominance over products of first necessity for the citizens.

Walmart uses a strategy of implementing its inventory system to its suppliers, facilitating control in the office and reducing time in transactions. The products offered in this company have a low individual volume in proportion to their price, delivering a huge advantage in transportation and operational costs of import to the country of destination. Thus, this benefit implies promoting its scale economic strategy, having the opportunity to move large quantities of products in fewer trips and transactions.

In the area of fruits and vegetables, which are low durability products in their natural state, Walmart is not adversely affected since it sells products to its consumers that come from nearby countries or within the same country. The reason is that the buying behavior of South Africans is marked by culture, and to get the presence of exotic fruits and vegetables or from another continent, it works with previously studied suppliers, which most of the time tend to be the same ones that supply its branch offices around the world.

Moreover, the difference between the climate between the United States, and South Africa, is not a great impediment to establish business, since it has air conditioning and heating systems, delivering a pleasant temperature of being in a cool environment in summer and a temperate climate in winter to its customers, but also to its workers.

In terms of economic differences, the United States is economically larger than South Africa, but the African nation is one of the five most emerging economies in the world, which created an opportunity for Walmart.

It is recognized that there is an unequal economy in South Africa: branded products for the richest, and low-cost products for the poorest. Walmart offered products at low cost, which for the South African market, were potential goods. In regards to HR, South Africa shared its labor force with unions, making them establish a minimum wage in the country, which was something that Walmart definitely looked at remotely and with suspicion, but after entering decisively, the company got adapted to this type of policy.

The statistics for South America were gotten back in 2011, and they show that the country 34.68%, while USA shows 3%. Therefore, there is a greater amount of people who are scarce of resources in South Africa than USA and Germany. This could be one of the reasons why Walmart has been having a greater opportunity in South Africa than in Germany while offering low prices to the community.

After analyzing the case, it can be observed that while Walmart was extending to other geographical regions, with different cultures, economy, political system, laws and even different languages, it was facing certain difficulties in the process of diversifying its company and products worldwide. A clear example of these difficulties was the attempt of Walmart entering the German market where the culture of this country was too strict. This fact did not allow Walmart to establish its full entry, so it could take a great advantage of the organization structure that this retail giant had carried out quite successfully. In retrospect, Walmart executives admitted that they acted too fast in Germany, and that they did not take advantage of their managerial experience during their acquisitions.

On the other hand, South Africa seemed to be a tremendously potential market thanks to the fact that the local government was always open to foreign investment in order to achieve sustained growth in the South African market. In regards to the cultural differences, it is worth noting that Walmart has an operation system outside of its parent company. In other countries it uses an operational strategy which allows it to facilitate the transfer, as well as having the necessary power to demand its suppliers low prices and speed when marketing their products, regardless of whether these branches operate in other economic regions such as South Africa. In this case, the factor that most complicates the branch in South Africa with the headquarters in the United States, is the difference of cultures due to the different languages used in that nation. It is concluded that Walmart learned from its operational mistakes. The horrible experience showed the lack of planning and research, but the company has been taking things more carefully in South Africa. In addition, it is not a coincidence that a company as big as Walmart is set in a market like South Africa. Because this is a market that in recent years has been growing significantly, which is definitely becoming a potential economic promise.


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