Business Strategy Of Wal Mart In Japan
Globalisation is described as a process of world wide integration of culture, technology, social, political and economic factors. It is all about the creation of a world unified market and this can be observed with the growing levels of global trade (Luthans and Doh, 2009). Globalisation is evident in the shift of Multinational companies (MNC’s) and economies from a world of isolation as a result of trade barriers to a world of reduced trade barriers and more inter related businesses and economies (Hill, 2009). MNC’s now, expand from both developed countries, developing countries and emerging countries and vice-versa. There is therefore increasing competition among nations (The Economist, 2008). The global expansion of businesses over the years into different international markets have helped these businesses to increase their sales, competitiveness, reduce their cost of production and expand out of their saturated home markets (Root, 1994; Hill, 2009; Daniels et al., 2009). Retailers are not exceptions to this global expansion.
This article will evaluate the internationalisation strategy of Wal-mart in Japan. Wal-Mart’s internalisation strategy in Japan is of particular interest because it recently pulled out of two of its international markets; Germany and South Korea. Its success in Japan is still questionable especially as Japan has proven to be a difficult market for many foreign retailers. International companies such as Carrefour, Boots have pulled out from the Japanese market after facing business challenges (Luthans and Doh, 2006). The literature review will analyse the Integration- responsiveness I-R framework as well as culture. These frameworks will be used for the evaluation of Wal-marts’
internationalisation strategy into the Japanese market in comparison with its international competitor Tesco Plc. The use of these two frameworks is to show the extent to which Wal-marts’ strategy responds towards Japanese local tastes and preferences in achieving a successful internationalisation. Conclusions and recommendations will be drawn from this analysis.
BACKGROUND OF WAL-MART
Wal-mart was founded in 1962 by Sam Walton and opened its first discount store in Rogers Ark, USA. In 1969, the company incorporated to become Wal-Mart Stores, Inc. Wal-mart stores feature general merchandise such as electronics, clothing, and home appliances. It also has complete groceries units. The company employs more than 2.1 million associates, serving more than 176 million customers a year. In 2009, it ranked first among retailers in Fortune Magazine’s Most Admired Companies survey and is also the largest retailer in the world (Wal-mart, 2009).
As a result of the saturation of the American retail market, Wal-mart started its international expansion into foreign markets in the 1990’s first into Mexico and subsequently expanded into thirteen other countries including Japan China, Canada and Great Britain (Wal-Mart, 2009; Hill, 2009). Today it has about 8,424 stores and club locations. The company’s most successful foreign venture is in its Mexican market (Hill, 2009). This is as a result of the fact that they adjusted their international strategy to meet local demands. Their everyday low price strategy was also successful in Mexico which is a developing country. However, these strategies are not always welcomed by consumers as revealed in their German and Korean market expansions where they failed and had to pull out. Wal-Mart is still struggling to succeed in the Japanese market where it has already invested $1 billion (USD) (BBC, 2007).
Nevertheless, Wal-mart’s international expansions of Wal-Mart has allowed it to develop economies of scale, increase Its customer base and develop more ideas such as their new shop layout (Hill, 2009; Wal-mart, 2009).
According to Prahalad and Doz (1987, p.18) the Integration-Responsiveness (I-R) framework is a ‘way of capturing the pressures on a given business ‘. This framework is based on the pressures for global integration and local responsiveness on a business as perceived by the managers of the company (Rugman, 2002). Pressures for global integration are industry forces which drives companies into the standardisation of their products, policies and procedures in order to reduce their cost of operations across ‘national boundaries’ while pressures for local responsiveness are forces which drive businesses into being locally sensitive to differences in culture, preferences, tastes, and general behaviour of each international market in their internationalisation strategies (Rugman, 2002; Daniel et al., 2009; Luthans and Doh, 2009).
According to Luthans and Doh (2009), the understanding of culture and its diversity is important to an international company’s successful internationalisation in any country. This is because it impacts upon work force attitudes, managerial ideology, technological transfers, business customs and practices as well as consumer behaviours.
The I-R framework was developed by Prahalad and Doz in 1987. They classified international strategies into Global strategy (global integrated, centralised management and move for cost reduction), Multi-focal strategy (an integration of global coordination and local responsiveness) and locally responsive strategy (customised and localised product and services). The adoption of any of these strategies is dependent on the dominant pressure on an MNC as well as its main focus which could be cost reduction or customer satisfaction.
Bartlett and Ghoshal (1989) further developed this framework and classified MNC strategies into four categories which can be compared with that of Prahalad and Doz. Their four strategic classifications are: Global strategy, International strategy, Transnational and Multi domestic strategy. Companies with global strategy (high Integration- low Responsiveness) focus on standardization and cost reduction with tight global control, those with International strategy (Low Integration-Low Responsiveness) usually introduce their existing competence and expertise into the new market while Transnational companies (High Integration and High Responsiveness) are flexible and integrate equal levels of global integration and local responsiveness into their business. The multi-domestic companies on the other hand (low Integration and High Responsiveness) respond more towards product customisation (Daniel et al 2009). It is however worthy to note that the adoption of one strategy may lead to the neglecting another. Figure 1, shows the diagrammatic representation of the strategic classifications by both authors.
The understanding of culture and its impact on international market expansion is imperative to the success an MNC’s strategy in a foreign country (Luthans and Doh, 2009). The degree of pressure for local responsiveness is reflective of the degree of influence of culture upon consumers. Differences in cultural match between companies and employees or consumers can often result to struggle for success in an international market (Holstein, 2007). Hofstede (1980, p.21), defined culture as ‘the collective programming of the mind which distinguishes the members of one human group from another’. Just as personality defines the identity of an individual, culture defines the identity of a group. According to Luthans and Doh 2009 p.96, culture is the ‘acquired knowledge that people use to interpret, experience and generate social behaviour’. This acquired knowledge often manifest into people’s attitude, values, behaviours and general ways of life. Many researchers have argued that culture can be learned, shared, symbolised, patterned, adapted and transgenerationalised.
Hill (2009) further argues that values and norms form the basis of a culture. These values could be attributed to collective responsibility, social obligations, loyalty and so on and are often times emotionally important to the group. Norms on the other hand are social codes of conducts which dictate people’s behaviour towards each other. The Japanese for instance, can be seen as a group of people with similar values and norms and related culture. Several researchers have studied cultural differences and its impact on different national behaviours.
Hall (1973, 7976) cited in Paliwoda and Ryans (2008), categorised culture into High and Low context. High context cultures like Japanese and Arabic, prefer implicit or unspoken messages and slow business discussions with emphasis on personal relationship and trust while Low context cultures like North America, United Kingdom, Germany prefer explicit, written or spoken messages with more emphasis on expertise, performance and efficiency.
Hofstede (1980) undertook a study of the impact of culture on values in a workplace. He categorised culture into four main dimensions: power distance, uncertainty avoidance, individualism -collectivism and masculinity-feminity. A fifth one confucian dynaminism also referred to as long term or short term orientation was later developed. Power distance shows the extent to which people perceive inequality. High power distance nations (cultures) emphasise on the inequality of power, its workforce follow their superiors orders while low power nations or cultures minimise this inequality to minimum thus the work force follow superiors orders as a procedural requirement. Uncertainty avoidance on the other hand is the extent to which cultures avoid uncertainty. High uncertainty avoidance cultures shy away from risks, while low uncertainty avoidance cultures see risk as a part of life. Individualism versus collectivism is the degree to which people look after themselves as individuals or work in groups. Masculinity is often compared with feminity. Cultures with emphasis on success, money were referred as more masculine by Hosftede while a culture with emphasis on quality of life and caring for people are seen as feminist ( Hill,2009; Luthans and Doh,2009). The table below shows the Work-related values for 5 countries adapted from Hofstede’s study.
In as much as Hofstede’s work is well accepted and has provided the basic characterisation of different cultural or national groups, these are not definite because culture cannot be easily classified and also culture is gradually changing with the increase in globalisation and integration of the world at large (Luthans and Doh, 2009).
WAL-MART’S EXPANSION INTO JAPAN.
Wal-Mart initially made a failed entry into Japan in the mid 1990’s when it entered the market through selling its products in local supermarkets, however sales were disappointing (Yoffie and Wang, 2002). The initial failure could be associated to slow market drive by the local super markets as Wal-mart had little or no control over them. This can be seen as a major disadvantage of indirect exporting (Root 1994). However, in 2002 Wal-mart made a second attempt into Japan (BBC, 2006). Japan is one of the wealthiest and developed economies in the world. It has the second largest consumer market (Haddock-Fraser et al., 2009). Wal-mart’s entry into Japan was through partnership with Seiyu Ltd which is Japan’s fifth largest hypermarket and was in financial distress at that time (Yoffie and Wang, 2002). It was a deal which was done in phases as agreed by both parties. Wal-mart was to initially acquire 6.1% of Seiyu shares and gradually increase its stake by acquiring up to 67% of Seiyu in 2007 (Yoffie and Wang, 2002). Sumitomo Corp a leading trading company in Japan also had a 15.6% stake of Seiyu (Luthans and Doh, 2009). In 2005, Wal-mart increased its acquisition stake making Seiyu a Wal-mart subsidiary and increasing Wal-mart’s control over Seiyu. In 2007, Wal-mart’s stake was again increased to 95.1% (Wal-mart, 2009). This partnership deal was meant to help Wal-mart minimise its risk of internationalising in Japan where there is strong domestic competition, price wars and strong suppliers and also help its entry and expansion in the market (Yoffie and Wang, 2002; Luthans and Doh, 2009).
ANALYSIS OF WAL-MART’S STRATEGY IN JAPAN.
Companies like Wal-mart, adopt ‘international strategy’ for global expansion as suggested by Bartlett and Goshal because they have core competences which they can capitalise upon especially if it’s difficult for their rivals to match them. Companies with ‘International strategy’ have important part of their value chain such as decision making, expertise, new products and international operations being controlled or decided from their headquarters. However such centralised decision making can often impede upon the abilities of the subsidiaries to respond to local demands (Hill, 2006; Daniel et al., 2009).
Wal-mart has a cost efficient operating system with an expense structure that is among the lowest in the industry (Shah et al, 2005). Its price of food was estimated to be 20% lower than its competitors in the United States (Yoffie and Wang, 2002). Wal-mart is therefore trying to replicate this successful American strategy and core competence of ‘Everyday Low Price’ (EDLP) in the Japanese international market. Though this strategy has been success in some of its international markets such as Mexico and China, the results in Germany and Korea were so poor that Wal-mart withdrew from those countries in 2006. Once again the success of this strategy is still questionable in Japan. Japanese consumers associate low price with low quality as they are willing to pay high price for high quality products (Holstein, 2007; Strategic Direction, 2008; Boyle, 2009).
The perception of customers towards low price signifying low quality is particularly high in its clothing segment (Brunn, 2006). This low price strategy was adopted by Wal-Mart in its entry into Japan in 2002, especially because it was at a time when the country was just emerging from a prolonged recession and consumer income was low (Luthans and Doh, 2009). In order to erase this image of ‘Low Price’ signifying Low Quality’ from the minds of their customers, Wal-Mart has introduced, more expensive products for the customer segment that prefers high cost while still maintaining some low cost variants. For example, it has jeans for $10 and $ 35 option as well (Business Week, 2005) this however may further confuse its customers who may not understand the basis for such price disparity.
Japan is a country with a high context society and collectivistic way of life (Paliwoda and Ryans, 2008). They have strong ties to families and groups and great emphasis for quality and prestige (Hofstede, 1980). As a result of these strong social ties, Wal-Mart’s sacking of 25% of Seiyu’s work force including 1500 managers and employees in 2004, was wrongly perceived by the Japanese people. Wal-mart opens its stores for 24 hours a day, this is seen as stressful by the employees and generally seen as an infiltration of the American culture into Japan. It’s introduction of American, Canadian and British managers who act on headquarters decisions rather than employing Japanese managers who understand the market better further portrayed them in a negative light to both the employees and the general public. This consequently led to the loss of some of its customers (Holstein, 2007; Strategic Direction, 2008).
Another core competence which Wal-mart introduced into Japan is its technology-focused inventory replenishment system which is linked to their suppliers. It helps them monitor and manage their inventories. However, because the Japanese people prefer personal interaction when doing business (Hofstede,1980), the implementation of this Information technology strategy has not been easy, especially as Japan has several layers of distribution network which are ‘closely networked’ and difficult to penetrate. It thus makes high volume discounting difficult and merchandising more expensive (Brunn, 2006; Holstein, 2007). Wal-Mart is however trying to eliminate the middle-man in order to successfully implement its low price strategy (Luthan and Doh, 2009).
Wal-mart’s response to local tastes, preferences and general way of life is perceived as low in its international strategy as It tends to implement its competences into international markets with little considerations to what the local demands, preferences, expectations are and this has led to its struggle to survive in Japan (Brunn, 2006).
Comparing Wal-mart with Tesco Plc in Japan, the following differences can be drawn from their strategy. Tesco Plc which is the biggest retailer in the United Kingdom entered Japan in 2003 through the acquisition of a domestic retailer just as Wal-Mart did. While Wal-mart acquired Seiyu which is a hypermarket, Tesco Plc acquired C Two-Network stores which has small discount supermarket stores (Tesco, 2009). Haddock-Fraser et al., (2009) have argued that large supermarket (hypermarkets) of the western cultures are not viable in Japan, rather small supermarkets, convenience stores with fresh and quality products are preferred by the Japanese consumers. Thus the strategic move of acquiring a discount supermarket chain by Tesco was aimed at meeting the local demand of the Japanese consumers who prefer to shop daily for fresh food in small quantities with convenience. This shopping behaviour makes them to patronise convenience stores and discount supermarkets which are more accessible than out of town hypermarkets. Tesco, with its small store format, experienced overall sales growth in 2006 unlike Wal-mart which has been making loss for four years (Haddock-Fraser et al., 2009).
Upon acquiring C Two-Network, Tesco retained the management team of the company to oversee its operations in Japan, because Tesco realised that these managers have better understanding of the Japanese employees, consumers and suppliers (Food and Drink, 2003). Japan, being a country with high collective behaviours, (Holfstede, 1980) perceived this as a good move. Tesco Plc tries to localise its products and services in each of their international markets, recognising that each market has unique preferences. This higher degree of local responsiveness in their international markets emphasises the reason why Tesco retains its foreign managers and limits its control from headquarters (Tesco, 2009).
Figures 3 and 4 below further shows the differences in the sales contribution of the international markets to the total revenue of both companies. Wal-Mart’s international markets contributed 24.6% of the company’s 2009 financial income while Tesco Plc has 53% of its 2009 financial income being generated by its foreign markets with Asia alone generating 30% of this value. It can, therefore, be concluded that Tesco’s response to local responsiveness has a positive impact on their financial performance internationally.
CONCLUSIONS AND RECOMMENDATIONS
Wal-Mart is very successful in its domestic market and also some foreign markets such as China and Mexico where it had to adjust its strategy in order to respond better to local pressures. It is therefore recommended that Wal-mart should further develop its strategy in Japan and respond better to the country’s local demands and preferences through the opening of convenience stores in order to capture that market segment and offering more fresh local products to meet the local demand. Wal-mart should also employ Japanese managers who understand the market better. These measures will help Wal-mart to succeed better in Japan where the pressure for low price by customers is not emphasised rather high quality is preferred. Wal-mart can still maintain its international strategy with a little more responsiveness to local demand as there is no one best strategy to adopt. This move will save Wal-mart from withdrawing from the market where it has already invested $1 billion USD. Wal-marts low sales value from international operations in comparison with Tesco reveals that the retail market is still a viable industry for Wal-mart to exploit.Order Now