CHAPTER 7 – CASE STUDY
CASE 1: WALMART
WALMART IN JAPAN
Japan has been a tough market for foreign firms to enter. The level of foreign
direct investment (FDI) in Japan is a fraction of that found in many other
developed nations. In 2008, for example, the stock of foreign direct investment as
a percentage of GDP was 4.1 percent in Japan. In the United States, the
comparable figure was 16 percent, in Germany 19.2 percent, in France 34. 7
percent, and in the United Kingdom 36.9 percent.
Various reasons account for the lack of FDI into Japan. Until the 1990s,
government regulations made it difficult for companies to establish a direct
presence in the nation. In the retail sector, for example, the Large Scale Retail
Store Law, which was designed to protect politically powerful small retailers, made
it all but impossible for foreign retailers to open large-volume stores in the country
(the law was repealed in 1994). Despite deregulation during the 1990s, FDI into
Japan remained at low levels. Some cite cultural factors in explaining this. Many
Japanese companies have resisted acquisitions by foreign enterprises
(acquisitions are a major vehicle for FDI). They did so because of fears that new
owners would restructure too harshly, cutting jobs and breaking long-standing
commitments with suppliers. Foreign investors also state that it is difficult to find
managerial talent in Japan. Most managers tend to stay with a single employer for
their entire career, leaving very few managers in the labor market for foreign firms
to hire. Furthermore, a combination of slow economic growth, sluggish consumer
spending, and an aging population makes the Japanese economy less attractive
than it once was, particularly when compared to the dynamic and rapidly growing
economies of India and China, or even the United States and the United Kingdom.
The Japanese government, however, has come around to the view that the country
needs more foreign investment. Foreign firms can bring competition to Japan
where local ones may not because the foreign firms do not feel bound by existing
business practices or relationships. They can be a source of new management
ideas, business policies, and technology, all of which boost productivity. Indeed,
a study by the Organization for Economic Cooperation and Development (OECD)
suggests that labor productivity at the Japanese affiliates of foreign firms is as
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much as 60 percent higher than at domestic firms, and in services firms it is as
much as 80 percent higher.
It was the opportunity to help restructure Japan's retail sector, boosting
productivity, gaining market share, and profiting in the process, that attracted
Walmart to Japan. The world's largest retailer, Walmart entered Japan in 2002
by acquiring a stake in Seiyu, which was then the fifth-largest retailer in Japan.
Under the terms of the deal, Walmart increased its ownership stake over the next
five years, becoming a majority owner by 2006. Seiyu was by all accounts an
inefficient retailer. According to one top officer, "Seiyu is bogged down in old
customs that are wasteful. Walmart brings proven skills in managing big
supermarkets, which is what we would like to learn to do."
Walmart's goal was to transfer best practices from its U.S. stores and use them
to improve the performance of Seiyu. This meant implementing Walmart's cutting-
edge information systems, adopting tight inventory control, leveraging its global
supply chain to bring low-cost goods into Japan, introducing everyday low prices,
retraining employees to improve customer service, extending opening hours,
renovating stores, and investing in new ones.
It proved to be more difficult than Walmart had hoped. Walmart's entry prompted
local rivals to change their strategies. They began to make acquisitions and
started to cut their prices to match Walmart's discounting strategy. Walmart also
found that it had to alter its merchandising approach, offering more high-value
items to match Japanese shopping habits, which were proving to be difficult to
change. Also, many Japanese suppliers were reluctant to work closely with Wal
mart. Despite this, after years of losses it looked as if Seiyu would become
profitable in 2010, indicating that Walmart might be able to ultimately reap a
return on its investment.
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WALMART'S FOREIGN EXPANSION
Walmart, the world's largest retailer, has built its success on a strategy of
everyday low prices and highly efficient operations, logistics, and information
systems that keep inventory to a minimum and ensure against both overstocking
and understocking. The company employs some 2.1 million people, operates 4,200
stores in the United States and 3,600 in the rest of the world, and generated sales
of almost $400 billion in fiscal 2008. Some $91 billion of these sales were
generated in 15 nations outside of the United States. Facing a slowdown in growth
in the United States, Walmart began its international expansion in the early 1990s
when it entered Mexico, teaming up in a joint venture with Cifra, Mexico's largest
retailer, to open a series of super-centers that sell both groceries and general
merchandise.
Initially the retailer hit some headwinds in Mexico. It quickly discovered that
shopping habits were different. Most people preferred to buy fresh produce at
local stores, particularly items such as meat, tortillas, and pan duke, which didn't
keep well overnight (many Mexicans lacked large refrigerators). Many consumers
also lacked cars and did not buy in large volumes as in the United States.
Walmart adjusted its strategy to meet the local conditions, hiring local managers
who understood Mexican culture, letting those managers control merchandising
strategy, building smaller stores that people could walk to, and offering more fresh
produce. At the same time, the company believed it could gradually change the
shopping culture in Mexico, educating consumers by showing them the benefits of
its American merchandising culture. After all, Walmart's managers reasoned,
people once shopped at small stores in the United States, but starting in the 1950s
they increasingly gravitated toward large stores such as Walmart. As it built up
its distribution systems in Mexico, Walmart was able to lower its costs, and it
passed these savings on to Mexican consumers in the form of lower prices. The
customization, persistence, and low prices paid off. Mexicans started to change
their shopping habits. Today Walmart is Mexico's largest retailer and the country
is widely considered to be the company's most successful foreign venture.
Next Walmart expanded into a number of developed nations, including Britain,
Germany, and South Korea. There its experiences have been less successful. In all
three countries it found itself going head to head against well-established local
rivals that had nicely matched their offerings to local shopping habits and
consumer preferences. Moreover, consumers in all three countries seemed to have
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a preference for higher-quality merchandise and were not as attracted to
Walmart's discount strategy as consumers were in the United States and Mexico.
After years of losses, Walmart pulled out of Germany and South Korea in 2006. At
the same time, it continued to look for retailing opportunities elsewhere,
particularly in developed nations where it lacked strong local competitors, where
it could gradually alter the shopping culture to its advantage, and where its
lowprice strategy was appealing.
Recently, the centerpiece of its international expansion efforts has been China.
Walmart opened its first store in China in 1996, but initially expanded very slowly,
and by 2006 had only 66 stores. Walmart discovered the Chinese were bargain
hunters and open to the low-price strategy and wide selection offered at Walmart
stores. In terms of their shopping habits, the emerging Chinese middle class
seemed more like Americans than Europeans. But to succeed in China, Walmart
also found it had to adapt its merchandising and operations strategy so that it
meshes with Chinese culture. For example, Walmart has learned Chinese
consumers insist that food must be freshly harvested or even killed in front of them.
Walmart initially offended Chinese consumers by trying to sell them dead fish, as
well as meat packed in Styrofoam and cellophane. Shoppers turned their noses up
at what they saw as old merchandise. So Walmart began to display the meat
uncovered, installed fish tanks into which shoppers could plunge fishing nets to
pull out their evening meal, and began selling live turtles for turtle soup. Sales
soared.
Walmart has also learned that in China, success requires it to embrace unions. In
the United States Walmart has vigorously resisted unionization, but it realized
that in China unions don't bargain for labor contracts. Instead, they are an arm
of the state, providing funding for the Communist Party and (in the government's
view) securing social order. In mid-2006 Walmart broke with its long-standing
antagonism to unions and agreed to allow unions in its Chinese stores. Many
believe this set the stage for Walmart's December 2006 purchase of a 35 percent
stake in the Trust-Mart chain, which has 101 hypermarkets in 34 cities across
China. Now Walmart has proclaimed that China lies at the center of its growth
strategy. By early 2009 Walmart had some 243 stores in the country, and despite
the global economic slowdown, the company insists that it will continue to open
new stores in China at a "double-digit rate”.
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Case Discussion Questions
1. Do you think Walmart could translate its merchandising strategy wholesale to
another country and succeed? If not, why not?
2. Why do you think Walmart was successful in Mexico?
3. Why do you think Walmart failed in South Korea and Germany? What are the
differences between these countries and Mexico?
4. What must Walmart do to succeed in China? Is it on track?
5. To what extent can a company such as Walmart change the culture of the nation
where it is doing business?
CASE 2: SPAIN'S TELEFONICA
Established in the 1920s, Spain's Telefonica was a typical state-owned national
telecommunications monopoly until the 1990s. Then the Spanish government
privatized the company and deregulated the Spanish telecommunications market.
What followed was a sharp reduction in the workforce, rapid adoption of new
technology, and focus on driving up profits and shareholder value.
In this new era, Telefonica was looking for growth. Its search first took it to Latin
America. There, too, a wave of deregulation and privatization was sweeping
across the region. For Telefonica, Latin America seemed to be the perfect fit. Much
of the region shared a common language and had deep cultural and historical ties
to Spain. Also, after decades of slow growth, Latin American markets were
growing rapidly, increasing the adoption rate and usage not just of traditional
fixed line telecommunications services, but also of mobile phones and Internet
connections. Having already learned to transform itself from a state-owned
enterprise into an efficient and effective competitor, Telefonica believed it could
do the same for companies it acquired in Latin America, many of which were once
part of state-owned telecommunications monopolies. In the late 1990s, Telefonica
invested some $11 billion in Latin America, acquiring companies throughout the
region. Its largest investments were reserved for Brazil, the biggest market in the
region, where it spent some $6 billion to purchase several companies, including
the largest fixed line operator in Sao Paulo, the leading mobile phone operator in
Rio de Janeiro, and the principal carrier in the state of Rio Grande do Sul. In
Argentina, it acquired 51 percent of the southern region's monopoly provider, a
franchise that included the lucrative financial district of Buenos Aires. In Chile, it
became the leading shareholder in the former state-owned monopoly, and so on.
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Indeed, by the early 2000s Telefonica was the No. 1 or 2 player in almost every
Latin American country, had a continent-wide market share of about 40 percent,
and was generating 18 percent of its revenues from the region.
Still, for all of its investment, Telefonica has not had it all its own way in Latin
America. Other companies could also see the growth opportunities, and several
foreign telecommunications enterprises entered Latin America's newly opened
markets. In the fast-growing mobile segment, America Movil, controlled by the
Mexican billionaire Carlos Slim, emerged as a strong challenger. By 2008, the
Mexican company had 182 million wireless subscribers across Latin America,
compared to Telefonica's 123 million, and intense price competition between the
two companies was emerging. With the die already cast in Latin America by the
mid-2000s, Telefonica turned its attention to neighboring countries in Europe. For
years, there had been a tacit agreement between national telecommunications
companies that they would not invade each other's markets.
In 2005 this started to break down when France Telecom entered Spain,
purchasing Amena, the country's second-largest mobile carrier behind Telefonica.
Telefonica moved quickly to make its own European acquisition, acquiring Britain's
major mobile phone operator, 02, for $31.4 billion. 02 already had significant
operations in Germany as well as the United Kingdom. The acquisition transformed
Telefonica into the second-largest mobile phone operator in the world, measured
by customers, behind China Mobile.
Case Discussion Questions
1. What changes in the political and economic environment allowed Telefonica to
start expanding globally?
2. Why did Telefonica initially focus on Latin America? Why was it slower to
expand in Europe, even though Spain is a member of the European Union?
3. Telefonica has used acquisitions, rather than greenfield ventures, as its entry
strategy. Why do you think this has been the case? What are the potential risks
associated with this entry strategy?
4. What is the value that Telefonica brings to the companies it acquires?
5. In your judgment, does inward investment by Telefonica benefit a host nation?
Explain your reasoning?