Wal-Mart's Failure in Germany: Lessons Learnt for International Business Expansion

This report discusses the challenges faced by business organizations during overseas expansion and the reasons that lead to the failure of Wal-Mart's expansion strategy in the German market. It also highlights the lessons learnt from Wal-Mart's failure in Germany for international business expansion.

INTERNATIONAL BUSINESS –
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Table of Contents
Introduction.......................................................................................................................3
Case Background – Wal-Mart’s Entry into Germany.....................................................................3
Challenges to International Business Expansion.................................................................3
Walmart’s Failure in Germany...........................................................................................5
Lessons Learnt from Wal-Mart’s Failure in Germany..........................................................7
Bibliography......................................................................................................................9

Introduction
International business expansion has become a top priority for business organizations in the
present-day world. Expanding business operations in multiple countries provides a number of
advantages to companies, such as increased access to different resources, decreased
operational costs, availability of professional employees at lesser wages, economies of scale,
a larger pool of customers, etc. because of which, a lot of organizations have started
expanding their business overseas (Hill, 2008).
Case Background – Wal-Mart’s Entry into Germany
International business may sound too good for companies but it can prove to be detrimental
for some companies that do not do their homework properly and are not prepared well
enough to enter into foreign markets. One such company is Wal-Mart, which operates in the
retail sector and is one of the largest multinational companies in the world. Wal-Mart
operates in 27 countries under 55 different names and has around 11,277 stores in total (Wal-
Mart, 2018). Even after such great figures and experience of foreign markets, Wal-Mart
failed miserably while trying to establish itself in the German market. Therefore, this report
has been prepared to get a deeper insight into the issues that lead to the failure of Wal-Mart’s
expansion strategy in the German market.
Challenges to International Business Expansion
Before discussing the reasons that lead to the failure of Wal-Mart in Germany, it is important
to discuss some challenges that business organizations face while trying to expand their
business operations in new foreign markets. Some of these challenges are discussed below:

Cultural differences
One of the biggest challenges faced by business organizations during overseas expansion is
the difference that exists between the culture of the home country and that of the hose
country. Cultural difference is defined as the difference that exists between the values,
morals, ethics, ethnicity, cuisine, clothing, etc. of an individual or a group of people. Culture
governs the behavior of the people and influences their decision-making process (Reynolds,
2016). A company that fails to understand the culture of the host country (where it wants to
expand its business) can face difficulties in operating smoothly because of the issues that
might arise between the company and its host country stakeholders. Not being able to adjust
to the culture of the host country can result in the host country stakeholders being offended,
which can lead to the failure of the expansion program.
Entry mode
Business organizations can expand their business overseas using a number of entry modes,
such as direct exports, indirect exports, licensing, franchising, turnkey projects, acquisitions,
etc. The entry mode selected by a company is purely based upon its expansion strategy and
the research that it has been able to carry out on the host country (O'Brien, 2015). At times,
selection of a wrong entry mode by a company, due to lack of market research, can lead to
the failure of a business expansion program altogether. Comparing the situation with the
Electric Paradigm, it can be clearly seen that the company did not check whether it had an
ownership advantage and an internalization advantage in Germany, which lead to the failure
of its investment in the country.
Legal and political factors

Every country has its own legal guidelines and all business organizations operating in a
country are bound by the legal guidelines of that country. Failure to abide by the laws and
regulation of a country can invite legal trouble for a company, which makes international
business difficult.
Lack of knowledge
At times, business organizations expand into foreign markets just to remain in the market
competition, even if they do not have proper knowledge about the market in which they are
entering. Such a decision can lead to the failure of a company’s overseas expansion because
of the lack of knowledge about the host country.
Walmart’s Failure in Germany
Wal-Mart’s failure in Germany is considered to be one of the greatest failures in the history
of Foreign Direct Investment cases. Even after investing a billion dollars in one of the prime
European countries, the American giant faced failure because of the following reasons:
Cultural misfit
One of the biggest reasons that lead to the failure of Walmart in Germany was its inability to
understand the culture of the host country. It made several cultural mistakes that lead to
disappointment amongst its customers and ultimately to its expansion failure (Landler &
Barbaro, 2006). First of all, the Germans are way too much into green business initiatives and
prefer to be associated with environmentally friendly companies while Walmart entered
Germany with their huge plastic bags and other plastic junks. Secondly, the German
customers preferred buying stuff from local retailers and small shops and were against
branded American retailers (Macaray, 2011). Thirdly, the Germans do not like to wish
someone or smile at someone who they don’t know, whereas Walmart’s employees working

in Germany were advised to smile at the customers all the time. Lastly, the American giant
did not make any efforts to use German as their preferred language while operating in
Germany and kept on emphasizing the use of English in the retail stores, which not only lead
to unhappy customers but made the employees unhappy as well.
Legal Issues
The company expanded its business operations in the German market relying on the fact that
it had an ownership advantage, which would allow the company to offer products at a lower
price than the other companies. Wal-Mart started a price war in the German region and its
competitors also started offering products at a price which was even lower than the cost price
of the products (Gerhard & Hahn, 2005). This invited legal trouble for the company as the
law prohibited their strategy, which was leading to an unfair competition amongst big
retailers and small shops. Further, the company also reduced the wages of its German
employees, which was against the laws and regulations of the country (Christopherson,
2007). The company did not even publish its financial accounts and statements for the
employee unions to view, which is demanded by the German law. As a result, the German
labor unions filed a legal complaint against the company for not publishing their financial
data.
Entry mode
Wal-Mart clearly failed to do its homework properly and invested in Germany in a rush. It
acquired a chain of retail outlets even though it had no understanding about the internal and
external factors that were having an impact on the German retail sector. Investing so much
money into acquisitions made it difficult for the company to pull out of Germany at the right

time and it kept on struggling to survive in the market by committing more mistakes (Durand
& Wrigley, 2009).
Operational issues
Wal-Mart thought that its success in US could derive its expansion in the German market but
the company failed miserably in establishing good work relations with German vendors,
which lead to shortage of supply of products. Further, the company also could not maintain
its inventory effectively because of the absence of human resources. The company failed to
recruit an efficient pool of employees who could manage its inventory system because it was
paying wages that were lower than the market average (Subhadra, 2004).
Lessons Learnt from Wal-Mart’s Failure in Germany
The failure of the company to grab a market share in Germany was surely a lesion for many
other companies and also for Walmart itself. Certain lessons learnt from the company’s
failure, which should be kept in mind while planning to expand business operations
internationally, are discussed below:
Customer behavior and preferences
While expanding into an international market, it is of utmost importance to understand the
behavior and preferences of the customer. Customers are the reason because of which a
business operates and unhappy customers can put an end to any business organization. An
organization looking to expand into a new market must understand the cultural preferences of
its future customer and design its operations accordingly (Pearson, 2018). Rather than
focusing on competition, a greater focus should be laid on the happiness of the customers and
offering an environment that would be in accordance with their cultural values.

Human resource management also matters
Another lesson learnt by Walmart from its failure in the German region is that proper
management of human resources is crucial for the success of a business organization. Issues
related to the human resources should be dealt with utmost care and an organization cannot
punish its employees by lowering down their wages.
Organizational assessment
An organization expanding its operations in a new country should carefully do its homework
and assess its ownership advantages, location advantages and internalizing advantages. Once
these advantages are identified, a company should also check if these would be applicable in
the host country as well (B2U, 2016). It is also crucial that the most suitable entry method
(for entering into a new country) is selected on the basis of the above assessment.

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