This research focuses on a number of different categories to look into details about owe Walter and Best Buy enter to developing countries, mainly on the entry modes, cultures and management. First, it discusses why companies failed in the beginning, the problems and difficulties they faced. Then, we evaluate how it turned it back to a success and using these as evidence to support the recommendations given to John Lewis. Introduction In recent years, emerging markets are seen as grounds of opportunities and potential growth.
However, is it as easy as it seems for a well-developed company to expand to a foreign undeveloped country? Here, as a consultant of John Lewis, I will be giving advice to John Lewis on expanding to China. John Lewis was founded in 1864, first store started in London Oxford Street. It is owned by the John Lewis Partnership, which also has a food chain store, Waitress. John Lewis is now Auk’s largest department store retailer, with 39 John Lewis shops. With numbers of awards and achievements, John Lewis is a well-known market department store throughout Great Britain.
Why should John Lewis expand to China? Quite a few key points here, to better serve key customers that have relocated abroad; to seek opportunities for growth through market versification; to gain new ideas about products, services and business methods; to confront international competitors more effectively or to thwart. Moreover, retail market is becoming saturated in UK and profits nowadays are going down. International expansion is necessary to raise profits. China is a huge opportunity because the Chinese economy is growing rapidly in these years, sales of luxury goods in china are booming.
With the growing middle class with aspirations taste in china, there are higher demands in china for foreign brands. Arbitration is a real and ongoing trend in china. China has a huge customer ass with increasing demand for luxury goods. It also has a huge potential growth rate. It is predicted that china will have 1. 4 billion middle-class consumers by 2030 compared to only 365 million in the US by 2030. Moreover, china has an annual growth rate of 10% continuous increase in income and consumption.
All of these factors and data above, along with a high population and rising GAP, make the Chinese retail market extremely attractive. Wall-Mart The first case study I am going to present is Wall-Mart entering Brazil. Wall-Mart was found in 1945, opened by Sam Walton. Wall-Mart operates with five different visions within the United States: Wall-Mart Stores, Wall-Mart Superstructures, Cam’s Club, Manacle’s Company and Wall-Mart International. In the late sass’s Wall-Mart began its international expansion, Canada, Argentina, Hong Kong, and Brazil, among others.
In September 1994, Brazil was experiencing a new thrust in its economy. Went through several years of hyperinflation, the “Real Plan” was implemented in March 1994, it was an economic stabilization program that indexed the Brazilian currency to the U. S. Dollar. It successfully began to reduce inflation to reasonable levels. In February 1994, the annual inflation rate as 40%, whereas by September of that same year, it was a relatively low 3%. A lower inflation rate was viewed as a viable step in improving the purchasing power of the Brazilian people, particularly in the lower socioeconomic segment of the population.
The optimistic scenario encouraged many foreign companies to make new investments in Brazil. Wall-Mart Stores, the world leader in retailing, announced on May 9, 1994 that it had decided to invest heavily in Brazil through a partnership with Locals Americans, Brazier’s leading department store chain. Unfortunately, the start of the expansion is not very smooth. The many thought they have a strong retailing knowledge and so applies the same business strategies. There are quite a few problems raised. Despite the economy in Brazil being more stable in the years than it had previously been it was still rocky.
Wall-Mart did not take fully into account the informal intuitions and the cultural differences in Brazil. The product mix didn’t reflect the needs of Brazilian customers, for example the stores stocked golf clubs, a game not known in Brazil. Brazilian preferred to buy from small local shops, whereas Wall- Mart had large out of town stores, which they would only visit once a week ND they found it difficult to change these habits. The out of stock rate was 40% which was huge compared to 5% in the US as Brazilian suppliers are not as advanced in distribution logistics.
Traffic problems in Brazil also caused lots of unpredictability in stock delivery. Inexperienced managers implemented a faulty product mix and miscalculated the floor space. The performance of the local managers was based on store sales values which led to mangers setting prices below cost to increase the sale volume resulting in a net loss. There is lots of competition in the retail market in Brazil, leading Wall-Mart to enter onto ‘price wars’; however they found it difficult to compete with the small local stores. Advertising was also a problem for Wall-Mart.
They only they only allocated 2% of revenue to it and the advertising agency which they hired had very little autonomy. Radio is a very popular form of advertisement on Brazil to reach customers, however they failed to utilize this. So how did they make it work? Following this disappointing performance in Brazil, Walter had to revise their strategy in the retail market. The company learnt a valuable lesson from expansion to Mexico and Canada. Wall-Mart’s strategy revision planned or adoption of a more conservative and controlled expansion, consolidation of distribution lines, and improved assimilation into the Brazilian culture.
Walter’s main turning point in the Brazilian market was when they acquired two of their rivals in 2004 and 2006. They grew from a two-brand company to a nine-brand company with multiple store formats. Now, Walter is the third largest retail company in Brazil. Walter enhanced their brand image by getting involved with local communities and supporting social programs and charities. Walter head-hunted proven professionals from local competitors to improve their management team in Brazil. They also formed alliances for example a marketing alliance with AOL whereby AOL Brazil is promoted in its stores.
Today Wall-Mart is now world number one retailer and international sales are 29% of the company’s overall sales. Best Buy My second case study is Best Buy entering into China. Best Buy is the world largest electronic retailers, entered the Chinese market in 2006, by acquiring the third-largest electronic company in China, Five Star. Their initial strategy was to focus on the big cities, all of their stores were located in the bigger cities in China. But Best Buy has struggled since it entered the Chinese market. By Feb. 2011 , they announced they would close all of their branded stores in China.
Best Buy was exposed to the risks that multinationals encounter when they internationalist. Best Buy wasn’t price competitive enough, it emphasized on the quality of their service. But Chinese customers are very price sensitive. Best Buy also didn’t allow price negotiation, something that is very common even among the middle class in China. Best Buy sells quite a significant amount of DVD’s and games, but they weren’t aware that intellectual property protection is weak in China. Best Buy also sell very similar products to their competitors, with he higher price it’s unlikely that customers would choose Best Buy.
Best Buy didn’t adopt the store-in-a-store model, a popular business model in China that allows retailers to pass the costs on to suppliers instead of customers. Hence Best Buy struggled to keep prices low. It was also a bad marketing move when they translated their brand into “abscissa”, meaning ‘think hundred times before buying’ in Chinese. Moreover, Best Buy focused on building large flagship stores. However, the two biggest electronic retailers, Sunning and Game, only captured 11% of the market shares between themselves.
Smaller convenience stores play really big part in the market. Firms will need to adapt to the local culture. For example, Chinese customers do not travel miles away to do their shopping, they prefer local convenience stores. Whereas in the US, people prefers large flagship stores. So companies need to recognize that and adopt the cultural differences. There is no one best way to do business. Best Buy didn’t adjust their business strategies when they entered China. Similar to Walter, they should not assume one business model that works in one country will work in another.
Especially in emerging markets, where formal institutions are relatively weak and informal institutions are strong, firms should be aware of the hidden and unwritten rules in the market. Therefore, companies need to do research about the market thoroughly before they enter a different market, adjust their business strategies if necessary. More importantly, companies should listen to their customers. Sell what they want instead of selling what you think they want. Recommendations When a company expand internationally, the firm must consider which markets to enter, when to enter them and on what scale, and also which entry mode to use.
The first two have already discussed earlier. Now, we will discuss which entry ode to use. There is no a “right way’ to enter a foreign market, so it is all about trade-offs between risks and rewards. Several factors will affect the choice of entry modes, including transport cost, trade barriers, political risk and economic risk. The optimal mode varies by situation with different companies, what make sense for one company might not make sense for another. Joint ventures are normally aiming at short-terms, so as we are aiming at operating long-term, it is too instable for us.
Also more importantly, joint venture may give us less operational control therefore may go against our Global Strategic Coordination. For Greenfield Investment, it is highly risky, and also very complex to handle everything from scratch, particularly in China where the rules of the game are so different from western. So we think acquisition suits us best. It has full control, quick entry, and more importantly the local knowledge and networks, which overcomes the market entry barrier. Therefore, we carefully selected the Beijing Haling Department Sore Co Ltd as the firm to acquire.
Internationalization firms are exposed to four major types of risk: cross-cultural risk, country risk, currency risk and commercial risk. Here, we will only be focusing on the first two. John Lewis has to minimize all these risks and maximize the returns. First, cross- cultural risk refers to situations or events where a cultural miscommunication put some human value in stake. It arises in environments characterized by unfamiliar languages and unique value systems, beliefs, and behaviors. This mainly arises from cultural differences and different negotiation in different countries. China has a very different culture from western countries.
China is about the same size as Europe, it is made of many different economic sub- regions. Therefore, one business strategy really isn’t enough. Best Buys failure n China is partly because they cannot differentiate themselves with their competitors. So John Lewis Store will offer all top-of-the-range products by narrowing them, aiming to provide quick, efficient and quality shopping. This really fills the blank of the upper retail market. Another main problem for Best Buy was the high price. Therefore, the Haul_Ian store will offer a wide-range of product, and will primarily focus on price.
By building relationships with people like distributors, suppliers, government officials, also by sourcing local, we are aiming to deliver our costumers the lowest price possible. And this is why we are introducing our Price Match in Haling store, which again is something currently unique in China. So in this extremely price-sensitive market, the price match will attract many costumers so to gain market share. Online shopping is a huge potential market in China. There are 193 million internet users who use online shopping in China, and this is more than 3 times of the whole UK populations.
We could stand out by being the first to enter the Online Chinese Retail Market. We will send our experienced UK IT managers to helping create the online store. This is where we use our specific resource to leapfrogging. Setting the Online store will be an on-going process, and we will first try out in big cities to gain feedback and experience, then hoping to expand to other cities in the future. Be risk aware but not risk averse because it is something new. John Lewis needs to research the culture and adapt to local retail habits, for example, selling the right product mix such as traditional furniture.
Having the one child policy in China, only one seated trolley is needed for kids. China has a huge population, so therefore it is highly congested with traffic. People do not travel far to shop, they prefer going to local central stores. It is hard for the Chinese to change habits. John Lewis should invest heavily in initial advertising and brand image. Chinese are very price sensitive, therefore promotions and deals are very influential. It is very important to select the right management strategy, John Lewis need to adapt to some of the Chinese values.
Guiana is an important in doing business in China, it refers to social connections and relationships based on mutual benefits. It emphasizes reciprocal exchange of favors as well as mutual obligations. John Lewis should employ local workers and managers. Secondly, country risk, also now as political risk, it refers to harmful or unstable political system with laws and regulations that are unfavorable to foreign firms. It includes inadequate or undeveloped legal systems, bureaucracy, corruption, government intervention and barriers to trade and invest.
John Lewis needs to be very cautious of the regulation in China. China allows Foreign Direct Investment (FDA) but today, it is still a heavily regulated market. The ‘bureaucratic maze’ disadvantages non- Chinese players. John Lewis has to consider risk and future expansions, make use of government resources abroad. Learn from past experience and adapt, e risk aware and not risk averse. Taxation in China can also be very tricky. We suggest John Lewis to heavily invest in brand advertising including online. It’s important for John Lewis to establish its brand before and during they enter the Chinese market.
Learning from the Best Buy case study, John Lewis needs to be aware of the translation of slogan. Online advertising in China can be beneficial from the soaring number of internet users: million internet users in 2012, 18. 6% growth compare to the previous year. Webb (micro blobbing) and Baud (search engine) are among the most popular websites in China, with active users ever 300 million. Flyers and newspaper are also important. Giving out opening discounts or coupon could attract customers. The Chinese retail industry is highly competitive with a variety of operating models.
There are lots of large retail chain companies located in China such as Sunning, Come and Wall-Mart. So in order to compete with these giant retail chains, we have to offer something unique to attract customers. We want to build a solid long term relationships with locals and government. Learning from our Walter case, we will set up John Lewis Education Fund to help students who cannot afford the school fees. We would also do some research on the market competition, likewise, facing high competitive such as Sunning, Come and Wall-Mart. We must distinguish ourselves to competitors.
Conclusion From researching several case studies, we have discussed the two that we believe to be the most relevant to John Lewis. We have discovered the three biggest causes for failure which were the failure to install a strong brand image, the restrictions of high regulation, and the difficulties of adapting to the culture of a foreign country. We suggest a heavy investment into advertising and supporting a local charity to gain community support. Overcome Chinese exultation by benefiting from existing relationships and networks through acquisition.
