Why Wal-Mart didn't work in German and IKEA in Saudi Arabia.

Wal-Mart's attempt to establish its unique selling point of Everyday Low Prices, achieved through aggressive supplier negotiations, an efficient distribution system, inventory management, and its distinct corporate culture, failed to gain traction when entering the German Retail Market. This was primarily due to the company's insistence on applying the American approach without adequately considering the nuances of German culture and retail preferences. Several key factors contributed to Wal-Mart's lack of profitability in Germany:

• Regulatory Hurdles: Walmart faced significant regulatory challenges in Germany. The government's strict enforcement of formal competition laws, including a fine of $308,000 for selling below market prices, made it difficult for the company to maintain its low-price strategy. Additionally, the Register Court (Registergericht), a formal institution, requires that all businesses make public their sales and revenue figures. A union strike was organized by Ver.di due to Walmart's non-disclosure of the S&R statement, resulting in a fine of 330,000 Euros.

• Acquisition Strategy: Walmart's entry into the German market through the acquisition of Wertkauf and Interspar, which held less than 3% of the total market share, presented challenges. Interspar's poor condition required substantial repair and maintenance costs. This approach of entering the market with struggling stores did not provide Walmart with a competitive edge.

• Labor Union Clash: Walmart's introduction of an American work culture clashed with the German labor market, which operates differently. The refusal to adapt to the coordinated bargaining system for negotiating wage rates with unions, the informal institution led to workforce discontent.

• Cultural Mismatch: The American retail experience, including a high-context approach to customer interactions, didn't align with the low-context practice of German customers. The initial push of American brands and unfamiliar in-store greetings made German shoppers uncomfortable and hindered trust-building.

• Intense Competition: The highly competitive German retail market, with established players like Aldi, Lidl, and Metro, posed a formidable challenge for Walmart. Metro's strong customer loyalty and positive brand perception allowed it to outperform Walmart, despite Walmart's higher net sales.

• Zoning Restrictions: Walmart's profitability in Germany was significantly hampered by strict zoning regulations and planning legislation. These regulations limited the construction of large stores outside urban centers, impeding Walmart's expansion plans and ability to effectively compete in the German market.

• Distribution System & Supplier relations: Walmart's highly efficient distribution system and strong supplier relationships are well regarded. This system was replicated when Walmart acquired ASDA in the UK, given the similarity between the two companies' operations. However, in Germany, the absence of adequate infrastructure and strained relationships with suppliers resulted in contractual challenges and left Walmart without a competitive advantage against its rivals.

IKEA, a company celebrated for embodying Swedish culture in all its endeavors, faced significant global criticism when it airbrushed women from its advertisements in Saudi media. This posed a significant challenge to the company's reputation, especially given its well-established commitment to upholding human rights and inclusivity.

• Cultural Sensitivity: Saudi Arabia's conservative culture, characterized by strict gender segregation, modesty norms, and adherence to Sharia Law, exerts significant pressure on companies to align with local cultural sensitivities. In response, IKEA made a concerted effort to ensure compliance with Islamic religious norms and Sharia Law. The company also provided space in their stores for a mosque to pray several times during the day and removing meatballs from their café as it is considered ‘halal’.

• Local Market Practices: Saudi Arabia lacks well-documented laws, leading to a subjective judicial system and occasional crackdowns on media outlets and bloggers, creating ambiguity and anxiety within the business community. To mitigate potential risks, IKEA adopted a cautious approach, conforming to both formal and informal institutions, including local customs and regulations, to minimize the threat of business closures or legal penalties. This included separation for families and females to single males, changing their product name from ‘Wine Glasses’ to ‘Glasses’, and hiring male employees in the majority.

• Commercial Viability: In Saudi Arabia, all printed materials must undergo scrutiny by the Ministry of Culture and Information before publication. Violations of the law can result in various penalties, such as material withdrawal, financial fines, or business closures. To enhance its commercial prospects in the Saudi market, IKEA likely believed that modifying its advertising would ensure acceptance and success.

• Brand Perception: Despite its advocacy of human rights, IKEA felt the need to adapt its practices in Saudi Arabian stores to cater to the local audience's Islamic religious preferences. This adjustment aimed to align the company with the cultural and religious values of the market, ensuring its relevance and competitiveness while still adhering to its global brand identity.

Nonetheless, this approach did not resonate with customers from more liberal regions, who

questioned how IKEA, as a participant in the UN Global Compact (Case Exhibit 2a), could

seemingly compromise its own corporate values by accommodating Saudi Arabian cultural norms, when it had the potential to introduce and uphold Swedish values in the market.

Should MNEs adjust to local markets?

In comparing and contrasting the foreign market failures of Walmart and IKEA, a Venn diagram can illustrate the commonalities and differences. Both companies encountered challenges due to a lack of understanding of cultural differences and local regulations in their respective foreign markets. However, distinct factors contributed to the failures of these global expansions as well.

Yes, MNEs should indeed adjust to local markets to enhance their chances of success. Here are specific examples and strategies that could have been implemented by Walmart and IKEA based on their experiences:

WAL-MART

Cultural Adaptation: Walmart could have conducted thorough market research to understand German consumer preferences and cultural norms. They could have adapted their product selection, pricing strategies, and customer service to align with local tastes and preferences.

Supplier Relationships: Instead of employing aggressive bargaining with suppliers, Walmart could have established collaborative partnerships with local suppliers and manufacturers. This approach would not only align with German business practices but also foster stronger relationships, ensuring a smoother supply chain and product availability.

Labor Relations: Adapting their labor practices to comply with German labor laws and engaging with local labor unions could have helped Walmart avoid labor-related challenges and improve its reputation as an employer and thereby as a brand.

IKEA:

Cultural Sensitivity: IKEA could have maintained its commitment to human rights and inclusivity while adjusting its advertising approach in Saudi Arabia. For example, they could have incorporated women in their advertisements in a culturally sensitive way, respecting local norms without excluding or airbrushing women.

Ethical Advertising: Rather than airbrushing women out of ads, IKEA could have highlighted their commitment to gender equality and diversity. They could have leveraged these values to engage in constructive dialogues with local audiences on cultural norms and gender equality.

Market Research: IKEA could have conducted extensive market research in Saudi Arabia to understand local values and consumer behavior. This research would have helped them make informed decisions about product offerings and marketing strategies that respect local sensitivities.