In his seminal book, Riding the Whirlwind, the great Fons Trompenaars looks at the role cultural integration plays in the success or failure of mergers and acquisitions. I wrote a blog post recently about Strategic Alliances and what they mean for the future of supply chain. In this blog I want to look at the role a lack of understanding of the importance of culture, played in one of the greatest failures of a strategic alliance, or in this case, merger, of recent times. The Walmart into Germany debacle.
In May this year the tale took a further turn. In what is becoming know as the Amazon Impact, Walmart announced it was selling 42% of its shares in Asda, its UK branded chain, to Sainsburys (one of the Big4 supermarket chains in the UK) for £3bn. This creates the largest retail group in the country, prompting Tesco and the French giant Carrefour into a global strategic alliance. But given Walmarts’ past failures in Europe, will this merger be a success? The past failures of the US retail giant into overseas markets are dominated by a single factor; the inability for the group to understand intercultural issues.
The biggest failure rate for international assignments is from which country to which other? I have asked this question all over the world as part of an intercultural training session my organisation runs and mostly, people think that the more extreme the move, the less likely it is to succeed. Examples such as U.S. to China, or Sweden to Saudi are given, with the intelligent assumption that the more extreme the cultures are, the more challenges the expat will face. But in fact the highest rate for assignment failures is for moves between the U.S.A and the U.K., and the reason for 60% of assignment failures is attributable to an inability for the individual or family to assimilate into the host culture. So, the culture shock of coming to Europe and transferring from a U.S. lifestyle to a European one, involves not just a dramatic change in comfort and status, but also in cultural reference.
There is an expectation for American citizens of familiarity with Europe, as we have a long shared history and many common societal references such as similar political systems. But scratch just a little deeper and the commonality ends. European social democracies work with an entirely different mindset to the American self-determinist model.
On a recent visit to New England, on hearing my accent, the owner of the gift shop I was in asked about the UK’s NHS, our socialised healthcare system. She wanted to know how I felt about people who were not working, having the same access to healthcare that I have as a fully paid up tax contributor. I said that in Europe healthcare is seen as almost an inalienable human right, but she said that in the U.S. it’s seen as the result of hard work and of having a stake within society as a functioning economic citizen. It made me think. These differences in attitude are not necessarily expected prior to a move to Europe and only increase a sense of difference. If we are talking about a move from Europe or the U.S. to the middle-east, we are already aware of the vast difference between the cultural norms and therefore don’t face such a unexpected reality check. So the more prepared the expat and family are, the higher the rate of success for their assignment and therefore for the whole project itself.
As I’ve said, one of the most striking examples of corporate expansion failure in recent years was Walmart’s move into Germany. Even by American standards, Walmart must be considered as a success story without precedent. Forty years after its start in 1962, when Sam Walton and his brother Bud set up their first convenience store in tiny Rogers, Arkansas, continuous double-digit growth rates have transformed it into the world’s largest retailer. After establishing itself as the dominant player in its home market, Walmart decided, in the late 1980s, to embark upon an ambitious overseas expansion plan to sustain its brisk corporate growth. The goal was to have its overseas operations contribute a third of its total profits by 2005. In 1991, the first store outside the U.S.A, a SAM’s Club membership warehouse, was opened in Polenco, a suburb of Mexico City. Continuing this aggressive expansion model, Walmart set its sights on Europe and a strategy was drawn up to enter the highly competitive German retail market.
The corporate culture of Walmart is interesting. The U.S. success formula was built on low prices due to extensive use of advanced IT in logistics and inventory management coupled with a highly motivated workforce, influenced to some degree by a quasi-religious attitude common in many U.S. companies. So how could they get expansion into one European market so wrong?
Firstly the entry-by-acquisition strategy they adopted was fundamentally flawed. Of the two existing retailers they bought, Spar and Wertkauf, Spar was considered a very weak player in Germany and perceived as very low quality. Its stores were small and in less prosperous inner city areas. The corporate cultures and marketing strategies just were not compatible. Coupled with this, Walmart paid far too much for the ailing Spar group and could not recoup the loss.
Secondly and most crucially from a mobility perspective, the U.S. management clashed cultures with the existing German teams. Post merger integration is tricky at the best of times, but when this is taking place across two very different cultures, the importance of intercultural competence in the management team is key to success. Walmart appointed four different CEO’s during the first four years of German operations. The first, Rob Tiarks, had supervised 200 U.S. mega stores from the Arkansas HQ. He had never been expatriated before, spoke no German and therefore decreed that the official language of Walmart Germany would be English. His team ignored legal frameworks that governed retail operations and as a result the top three senior executives from Wertkauf resigned. After Walmart bought ASDA in the U.K. in 1998, Tiarks was replaced by Brit, Allan Leighton, who ran the German group from the HQ of ASDA in Leeds. Six months later he was replaced by Volker Barth, the first German to be in the CEO role and one of the remaining top executives at Wertkauf. By this time, faith in the top management team had evaporated and Volker failed to integrate Spar into the operation.
The third reason why Walmart failed was a lack of cultural sensitivity to the retail operations as a whole. U.S. and German consumers are very different and even the most basic of intercultural training programmes could at least have highlighted this fact prior to the expensive takeovers. U.S. consumers are used to a very high level of interactivity with staff in a retail environment. High and low context cultures, were first identified by Geert Hofstede in the 1970’s. Consumers in a high context culture do not need the same levels of assistance and information given to them as consumers in a low context culture. The U.S. is a low context culture and Germany, a high context one. The result was that the meet-and-greet philosophy so popular in Walmart U.S.A, was seen as intrusive and rude to the German customers, who did not want or appreciate Walmart greeters welcoming them to the store. They saw it as patronizing. One retail success in Germany is the U.S. chain Eddie Bauer, specialists in outdoor clothing. Walk into Eddie Bauer in the U.S. and a staff member will immediately ask if you need help. Walk into Eddie Bauer in Berlin and the staff remain at arms length until you ask for help. This is the German way and the management team at Eddie Bauer recognized this and incorporated it into their expansion planning.
Mobility providers and relocation specialists know all this, it is one of the great USP’s of our industry. Just using a German relocation provider could potentially have immediately highlighted these issues as the US management team began their assignments into the country. The wider understanding of the impact of culture often begins when working with the relocation company and can be huge success factor in both the assignment and down the line, team integration. Spending a tiny fraction of the cost of the expansion could well have saved Walmart millions of dollars. Within five years of the purchase of Spar and Wertkauf, Walmart had pulled out of Germany completely at enormous cost.