The History of Wal-Mart Essay Sample
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- Category: walmart
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The History of Wal-Mart Essay Sample
Wal-Mart is a US-based multinational corporation. Critically discuss the costs and benefits likely to have occurred as a result of its takeover of ASDA, a UK-based company. Wal-Mart is a US based corporation established in 1962 by Sam Walton as one self-service store, in period of 40 years it has developed into one of the biggest and most influential corporations in the world, operating 5000 facilities in 15 different countries. On 26th of July 1999, it successfully acquired the UK based third biggest retail chain ASDA with its 229 stores for 11billion dollars. (OU case study for B200 TMA 07, 2005, pg.61,55,54). In this essay I will identify and examine the benefits and costs that have occurred as a result of Wal-Mart’s takeover of ASDA, however, first it will be necessary to define the term “multinational corporation” and identify the motives that may lead the companies to become MNCs. It is estimated that there are some 35000 multinational corporations worldwide. The MNCs are defined as businesses that own or control foreign assets in more than one country.
These numbers of MNCs raise a question, what makes the ownership of foreign assets so attractive for the companies, that they are ready to invest billions of dollars into the acquisitions. In order to answer this question, first we should consider that the primary objective of the for-profit businesses is to maximize their profitability. The ownership of foreign assets presents them with a range of opportunities to achieve this objective. Depending on the business nature and its corporate strategies, by locating their operations within the countries with the suitable market and economic conditions, the companies may be able to increase their market share so sustaining their growth and improving profitability. Or they may also gain competitive advantages by jumping tariff barriers and by achieving significant reductions in costs, such as: labour, transportation, the raw materials. ’
In highly competitive global markets, even small cost savings might mean for the difference between success and failure, therefore, the MNC’s will be constantly searching for new ways of minimising costs and ensuring further growth by locating their operations where the greatest advantage might be gained’. (Sloman/Sutcliffe, 1998 p. 50). However, apart from the benefits that may be gained from the acquisitions, they may also have some negative impacts on the companies and their stakeholders, a perfect example would be the Wal-Marts takeover of ASDA. According to (Levine, J. 2004) “Wal-Mart spent wisely when it acquired ASDA for $11 billion “, as this cross-border acquisition presented the company with the new growth opportunities. Considering that Wal-Mart’s revenues are mainly generated through the sales and provision of services, in order for the company to achieve its growth targets , the potential market of its subsidiary must provide suitable economic and market conditions with sufficient levels of demand.
Through the acquisition Wal-Mart has gained existing segment of ASDA’S market and also the unlimited access to the relatively rich UK’s market with 55,000,000 potential customers, which has enabled the company to increase its market share so increasing its profitability and sustaining its growth. Also, the acquisition has opened the company new opportunities for its further expansion, in period of five years after the takeover the company has opened additional 30 stores and 19 depots. (OU case study for B200 TMA 07, 2005 pg. 55). Furthermore, the acquisition of the third biggest UK’s retailer with its 229 existing stores, gave Wal-Mart the opportunity to avoid any extensive initial investments into the creation of the new facilities, as a result the company was able to reduce its internal expenses and minimize the risks of its investment.
In addition, the takeover of food retailer with similar marketing strategies and already established local distribution networks, has allowed Wal-Mart to minimize the import of the food-products, thereby, significantly reducing its transportation and import tax expenses.( Sloman/Sutcliffe, 1998 in Suneja, 2000. Pg. 50, 51). In regard to ASDA, according to (Levine, J. 2004) Wal-Marts arrival had positive effects on ASDA’s operational productivity and efficiency. Considering that, the Wal-Mart’s success was mainly built on its ability to maintain highly competitive prices which was achieved through its managerial competencies and the efficiency of distribution systems, which was supported by company’s technological advantages. The takeover has enabled ASDA to access and exploit these competitive advantages, therefore, after the acquisition the company has moved over to the standard Wal-Mart corporate systems.
In the period of 18 months almost every company’s operational and financial system was replaced, so eliminating any operational discrepancies between the companies and thereby enabling ASDA to engage into the global sourcing with Wal-Mart more effectively. As a result the company was able to further reduce its prices, increase the diversity of its food products and add a wide range of non-food products. The ability to utilize these competitive advantages has led the company to the significant improvement of its sales performance so resulting in positive effects on both companies. ‘In the first five years after acquisition, ASDA’s market share increased by 3% without acquiring any new facilities and in 2005 it became the second biggest supermarket chain in the UK’.(OU study for B200 TMA 07, 2005 pg. 59). Furthermore, the close collaboration with Wal-Mart provided ASDA with more extensive financial and strategic planning capabilities which have enabled the company to open a range of small ‘community’ discount stores and expand its operations into the other areas of business. (OU study for B200 TMA 07, 2005 pg. 55, 56).
The takeover may be also considered beneficial for the UK’s economy, as by acquiring ASDA, Wal-Mart has taken the control of its assets but also of its tax liabilities. As the company continued to conduct the business within the UK’s market, it was obligated to pay corporation tax. Additionally, after the acquisition the range of non-food products and services within ASDA’s stores was extended, thereby significantly increasing the demand of import products and as a result the company had to pay import taxes. Furthermore, due to 2005 expansion of the retail space and the acquisition of new properties for its discount stores, ASDA/Wal-Mart was also eligible to pay’ Stamp Duty Land Tax (SDLT). By paying all the taxes mentioned above, ASDA/Wal-Mart makes a substantial contribution to UK’s tax system.
Apart from this, Wall-Mart has also brought its technological advantages and managerial competencies which were used for ASDA’s internal restructuring and training of its employee. The improvement of employee qualification has contributed to the reduction of the number of unqualified work force within UK’s labour market. (Suneja, 2000, pg.65) However, apart from the benefits that UK’s economy has gained from the takeover, the arrival of Wal-Mart had also some negative effects on it. Following the acquisition, Wal-Mart/ASDA was accused multiple times of repatriation of profits and tax avoidance. The close collaboration with its UK subsidiary has enabled Wal-Mart to manipulate its price structure and declare the payments for the provision of its assistance services to ASDA as operational expenses so reducing the retailer’s taxable profitability.
The payments to its US parent have reduced ASDA’s declared profits and are reckoned to have cut its British corporate tax bill over the period of seven years by a total of almost £250m’. (Goldfingle, 2012). In addition, according to the critics “Wal-Mart achieves its success by denying worker’s rights” in regard to the UK, due to company’s aspiration to improve ASDA’s productivity and efficiency levels, it has introduced new employee rules and regulations, which included: access restrictions to arbitration services, shorter breaks and the increase of the workload. This action had negative impact on the work conditions of the employees. (Suneja, 2000, B200 pg.61)
With every entry into new markets companies are facing certain problems, in regard to Wal-Mart, it has encountered certain cultural issues. As the company has acquired ASDA, in order to improve its productivity and efficiency, it has replaced its operational systems together with its sales and marketing strategies, to the systems based on US standards, as a result, in 2005 ASDA started to indicate the signs of operational failure as the strategies found to be highly effective within US, were unsuitable for the UK’s market, this disregard of cultural differences by Wal-Mart has led ASDA to the loss of market share and resulted in deficits of it growth.( case study B200 TMA 07, 2005).
Additionally, ASDA/Wal-Wart was accused multiple times by charities and trade unions for the violation of its employee rights and their exploitation. The introduction of the new rules and regulations resulted dissatisfactory reaction among the employees and which later had negatively affected company’s performance. (Suneja, 2000, B200 pg.61) Finally, Wal-Mart’s acquisition of ASDA has clearly shown how through the cross-border acquisitions MNC’s are able to achieve their growth and improve their profitability, it has also shown that by entering new markets they may also bring certain advantages, although not always equally beneficial for all the parties involved, still, they can have positive impacts on them. However, it can also be clearly seen that MNC’s will use any means necessary in order to maximize their profits even if that results in negative effects on the other businesses, host countries and even themselves.