Costs and Benefits of Walmart's takeover of Asda (Term Paper Sample)

OBE64021 Costs and Benefits of Walmart's takeover of Asda Introduction Walmart is an international grocery store chain with origins in the US. The Walton brothers opened the first Walmart store in 1962 in Rogers, Arkansas (Atif, 2014). Having saturated the US market with Walmart stores, the corporate giant was ready for international expansion. This is for seeking new markets for its products and exploiting other opportunities that come with presence in another country (Sloman and Sutcliffe, 2000). This happened in the early 1990s, in Canada, South America, China, Germany, and the UK (Hegazy, 2012). In the latter, the grocery store giant expanded through acquiring another chain similar to itself: ASDA. The geographical and cultural proximity of the UK made this expansion a low-risk one for the company. This is because it had a ready market and it would ensure elimination of a formidable competitor through acquisition (Zhen, 2007). This is effective in reducing the number of competitors that the company would have to contend with once it established itself in the host country. This made the chain attractive to Walmart, which made a £6.7 million successful bid to acquire it (Whysall, 2001). This was the giant's entry point into the UK market. The entry of a highly successful and large corporation into a new market is likely to have effects on the company itself and the host country. This paper seeks to discuss critically the costs and benefits of Walmart's takeover of ASDA, for the UK and Walmart itself. Costs and Benefits to Walmart Benefits One of the primary advantages that the company gained is the ability to achieve growth. Establishing itself in the UK through ASDA has enabled the company to gain profits from tapping into a market that values low prices and quality services. According to Hegazy (2012), Asda got credit for 42.7% of Wal-Mart sales in international markets in 2006. This indicates that the corporate giant is benefitting from its subsidiary, hence has been able to achieve growth. Another benefit for Wal-Mart is the ability to learn from ASDA regarding managerial, marketing, and packaging ideas. This took place in form of exchange programmes where ASDA employees and managers exchanged with their Wal-Mart colleagues to learn from each other (Wal-Mart, 2000). Some of the things that Wal-Mart borrowed include the hands-on training of new retail managers and holding ten-minute conferences to set priorities at the beginning of each working day (Reilly and Williams, 2011). Such borrowing exercises are beneficial for the corporation and its subsidiary as they foster improvement. Another benefit that Wal-Mart is enjoying due to its acquisition of ASDA is the control it has in its host country. This concerns pricing. Wal-Mart has led to the lowering of prices in supermarkets due to its price-cutting efforts. This has kept customers and competitors on their toes due to the price war that it instituted when it entered the UK market. This gives Wal-Mart a firm foothold as a corporation that has the ability to shake up the supermarket industry in the UK. Another benefit that the firm is enjoying is the ability to spread risks in more countries. Having failed in Korea and Germany, the company needed to expand in a country in which it would be able to succeed and hence gain profit. ASDA was an already existing producer; hence, it provided a much easier opportunity for expansion than starting from scratch in the UK. This is because the probable cost of land and taxes accompanying establishing a subsidiary from scratch would cripple the enterprise even before it began. Costs One of the costs that Wal-Mart has to grapple with is competition. Its main competitor in the UK is Tesco, which has been experiencing higher domestic and international annual growth rate than Wal-Mart (Atif, 2014). This means that it is gaining ground in the country and abroad through expanding faster and getting more attention than its counterpart. Tesco also seeks to establish itself as a low-cost seller to reduce the price differences between it and its competitor (Atif, 2014). For Walmart to gain and maintain a competitive edge there needs to be a gap between its pricing and that of its contenders. When the gap no longer exists, then it becomes difficult for it to attract customers as it invests heavily in price-cutting. According to the neoclassical model, where the price is as low as possible and the demand is less than the supply, then the company would have no option but to further reduce its prices (Brown, 2000). However, for Wal-Mart, this would not be an option since it has already reduced the price of its products to the lowest point at which it would still be able to gain profits. Otherwise, it would only be recording losses. Another cost is high employee turnover. When Wal-Mart took over ASDA, managers and subsequently some of their team members left the company. For instance, three members of the subsidiary's eight-member board have left, as did the pioneer of its George clothing range followed by three of his underlings (Piercy, 2009). These demoralizing occurrences do not aid in helping Wal-Mart come back from its reputation of employee mistreatment. Labour is a major factor of production (Costello, 2000) and the cost of training and recruiting workers is high (Hosbawm, 2000). Therefore, this is a major cost for the company. Costs and Benefits for the UK Benefits Wal-Mart brought price-cutting to the UK. This means that consumers could buy products at much lower prices. ASDA sells its products at prices that were 9% less than that of its competitors (Piercy, 2009). This enables low-income households to have the ability to afford the products that they could not afford before. This is a way of improving the living standards of the populace since they move from the point of desiring products to buying them. This is a perk that authorities would approve of and encourage as it improves the lives of citizens. Another advantage for the host country is technological transfer. Sloman and Sutcliffe (2000) elucidate that multinational corporations impart technological knowledge through training of employees and local producers imitating the new entrant's technology. This is a significant contribution to the host country as it plunges forward in technical expertise through the development and use of machinery and other equipment. The technology in question is the inventory control system, which exists in-house but also connects the supermarkets to the US, as are all Wal-Mart stores in the world (Hegazy, 2012). The satellite system has video conferencing facilities and stock control systems where the head office keeps an eye on the inventory, sales, and customer numbers (Hegazy, 2012). This sophisticated system allows the locals to learn from it and perhaps develop it for use in other fields. Costs Multinational organizations tend to displace local producers and companies when they permeate a new market. This happens because the domestic enterprises lack the necessary resources such as technology to compete with the international corporations (Sloman and Sutcliffe, 2000). According to Rowell (2011), Wal-Mart uses predatory pricing to drive its competitors (both big and small) out of business. This has led to loss of employment since organizations close, and, farmers and some of their workers commit suicide (Rowell, 2011). This undesirable outcome puts the host country at a great loss. Wal-Mart operates on having the lowest prices possible. This indicates that its production factors including labour have to cost them as little as possible as well for the company to be profitable. This results in poor wages for the employees that work for them. Poor employee benefits and the inability to unionize also follow where poor wages exist (Rowell, 2011). This formula seems fitting for high employee turnover, a loss, which the company appears to have no problem carrying. The company also faces backlash for exposing their local and international employees to bad working conditions (Rowell, 2011). It is likely that the host country would have to bear this cost as well. Conclusion Wal-Mart took over ASDA, a grocery chain store that is similar to it, and used it to enter the UK market without having to establish themselves from scratch. This takeover has had effects on Wal-Mart itself and the country host. For Wal-Mart, the perquisites include achieving growth through entering a new market, learning opportunities through interaction with ASDA organizational culture, control over the host country, and spreading business risks through operating in more countries. For Walmart, the costs include having to grapple with tough competition locally and internationally, and high employee turnover. On the other hand, the host country enjoys advantages such as low prices for products including food and housing appliances. It also gains technological knowledge from Wal-Mart's sophisticated use of ICT in its stores. The costs that the UK has to grapple with include the displacement of local producers and businesspersons. It also has to suffer poor wages, low employee benefits, and poor working conditions for the part of the population that Wal-Mart hires. From this critical analysis, it is clear that Wal-Mart benefits more from this take over than the host country and its populace does. Reflection on the Writing Process The essay in Part 1 is a critical analysis of Wal-Mart's takeover of ASDA, a UK-based grocery store chain. The analysis focuses on the costs and benefits that resulted from the acquisition. This is for both Wal-Mart and the host country. The writing procedure begins with a critical analysis of the reading materials. This includes the recommended chapters in (Suneja, 2000). Starting with this text helped lay the...