Why do International Business fail in Germany and other similar countries? It seems that no matter how much success a company may have domestically when it decides to venture overseas and expand internationally it’s always a risk. While many companies make the move and achieve great success, others find the move less than stellar and wind up admitting defeat. When we look at Germany, we see a developed market with strong customer potential. However, most businesses focus purely on the size of the market and the opportunity and do not take cultural, political, and environmental issues seriously enough to understand the undercurrent of business failure can bring in a market like Germany.
Why do International Businesses Fail?
When we take a look at the internal working of the German culture, its work roles, rules, and customs, we see that their value system is structured differently than that of the United States. Why international businesses fail in Germany is a question clients have asked us over the years, and we have come up with several reasons for the failures. The following analysis provides a synopsis of why International firms could fail in the German market.
One of the major reasons why international businesses fail in Germany is a lack of knowledge concerning local cultures. One of the most glaring examples of this is the retail giant Wal-Mart. Known for its one-size-fits-all business model, the business giant had to sell off its 85 German stores for a significant loss and admit defeat in its quest to conquer the German marketplace. Wal-Mart had entered the German market in 1998 and by the time it exited the German market it had lost hundreds of millions of U.S Dollars. Wal-Mart, whose business model depends on lowering prices by pressuring suppliers and keeping unions out of its workplace, ran into trouble on several fronts. Wal-Mart’s hubris and clash-of-cultures management approached, alienated both employees and customers. In Germany, domestic stores such as Aldi, Rewe, Globus, Schwarz, Metro, Edeka, Tengelmann, and Spar already control the grocery market, hurting Wal-Mart’s chances for success. Other reasons for the company’s failure include:
- Customers disliking store designs
- Too small selection of produce versus the competition
- Labor dispute(s)
- Customer buying behavior
- Local and national regulation
German customers were particularly turned off by Wal-Mart’s greeters, who smile at customers when approached. In Germany, smiling at someone when telling them to have a nice day goes against local culture, making customers uneasy and being viewed as a slap in the face to the German way of life. “People found these things strange; Germans just don’t behave that way,” said Hans-Martin Poschmann, the secretary of the Verdi union, which represents 5,000 Wal-Mart employees. Wal-Mart had taken American values and transplanted them to the German market. Wal-Mart lacked a cohesive international strategy and could not convey its differentiation within the market space, versus local competitors. Not understating the cultural nuances and ability to amalgamate to local values is key to why international businesses fail in Germany.
Many businesses, including Wal-Mart, fail to fully understand the state of a country’s economy when making their move into the country. International business failure is an unwillingness to pivot from your existing model and trying to fully replicate your products and services in the primary market. This is evidenced by Wal-Mart’s market expansion into Germany the country was experiencing high unemployment and weak consumer spending, two events that when put together spell doom for almost any company. Furthermore, the way trade-unions are viewed in Germany is different than in the United States. Trade unions are seen as partners in the business in Germany, whereas in the United States it is a more combative relationship. They didn’t understand that in Germany, companies, and unions are closely connected. However Wal-Mart’s perspective was different; they didn’t want anything to do with unions, because they thought of them as communists. Their lack of understanding of social and cultural differences across countries is a key reason why international business fail in Germany.
Many times, a country will already have companies that are well-established within a local market, making it more difficult for outside competitors to enter the country and have success. In Wal-Mart’s case, the grocery market was already dominated by local vendors with long-standing relationships with customers, making it difficult for an outside competitor to find its place within the country. Understanding the domestic economy, and market positioning of the competitors is key in developing a core international market entry strategy. The lack of understanding of the competitors and their respective value proposition is another key reason why international business fail in Germany.
International business failure can be based on a complex web of lack of information, lack of detailed market analysis, regulations, buying behavior but also the cultural and historical nuances that define the purchaser’s mentality. Although we think of International Market Entry as a safer business model, if it is not implemented correctly the costs are staggering. For Wal-Mart Germany, it was forced to sell its 85 stores with $2.5 billion in annual sales because it did not conform enough to the host market. When companies decide to make the move into foreign markets, it’s always best to take time and carefully analyze every detail of the business and cultural landscape. To this extent, HafeziCapital develops International Feasibility Studies, to decrease the risk and develop an international market entry strategy for companies seeking to enter Germany and other markets Internationally. Often, it is the slightest of details that may turn the tide for or against a business attempting expansion internationally.