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Country Analysis Report!

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Every Day Low Prices Creates Every Day Problems for Market Competition in Mexico
Samantha Perlman & Akash Miriyala Produced on October 9th, 2013 For Professor P. Roberto Garcia BUS-D270: The Global Business Environments Section #29578 ! !
smperlma@indiana.edu amiriyal@indiana.edu

Part 1: A Brief Introduction to Set the Context

The case being analyzed depicts the complex situation of a U.S. company, Walmart, entering Mexicos retail market. This expansion has evidently created complications for other corporations in Mexico that are of similar industries as Walmart. Its crucial to note that the companies struggling in Mexico are those that had been established within the countrys own borders, so it is pertinent to examine later in the analysis how Walmart has affected the Mexican economy. The company focused on in the case, Comerci, is a large retail chain in Mexico. Comerci experienced difficulties to stay competitive in the Mexican market with the aggressive entry and development of Walmart de Mxico (which later expanded to Walmart de Mxico y Centroamerica, and became an even bigger force in the market.)[1] Those problems have arisen because on the one hand, Walmart notoriously has everything thus making it difficult for competitors to provide all the same products and services. Additionally, the company has outstandingly low prices accredited to its price-slashing motto. The case reported that Mexican companies simply could not get their prices as low Walmarts strong international presence and ability to boast low prices have ultimately made it difficult for Comerci, and other similar companies, to retain their market share. [1] All the complications addressed in the case are relevant to todays global economy. The issues detailed are especially noteworthy to analyze in order to gain a deeper understanding of the Global Business Environments course. Given that Walmarts emergence into Mexico is a real-world situation, the concepts of globalization and international business can be applied to the case to better grasp those ideas discussed in class. The problems experienced by Comerci and other similar companies as a result of Walmarts successful expansion venture have affected the cultural, political, legal, and economic environments. All these issues persist in the global economy today, and will remain relevant in the future as technology progresses, cross-border trade is further liberated, services supporting international business are developed, consumer pressures and global competition rise, political and legal systems evolve, and cross-national cooperation expands. The history of the industry is necessary to understand for better comprehension of the case. Mexicos government pushed trade liberalization in a bullish (rising) market around the early 1990s, which eventually led to the entrance of Walmart. Comerci struggles to stay competitive because Walmart consumes the market; its ability to negotiate with suppliers to buy large volumes of product for a low cost, and then sell to consumers for a low price practically blows other competition out of the water. Walmart keeps a detailed database of all purchases and inventory, therefore suppliers can run their production lines in a more timely fashion and stock Walmart with more merchandise. After the passing of NAFTA in 1994, Walmart was able to sell American goods in Mexico with lower tariffs, and in response, Comerci collaborated with two other retailers in Mexico to gain purchasing power in hopes of better bulk prices, yet Walmart still prevailed. [1] The goal of this report is to 1) Establish the issues for why Comerci and other retailers have struggled, 2) Determine how Walmart has continued to be more successful, even after three supermarket chains including Comerci formed a purchasing consortium to lower their prices, and 3) Develop a recommendation, based on concepts from the Global Business Environments course, for both Walmart and the Comerci group to uphold competitiveness with one another in the market in order to remain profitable.

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Part 2: Analyzing the Country

Cultural Environment of Mexico
Mexico is a high context culture, meaning the culture emphasizes relationships and a shared understanding between members of a group. Small talk isnt taken lightly, in fact its rather important; in doing business, Mexicans generally want to get to know the businessperson they are working with on a more personal level prior to engaging in business talks. On the contrary, jumping right into business and engaging in persuasion is considered overly pushy. When doing business with Mexicans, it is highly advised to show interest in their customs and traditions, and to appeal to their values without seeming patronizing. Many times Mexicans give the answer you want to hear however behind those words, action may not take place. The implication is that foreign managers must understand Mexican values to some extent, and that they will take their time in business proceedings. This is not as easy as it may sound. There must be a level of patience and respect when dealing with another businessperson. By building close relationships and taking things slowly, it is more likely that international business will succeed. !

Comparing Cultural Differences

Walmart, a company headquartered in the United States, has continued to be successful because they have been able to understand and adapt to the cultural environment of Mexico. However, during the initial implementation of Walmart stores across the border, Mexican managers clashed with American executives because of their cultural differences. To compare these differences, the GlobeSmart Assessment Profile generates an analysis of each countrys ranking for the five dimensions deemed in the intercultural world to have the greatest impact on behavior in the business contextand proved to be reliable indicators of behavioral trends.[2] When countries are vastly different in terms of these dimensions, it can be difficult to engage in business with one another. People often have an ethnocentric view, meaning they see things only from their own perspective and can have trouble adjusting to other cultures. Geert Hofstede conceptualized that culture is the collective programming of the mind distinguishing the members of one group or category of people from others[and] only exists in comparison.[3] In a GlobeSmart assessment between Mexico and the United States [Figure1], there are some noticeable distinctions between them that influence how business works. Mexico as compared to the US is oriented towards interdependence, prioritizing status, restraint in business practices, indirectness, and building relationships. Business officials from the US will value independence, egalitarianism, taking risks, directness, and prioritizing tasks. So generally, Mexico is more conservative and focuses on interactions between people and the meanings behind them. The United States has an extremely independent culture, meaning the individual is deemed more important than the group, while Mexico leans predominantly towards the value of interdependence. Mexico also has a cultural mannerism of indirectness. On the other hand, the United States is considered very direct. Americans are known to get to the point and approach conflicts head on; expressing disagreements is often viewed as constructive criticism. Walmarts entrance into Mexico got off to a rocky start because Mexican businesspeople prefer to avoid overt disagreements; their way of saying no is often by saying maybe or I'll get back to you,[4] and therefore the American executive may have come off as rude, pushy and too forward about ! #!

their plan for executing business. Additionally, the United States is much more of a risk-taking country than Mexico. Mexicans demonstrate restraint, and thus are meticulous about researching prior to making a decision. The United States praises egalitarianism; American businesspeople are generally comfortable challenging views of superiors because they place little value on status. In contrast, Mexico values status, meaning they have greater respect for those ranking above them and are less likely to challenge the decisions of a superior. But the most extreme conflicting dimension is the United States value of task over relationship. Mexico is very much in opposition. Americans tend to focus on the end goal, while Mexicans believe that developing relationships is the key to achieving success. In order for Walmart to culturally assimilate, the American executives formed relationships with Mexican managers to overcome this challenging culture clash. Walmarts ability to adapt to Mexican culture and put aside ethnocentric ideals has propelled them to succeed. When examining solely culture, it is easy to understand why Mexicans are known to have a sense of strong national identity. Due to this, it is unexpected that Mexico has such a strong loyalty to Walmart due to the fact that it is founded by another country, which has such strong cultural differences to their own country. To fully grasp why Comerci and other similar retailers (even though they are based in Mexico) have struggled to survive, the other factors of globalization need to be analyzed. Subjectively, one can infer that a Mexican company like Comerci has a better grasp on the cultural aspects of Mexican business than an American company like Walmart. With that said, the home-field advantage doesnt do much for Comerci as it is edged out of competition based on other factors like pricing and Walmarts ability to work closely with its suppliers.

Political Environment of Mexico

According to the United States CIA, Mexicos government is divided into legislative, executive and judicial branches, with a civil law system influenced by the United States constitution. The president is elected by popular vote for a six-year term, and the current president is Enrique Pea Nieto who has been in office since July 1, 2012. The judicial branch consists of a Senate with 128 seats, 96 of which are elected for six-year terms (three from each state). The remaining 32 seats are allocated based on proportional representation of the popular party. The Chamber of Deputies (similar to the House of Representatives in the US) has 500 members serving three-year terms, 300 of which are elected by popular vote. Re-election is prohibited; incumbents must sit out at least one term. [5] In 1917, as a product of the Mexican Revolution, then-president Venustiano Carranza drafted a constitution that still governs Mexico today. The document structured social reforms such as labor laws and equality on the basis of race, social status, and political affiliation. [6] Similar to the United States Constitution, Mexico clearly outlines the separation of powers between the executive, legislative, and judicial branches. Being that separation of power is clear, it is easily identifiable that the power is centralized in its executive branch. The Mexican governments powers can be described as federal democratic republic. Foreign business managers, especially from the United States, can easily understand the operations of the Mexican government, as its structure is similar, which is beneficial to the ease of doing business.

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Mexico strives to be a free country. According to Freedom House rankings, Mexico is party free. [7] Its freedom rating, civil liberties, and political rights rank at a 3 (1 is free, 5 is not free). Looking at another figure [Figure2], Mexico is well below the average for free countries. Government regulation restricting business activities is a factor in these ratings. With controlling interests, the Mexican government has placed restrictions on foreign land ownership on the coastlines and borders and many basic industries, like oil refining and the distribution of electrical energy. [8]

Impact of Politics on Foreign Firms

Government control has raised barriers to foreign business owners in Mexico in the past. Currently, Mexico ranks 48th out of 185 countries in ease of doing business based on a variety of factors: starting a business, property rights, energy, credit, protection of investments, taxes, etc. Poor rankings in getting electricity, registering properties, and paying taxes hold back Mexicos scores. [9] With the passing of NAFTA in 1994, the outlook changed for Mexico as doors opened to a freer market. A growing acceptance of foreign business in Mexico is beneficial to firms like Walmart and hinders local firms like Comerci. NAFTA was the beginning of political and economic transformation to foster foreign business in Mexico. The act lowered tariffs allowing Walmart to import cheaper goods while opening the doors to suppliers to infiltrate Mexico. This, in turn, led to increased competition in Mexico in order to gain the trust of suppliers and access to a wide variety of goods to stay competitive in the retail markets. Bills like NAFTA boosted Mexican efficiency, but in order to take the next step up, Mexican government is focusing on eradicating inefficiencies in protecting against bribery, political interference leading to corruption, and intellectual property rights.

Economic Environment of Mexico

The contextual information from the case itself described how the passage of the North American Free Trade Agreement (NAFTA) in 1994 was expected to raise economic growth by phasing out tariffs on trade, and subsequently exporting American jobs to Mexico. However, Mexico was unsuccessful in establishing the institutions and the infrastructure essential to fostering competitiveness in the globalized free market it had become part of. Mexicos political system, which was weakened by ongoing corruption in an unorganized government, made the economy unappealing to investors, entrepreneurs and expanding corporations. By entering a foreign economy affected by a shaky political environment, a company or individual is subjected to dealing with these instabilities, which could create problems as they try to appeal to the objectives of their home country, but still abide by the host countrys policies. The dilemma of the floating subsidiary [Figure3] is very relevant because difficulties arise when Mexico fails to honor contracts and punish lawbreakers because their policy does not enable and/or require them to. Mexico can be a challenging place to do business, and because of its lack of appeal to many foreign investors and corporations, it suffers limitations in economic growth. [10]

Impact of Mexican Economy on Foreign Firms

A source of economic weakness impacting foreign firms is that Mexico has intellectual property rights lacking legal protection. With a 5.7/10 in IP rights as compared to 8.3/10 in the ! %!

United States [11], Mexico still has a ways to go in terms of establishing infrastructure that will lead to the formation of secure international business relationships. The protection of intellectual property is always at the forefront of concerns for foreign business executives. This may provide some reasoning as to why certain industries like pharmaceuticals and technology have yet to enter the Mexican markets, despite the fact that Mexico shows a promising score on the Market Potential Index. [Figure4] However, in terms of the case analyzed, retailers like Walmart worry less about the protection of intellectual rights and value the big emerging market Mexico has to offer. Even though Mexico suffers limitations on economic growth, an important factor of measuring MPI that Mexico scores highly in is market consumption capacity. Consumption, in other words consumer spending, is high in Mexico and this has led to a recent influx of retailers over the past decade. [Figure5] Mexico's high consumption in addition to its close proximity to the United States provides significant opportunities for US companies, such as Walmart, to expand across the border. [12] Foreign companies even built manufacturing plants in Mexico so that their retailers could more easily work out deals for goods at lower costs and to avoid high import tariffs. Being that Walmart is such a strong force in the market and because economic growth is stalling, other firms in the same market cant compete. A large conglomerate like Walmart can work out business deals easily and thus beat out the smaller firms, which explains why Comerci struggled with so many problems to remain competitive. But even after Comerci collaborated with Soriana and Gigante to form the Sinergia Corporativa (Corporation) to gain purchasing power, Walmart still experienced greater growth and rooted itself firmly in the Mexican economy. The most plausible reason Walmart exhibited a market takeover in Mexico was due to a direct effect of corruption. In September 2005, a senior Walmart lawyer received an alarming email from a former executive at the companys largest foreign subsidiary, Walmart de Mexicothe former executive described how Walmart de Mexico had orchestrated a campaign of bribery to win market dominance.[13] Mexican executives concealed the bribery from Walmarts headquarters in the United States, and even after headquarters were informed and an internal investigation was made, none of the culprits of the crimes were held responsible. In fact, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Walmart in 2008 and none of this information was publicly revealed until The New York Times released it in 2012. [13] This hardly comes as a surprise because of the corrupt political environment in Mexico. With bribes given to government officials, legal and bureaucratic barriers to Walmarts expansion quietly disappeared. With all barriers being broken down, Walmart was able to reach out to a larger consumer base than Comerci, and thus Walmart experienced huge growth in Mexico. The greed of top-level Walmart de Mexico executives resulted in the destruction of competitiveness in the market, which leads to market failure. The foreign-based monopoly, Walmart, created inefficiencies in Mexicos market because the corporation holds nearly all the market power, leaving no room for national companies to flourish.

Societal Views of Foreigners Doing Business in Mexico

Mexicans have differing views of foreign business. Many admire the technology and innovation of foreign firms, but others see them as threats to the national sovereignty of Mexico.

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Foreigners partaking in business activities in Mexico, even if they boost economic growth, are not always seen in a positive light by the nationals. Ambivalence about the presence of outsiders runs through Mexican culture and law, [having] endured exploitation at the hands of foreign powersAnti-American rhetoric in Mexico has been known to veer into extreme nationalism and even xenophobia.[10] The United States often has a bad reputation because of their ethnocentric behaviors. Some see the United States presence in Mexico as more of a hindrance than helpful, viewing Americans as egotistical and disrespectful. Most of these attitudes stem from poor business negotiations in the past between Mexicans and Americans because the American executives hadnt taken the time to understand the societal views of Mexicans as it pertains to foreign direct investments in their home country. Mexicos negative view towards outsiders doing business in their country has influenced their role in globalization. Many foreign companies trying to facilitate business in Mexico have experienced difficulties and even failure because the country does not have an environment conducive to cross-national cooperation. When Walmart first entered Mexico, they experienced many challenges working with the nationals. Corporate Walmart describes its dedication to consumers by stating, We are committed not just to expanding the business to better serve our customers, but also to improving the communities we serve through our efforts to constantly improve what we do and how we do it[14] By gradually understanding and adapting to the culture of Mexico, Walmart transformed its emphasis on competitiveness to a more customercentric approach. By dedicating themselves to the needs of consumers, Walmart executives achieved success across borders.

Mexicos Government Policy toward FDI

The Mexican government has become more accepting to FDI in recent times. Theyve implemented plans for further economic development and plan to diversify by striving to achieve industrial development and expansion through increasing exports. NAFTA was enacted in 1994 and has helped Mexico reach its goals. Taking further action, Mexico joined the World Trade Organization, which has helped eliminate trade barriers, relax foreign investment restrictions, and facilitate the assimilation of foreign firms into the Mexican markets. [15] Net inflows of FDI spiked in the years following the enactment of NAFTA. In 1993, FDI inflows were about 1.1% of Mexicos GDP. After NAFTA, the percentage rose to 3.3 in 1995, and 4.8 in 2001. In more recent years, FDI has slowed down in Mexico. [Figure6] In 2012, FDI in Mexico totaled $12.66 billion, 34.9% less than what was originally reported in the same period of 2011 ($19.43 billion.)[16] This proves Mexico was dependent on foreign investments for economic growth. It can be inferred that Mexico is planning to pull away from dependence by encouraging independent growth in the Mexican markets.!The government has enacted major reforms to reverse the slowing of growth by reducing labor regulations, reforming education, and increasing competition in the telecommunications and banking industries. Walmart experienced firsthand the benefits of open foreign investments. As low import fees opened the doors to cross-border trade, foreign companies expanded manufacturing plants to Mexico to cut costs with cheaper labor, and then ship goods to merchants in the US, Mexico and Canada. [1] As suppliers started popping up in Mexico, Walmart had an increased variety of ! '!

products to sell and could strike deals with its negotiating powers to keep passing on the savings to consumers. Local retailers like Comerci had few options to combat Walmart after the loosening of foreign investment regulations. Too small to strike deals with suppliers alone, Comerci needed to partner with other retailers in Mexico to accrue larger purchasing power. The lax foreign investment rules led to competition in the marketplace, but eventually led to a market takeover by the retail giant Walmart. Local firms lose out to larger foreign firms, and thus the home country can experience a weakening of its national sovereignty, in other words its ability to act in its own economic interest.

Part 3: Overall Analysis & Recommendations

! The ways of Mexican culture, politics, economics, and society provide a framework to how foreign firms must act in the host country. For example, Mexicans are relationship-oriented rather than task-oriented like Americans tend to be. In this sense, foreign executives must understand Mexican culture so as to facilitate negotiations. They must be patient, respect opinion, and never be pushy for action to occur. Understanding Mexicos political and economic environment is crucial to mapping its impact on foreign firms as well. Government changes in foreign direct investment policies have benefitted firms in Mexico by opening the doors for manufacturers while corruption leads to inefficiencies in legal proceedings and business contracts. Taking into account the environments in Mexico we have assessed the situation for current and future businesses. Based on a detailed analysis of the business environment, our team would recommend that certain foreign firms enter into Mexico, but to proceed with caution. We also recommend that existing firms based in Mexico should establish business processes to remain competitive in a market that is becoming highly globalized. Our recommendation for foreign firms entering into Mexico is that first and foremost, they need to evaluate the specific market they are entering. For example, after researching Walmarts expansion to Mexico in depth, it is clear that Walmart dominates the retail sector of the market. Unless a retailer can differentiate from Walmart and offer competing prices, we suggest not entering that market. Another thing to consider is that intellectual property rights lack sufficient legal protection. The implication of this is that companies in industries like pharmaceuticals and technology face higher risks entering Mexico. However, for companies in other industries, we advise expanding into Mexico. Consumer spending is at an all time high and as the country works towards resolving corruption, economic growth will increase. We predict that foreign companies in the Mexican market will reap huge rewards in the future. The other part of our recommendation is aimed at existing firms based in Mexico. The only way to survive in the economy is to remain competitive. If a company is not competitive, they are no longer relevant to economic growth and eventually other companies replace them. For companies like Comerci, we recommend that they focus on enhancing brand equity and corporate reputation to differentiate from competitors like Walmart. Being that Mexicans have a strong national identity, existing firms should use targeted advertising campaigns that exemplify their loyalty to valuing Mexican culture and economy.

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List of Figures
Figure 1: GlobeSmart Assessment Profile

http://www.aperianglobal.com/web/globesmart/

Figure 2: 2013 Index of Economic Freedom for Mexico

http://www.heritage.org/index/country/mexico

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Figure 3: The Floating Subsidiary Dilemma

Source: D270 PowerPoint

Figure 4: Market Potential Index for Emerging Markets - 2013

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http://globaledge.msu.edu/mpi

Figure 5: Mexicos Consumer Spending

http://www.tradingeconomics.com/mexico/consumer-spending

Figure 6: FDI Growth in Mexico

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http://www.indexmundi.com/facts/mexico/foreign-direct-investment

Bibliography
1. Sullivan, Daniel P., Lee H. Radebaugh and John D. Daniels. International Business: Environments and Operations. 14. Upper Saddle River: Pearson Education, Inc., 2013. 2. Aperian Global. Frequently Asked Questions. 2013. 3 October 2013 <http://www.aperianglobal.com/web/globesmart/>. 3. Hofstede, Geert. Cultures Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations. Second Edition, Thousand Oaks CA: Sage Publications, 2001 4. Li, Hao. Doing Business in Mexico: Culture Differences to Watch For. 20 February 2012. 28 September 2013 <http://www.ibtimes.com/doing-business-mexicoculture-differences-watch-413594>.

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Central Intelligence Agency. The World Factbook: Mexico. 10 September 2013. 1 October 2013 <https://www.cia.gov/library/publications/the-worldfactbook/geos/mx.html>.

6. Buchanan, Kelly. The History of the Mexican Constitution. 24 February 2011. Library of Congress. 6 October 2013 <http://blogs.loc.gov/law/2011/02/the-history-of-themexican-constitution/>. 7. Freedom House. Freedom in the World: Mexico. 2013. 7 October 2013 <http://www.freedomhouse.org/report/freedom-world/2013/mexico >. 8. McKervey, Clayton. "Doing Business in Mexico." PKF International. October 2013 <http://www.claytonmckervey.com/attach/doing-business-in-mexico.pdf>. 9. The World Bank. Economy Rankings. 2013. 7 October 2013 <http://doingbusiness.org/rankings>. 10. World Savvy Organization. "Mexico." The World Savvy Monitor. Issue 10. August 2009. 11. Americans for Tax Reform Foundation. International Property Rights Index 2013. 2013. <http://www.internationalpropertyrightsindex.org/profile?location=Mexico>. 12. Euromonitor International. Business Environment: Mexico. 12 March 2012. 6 October 2013 <http://blog.euromonitor.com/2012/03/business-environment-mexico.html>. 13. Barstow, David. "Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle." The New York Times 22 April 2012: A1. 14. Walmart Stores Inc. Our Story. 2013. <http://corporate.walmart.com>. 15. PricewaterhouseCoopers. Doing Business in Mexico. 2011. 8 October 2013 <http://www.pwc.com/mx/es/publicaciones/archivo/2011-05-Doingbusiness.pdf >. 16. US Embassy. 2013. United States Department of State. 8 October 2013 <http://mexico.usembassy.gov/eng/ataglance/foreign-direct-investmentfdi.html.>.

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