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Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronictextbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible viapaper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the manywho cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us atdrexel@uga.edu and dcwill@cnx.org.
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA)
Reviewer: Bettina Cornwell (University of Michigan, USA)
In general, a product fails when it does not meet the objectives that were established by the sponsoring organization. Failure rates vary by industry. For instance, failure rates for new packaged goods range from 75 per cent to 90 per cent (catalinamarketing.com). When considering “innovative” new products, Gourville (2005) estimates that approximately half of all such products fail. It often costs more to launch an innovation nationally than to develop the good or service in the first place.
In the following section, we describe Wal-Mart’s failure as it tried to enter the German market. Our purpose is to use this one example to illustrate key reasons that new products fail and subsequently must be deleted. See Table 4 for a listing of major reasons that cause products to be deleted. Table 4 includes a description of 13 reasons that products fail. Note that the Wal-Mart experience in Germany provides concrete examples for 10 of these key reasons. In the table, the reasons for product deletion are divided into 5 groups: (a) Market Structure (MS); (b) Business Model (BM); (c) Culture (C); (d) Politics/regulation (P): and (e) Product failure (PF). These same categories are highlighted in the sections which follow.
Wal-Mart is the biggest food retailer in the world and has a presence in several nations. In some nations (e.g. the US, Canada, China), Wal-Mart is a great success. However, Wal-Mart has failed in some countries (e.g. Germany, South Korea). First, we describe Wal-Mart’s failure in Europe’s largest economy. Second, we use Wal-Mart’s experiences in Germany to illustrate some key principles related to product failure and product deletion (see Table 4). Wal-Mart’s experiences are also an example of the importance to adapt to culture when starting a business in a new country.
The German grocery industry
There is fierce competition in the German grocery industry, due to the increasing number of discount supermarket chains (KPMG 2006). As a result, there is low profitability in the food retail sector; profit margins range from 0.5 per cent to 1 per cent which is one of the lowest profit margins in Europe (Frankfurter Rundschau 2007). By contrast, profit margins in Great Britain are 5 per cent, in this same sector. In particular, Metro is a tough competitor, and it already applies some of Wal-Mart’s successful strategies (e.g. related to economics of scale and low prices). Of course, Wal-Mart is interested in other metrics beyond profit (e.g. shareholder wealth, market share), but, as indicated above, profitability and margins are of key concern to retailers.
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