Assessment of Wal-Mart's International Expansion Strategy - Essay Example

? Assessment of Wal-Mart’s international expansion strategy BY YOU YOUR SCHOOL DATA HERE HERE Assessment of Wal-Mart’s international expansion strategy Introduction Wal-Mart maintains dual modes of entry for establishing an international presence. This multi-national retailer is currently the largest retailer in the world and much of this revenue growth stems from its strategic planning regarding its methodology for market entry. Wal-Mart conducts considerable market research before deciding on a foreign entry strategy to determine which mode of entry will bring the most revenue and allow the organisation to build its brand in the local region. Wal-Mart operates in many different countries, however for the sake of analysis, this paper will concentrate on key markets in China, Japan, Germany, South Africa and India. These locations where Wal-Mart has a well-established or newly-established presence were the product of joint ventures, foreign direct investment for wholly-owned Wal-Mart cash and carry stores, and through intense acquisition strategies. Wal-Mart in China Wal-Mart chose an export-led growth strategy in China as well as foreign direct investment for wholly-owned Wal-Mart stores. One of the main reasons for selecting this particular entry strategy is the difference in currency value between the Yuan and the U.S. Dollar, especially at the time of market entry in the 1990s before China became its current industrialized entity. Chinese domestic firms, additionally, have significant credit restraints for business development that restricts international trade activities (Manova, Wei and Zhang 2010). Limited credit availability gives Wal-Mart a significant advantage as it can procure capital from its domestic operational environment (i.e. The United States) to perform expansion, improve operations, and also ensure better procurement of international goods for sale in China. Limited credit availability in China gives Wal-Mart a significant competitive advantage as research data shows that exporting or foreign-owned businesses perform better than domestic Chinese firms (Manova, et al). Having access to more capital and credit gives Wal-Mart the ability to set lower prices as a means to outperform domestic firms operating in the same sales industry as Wal-Mart in China. Further, Chinese consumers are extremely price sensitive and a recent survey indicated that Chinese consumers consider pricing above all other factors when buying merchandise (Suessmuth-Dyckerhoff, Hexter and St-Maurice 2008). Chinese consumer willingness to defect to another brand is significant when prices rise by a mere five percent (Suessmuth-Dyckerhoff, et al). Wal-Mart is a well-established promotional leader in the United States and other Westernized countries, thus it has an immediate advantage in talent expertise upon entry into a foreign market. Coupled with price-sensitive buyers, Wal-Mart can simply transfer its existing everyday-low-price model directly in the new region without significant costs of redesigning organisational structure or service delivery design. Long-run operational cost reduction is the methodology for entering China under direct investment in wholly-owned businesses due to environmental and social conditions in this country. Additionally, Chinese consumers learn a great deal about Western culture through media exposure and their personal travels which has led to a great demand for Western brands (Emmons 2002). This determined the export-led strategy for taking domestic product and flooding it into the Chinese market based on social demographic characteristics of the Chinese consumer. The high Chinese demand for U.S.-produced products is also supported by a vast global infrastructure for procurement needs, thus satisfying budget related to the supply chain. Furthermore, the political environment in China is growing ever-more favourable for foreign direct investment, such as reducing the tariff rates associated with foreign exports (Carbaugh 2009). Governmental restrictions and supplemental taxation rates that existed during the traditionalist government regime made Chinese exporting or foreign direct investment uninviting for the MNC. The transitioning government to a more democratic and capitalistic system provides the incentives for direct entry and the export-led strategy as it relates to cost and relationships with political regimes that can impact licensing fees and other operational aspects. Wal-Mart in Germany Wal-Mart chose an aggressive acquisition entry strategy in Germany, based on limited competition in the foods sector and also minimal competition in fashion and home goods retailing. Wal-Mart acquired nearly 100 hypermarkets in less than a year, renaming them all to carry the Wal-Mart brand name (Towers 2004). Wal-Mart maintains an international procurement model for all of its grocery products, rather than absorbing the costs of localisation according to unique consumer tastes and preferences. Germany sits amidst a vast European infrastructure of ground transportation that minimizes the costs associated with supply chain. From an operational perspective, Germany’s limited competition and access to tight supply networks provided excellent opportunity for market entry. The German culture is has a short-term orientation under Hofstede’s cultural dimensions framework, meaning that they value strongly the fulfilment of social obligations, rather than thrift (Hofstede 2011). Wal-Mart is renowned for its corporate social responsibility and the culture of teamwork and unity that exists within the organisational structure and management systems. Wal-Mart believed that the organisation would be able to establish a brand quickly based on the congruency between its corporate philosophy and that of the German people related to their social close-knit propensities. This determined the market entry strategy of acquisition as it was determined by executive leadership that it would not take long to build a brand after acquiring existing hypermarkets. Largely, it was anticipation of long-run promotional and branding success under the marketing model that determined method of entry in this country. Additionally, in Germany, due to its vast infrastructure for distribution and procurement and access to foods producers, acquisition was the most logical entry strategy. Under Porter’s Five Forces model, in regions where there are many suppliers, it weakens their power on the supply market (Porter 2011). Suppliers have less negotiation leverage for pricing and supply scheduling simply due to the high volume of supplier competition. Since suppliers are then reliant on Wal-Mart’s financial profitability, it gives the business more flexibility in gaining control over suppliers and thus reduces costs in the short- and long-term. Wal-Mart in South Africa Wal-Mart determined that acquisition would be the most appropriate entry strategy in South Africa, a country that is only in the earliest stages of industrial and consumerism development. Wal-Mart purchased a majority stake in a retail centre known as Massmart Holdings as a means to give the business its first foothold in a country that maintains very limited competition in virtually all product categories (Bustillo 2011). The South African currency is significantly deflated against Western currency values, thus providing further incentive for this market entry strategy. By saving the costs associated with operations for establishing a wholly-owned cash-and-carry business, the organisation maintains more capital for further expansion into other African nations over time. The everyday low pricing model that supports the majority of Wal-Mart’s pricing structures is ideal for a nation that faces ongoing problems with economic growth and where consumers have limited discretionary income. This region is dominated by small-scale mom-and-pop variety retailers and still supports street vendor philosophy for the majority of its domestically-grown merchandise. By acquiring Massmart Holdings, the business saved costs and also established a foundation for building its brand using existing talent and facilities so the firm could concentrate its capital on branding and marketing. Wal-Mart in Japan Wal-Mart determined that wholly-owned direct investment in Wal-Mart store development was the most appropriate market entry strategy for Japan. Japan maintains very densely populated urban regions that provide the organisation with a very high volume mass market for revenue growth (Financial Times 2008). Consumers in Japan are also very brand-conscious like many Western consumers and therefore Wal-Mart did not have to adjust its procurement model to satisfy these consumers. It was a long-run advantage in terms of utilising its existing procurement model without reliance on foreign facilities for cost-savings associated with development fees for facilities management and construction. When Wal-Mart entered the Japanese market, it was still, by some definitions, considered a developing market. The Japanese currency was in a state of growth based on export-led growth patterns and the revenues associated with infrastructure development to support domestic business growth. This gave Wal-Mart a significant pricing advantage over domestic Japanese retailers due to issues of inflation and limited credit availability. Today, however, the Japanese currency is showing signs of deflation, which is driving down the costs of domestically-produced merchandise (Inagaki 2009). This is limited Wal-Mart’s price advantages under its everyday low pricing model. However, again, at the time of market entry, the most significant advantage for a wholly-owned foreign direct investment of cash and carry business models was the currency advantages it was experiencing. Japanese consumers still hold onto their traditionalist, collectivist values associated with family and group welfare. Collectivist consumers view themselves from a family perspective and value group affiliation (Blodgett, Bakir and Rose 2008). Wal-Mart recognised an opportunity for long-term orientation with the Japanese buyer by transferring its existing business model into Japan since there was congruency in values and attitude associated with the Wal-Mart corporate philosophy. Rather than absorbing the costs associated with rebranding under acquisition over the short-term, direct investment into wholly-owned business development represented a strategic focus for long-term growth and facility asset production with limited depreciation of new building retail centres. Wal-Mart in India India has been one of the most complex potential market entry strategies for Wal-Mart due to the political system that restricts foreign business entry. India supports legislation that restricts market entry of foreign-owned business that carry multiple brands of merchandise (Bowers 2007). They are not allowed to create direct facilities if they fit this business model, which Wal-Mart supports for multi-branded merchandise selection. However, despite these restrictions imposed by the political system, Wal-Mart viewed India as an excellent opportunity for market entry. This is due to limited retail competition in this market and growth in consumer discretionary income created by better educational systems and jobs development. Wal-Mart found a method of skirt these legislations by creating a joint venture with Bharti Enterprises, an Indian telecom company (Bowers). Wal-Mart holds a 50 percent stake in Bharti and provides merchandise to Indian consumers under the brand Bharti Wal-Mart Private, Ltd (Bowers). This entry methodology was an effort to find a proverbial back door against existing regulations on multi-branded retailers in order to gain a long-term brand reputation in the country while it attempts to lobby for the right to develop wholly-owned Wal-Mart stores in India. Under this entry strategy, Bharti Wal-Mart Private Ltd. maintains facilities that carry only one brand, including clothing, grocery, stationary and consumer durables (Yee 2007). If the company is successful in lobbying for loosened governmental regulations, the organisation intends to open wholly-owned multi-branding Wal-Mart facilities and establish a corporate social responsibility approach in India. According to Vice Chairman Mike Duke, a leader with Wal-Mart International, “Through wholesale cash and carry, we will drive efficiencies across the supply chain and work toward the betterment of farmers, small manufacturers, and in line with our global vision of saving people money so they can live better” (Bowers 2007: 3). Limited competition and growing consumerism will transform its market presence over time if the political systems allow for direct foreign investment by Wal-Mart. Market entry in India under joint ventures also satisfied costs of new facilities development which allows the organisation to devote more capital to improving procurement to fits local tastes. Indian consumers maintain different eating preferences and fashion expectations than other Western consumers, thus forcing a change to its procurement model associated with foreign imports into India. The joint venture as a cost savings effort is supported by growth in the waterway transport systems in India as a means to procure merchandise at lower fees. In 2008, India developed its first major port that supports corporate merchandise movement and is supported by the Union government (Port Strategy 2008). This dedicated terminal allows for localized procurement of Asian merchandise without reliance on air transport systems or other costly procurement systems. Better infrastructure for local procurement, always costlier than procurement under the international supply model, supported the joint venture strategy. In the long-run, India’s new port developments give Wal-Mart opportunities for further expansion into other Asian regions where localized procurement strategies will be necessary to satisfy diverse consumers in apparel, home goods and agriculture. Wal-Mart could not choose an acquisition strategy in India since the majority of retailers that operate in the same product categories make up only five percent of the total retail market share in India (Boyle 2009). There simply are very few large-scale competitors in this region, even if the regulatory environment allowed for direct foreign investment and facilities management of the Wal-Mart model. Wal-Mart, with Bharti, also established Best Price Modern Wholesale that gained 30,000 members immediately upon entry with the joint venture concept (Boyle). Thus, this is an indicator that Indian consumers would value a one-stop shopping experience if the government allows for future Wal-Mart stores development. Export-led growth and acquisition costs Export market entry into a country without foreign direct investment also gives Wal-Mart an opportunity to observe the cultural reaction to its brand without absorbing the costs of wholly-owned Wal-Mart facilities. Wal-Mart conducts considerable market research before choosing an entry strategy, weighing the potential consumer-related gains with their accounting systems. Wal-Mart imports $600 million USD in goods each year from India for sale in domestic and foreign markets (Bowers). Thus, Wal-Mart already maintains a brand presence in India (even before recent market entry) that impacts the supply relationships and allows for Wal-Mart to test its branding strategies to witness whether consumers will prefer Wal-Mart or recognise its philosophy prior to market entry. The costs associated with acquisitions and new facilities development are substantial for foreign direct investment, thus gaining a foothold through export-led growth is one method of ensuring that direct investment will sustain the business over the long-term. Wal-Mart seems to prefer the direct investment approach, whether an early or late mover, as it provides tangible assets especially in an environment where barriers to exit are high due to financial costs. Wal-Mart has a well-established international brand that rests not only on its corporate philosophy and pricing structure, but in the tangible facility assets and aesthetics associated with the store development concept. Development of new construction illustrates modernism in the foreign environment, especially in regions that maintain retail structures that are rather antiquated, such as India and South Africa. Rather than absorbing the costs of revamping the interior and exterior of existing facilities to bear the Wal-Mart image, direct investment entry strategies are in-line with total brand concept. In China, as one example, Wal-Mart competes with similarly large competition such as Tesco. China is a market that is saturated with multi-branding retailers and one where competitive rivalry in marketing and pricing is extensive. Tesco, in order to compete effectively, must localize its grocery offerings based on local customs. In South Korea, Tesco customers demand pickled cabbage, fresh fish and squid, as well as local produce not found in other international regions (Felsted 2010). This is similarly true in China and other Asian countries. Thus, market entry in these countries represents very long-term commitments associated with adjustment of procurement and gaining brand-building relationships with consumers; over that of just pricing competition. Since such investments are long-term orientation for Wal-Mart, it makes sense to develop wholly-owned Wal-Mart facilities for liquidity purposes as well as modernism branding principles associated with the company. Though other strategies are favourable, the resale value of existing facilities is one dimension that makes this business apparently favour this direct foreign investment. Conclusion Wal-Mart operates differently in China, Japan, Germany, South Africa and India depending on the political forces driving market entry decisions, the consumer attitudes in the region as well as long-run strategic intention for asset development. Cost reduction associated with supply chain and infrastructure, a logistical decision modeled against value chain expectations, drives the method of entry for this multi-national. Whether export-led entry, direct investment, joint ventures or acquisitions, Wal-Mart seems to understand the complexities of entering a new market and prepares the internal and external systems in advance to support mode of entry decision-making for better cost recognition. In regions where Wal-Mart can maintain its existing marketing and procurement models due to distribution infrastructure availability, the organisation seems to favour direct foreign investment entry strategies as long-term orientation. Where such infrastructures are limited and where local consumer preferences drive procurement, joint ventures or acquisitions better support cost leadership. Whatever the mode of entry, Wal-Mart is a leader in establishing a market entry strategy that continues to build profitability and satisfy diverse international consumers. References Blodgett, J., Bakir, A. and Rose, G. (2008) A test of the validity of Hofstede’s cultural framework, The Journal of Consumer Marketing 25(6), 339. Bowers, K. (2007) Wal-Mart inks deal for India venture: women’s wear daily, WWD 194(27), 3. Boyle, M. (2009) [internet] Wal-Mart’s painful lessons, p.4 [accessed November 10, 2011 at http://csumba.org/mba602/2010-Spr/Walmart%27s%20Global%20Strategy.pdf] Bustillo, M. 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