The US Retailing Industry: Wal-Mart - Essay Example

? International business (Case Analysis- Wal-Mart) Contents How attractive was the discount retailing industry in the USA when Wal-Mart first began operations in the 1950s. 3 With reference to the key components of its Business Model, describe the sources of Wal-Mart’s competitive advantage in the USA. 6 How sustainable is Wal-Mart’s competitive advantage in discount retailing in the USA 9 With reference to Dunning’s Eclectic Paradigm of foreign direct Investment (FDI), compare and contrast Wal-Mart’s entry into the German market in 1997 with its subsequent entry into the UK market in 1999. Why was Wal-Mart unsuccessful in Germany, withdrawing in 2006, and relatively successful in the UK? 12 Reference 16 How attractive was the discount retailing industry in the USA when Wal-Mart first began operations in the 1950s. The US retail industry has considerably changed over the few decades due to two related trends, one being the discount retailing and second factor is the increasing prevalence of the large retail chains. The discounting retailing sector is controlled by chains. The concept is fairly new and the first discount store appeared in the 1950s. Discount retailing is one of the most dynamic sectors in the retail industry. Until 1990s two important retail chains were Wal-Mart and Kmart (Jia, 2007, p. 5). The retailing industry is known to be the second largest industry across the globe with respect to total number of establishment as well as total number of employees. The retail industry generates about $3.8trillion annually. The top five retail industry operating across the world are Wal-Mart, Target, Home Depot, Costco and Kroger. Wal-Mart apart from being the largest retailer globally is also the largest company and generates approximately $256billion sales annually. In discount retailing industry the two main competitors are Wal-Mart and Target. In order to determine the attractiveness of the discount retailing industry in USA, Porters five forces can be used. According to Porter, competition in industries usually depends on five competitive forces shown below in Figure 1, Figure 1: Porters Five force for Discounting Retail Industry Bargaining power of Supplier: The bargaining power of supplier is said to be low as there are few suppliers who are unique and thus the retailers have to work against their speculation. With regards to Wal-Mart, suppliers who do not maintain or live up to the expectation of Wal-Mart point of system are thus replaced. Wal-Mart being a big brand and is powerful enough to make the suppliers recognise the fact and the situation when they do good business and thus can very conveniently switch suppliers at its convenience when they do not perform the work as expected. The suppliers also cannot afford to lose on the big brands, the key players and hence the supplier power tends to be low. As shown above the bargaining powers of customer are relative high as discount retail purchase can be substitutable and thus consumers has the power to go between the competitors depicting a high bargaining power. The switching cost involved in shifting from one competitor to another is also low and the consumers demand for high quality products at discount price. It is important to understand that consumer as individual does not have bargaining power with the retail stores but as a group consumers can demand a higher quality product at low price. Consumers are also price sensitive as a result the suppliers need to keep the price low to succeed indicating high customer power. Threat of new entrant is particularly low in the discount retailing industry as there exist a high barrier to enter the discounted retail industry with respect to investors, capital and competition. The huge capital required by a new entrant to compete with all the established retailers will take a longer time and establish them in the retail market. Although the switching cost is low for the consumers but brand loyalty towards a particular brand are relatively high and consumer would not like to shift towards a new brand against established brands like Wal-Mart. Thus new entrants need to establish competencies in price and lure the customers into the stores competing with the key players. The threat of substitute is mainly high because a wide range of products exists with all the key players which lead to likelihood of finding new products with the competitors. Retailers usually compete in areas of marketing, pricing, quality, and service and product quantity and their ability to compete with new technology. Rivalry among the competitors is high with growth in retail industry led to various numbers of emerging discount stores leading to intense competition among the retail stores. High cost which needed to run discounted retail store lead to economies of scale and Wal-Mart earned it by building its own distribution centre (Golberg, et al, 2005, p. 2). Therefore analysing the Porters five force framework, it can be concluded that the discount retailing industry was not attractive for the new comers who had the potential to succeed but was highly attractive for the established players like Wal-Mart and was one of the reason contributing towards the success of Wal-Mart as the biggest discount stores in US. With low threat of potentials entrant, the entrance barriers were high making the industry attractive mainly for the established players and ruling out the new comes and Wal-Mart was one of the first companies to introduce discount retailing stores. Thus it can be said that the US discount retailing industry was attractive for Wal-Mart and it has been able to establish itself in the US market. With reference to the key components of its Business Model, describe the sources of Wal-Mart’s competitive advantage in the USA. Wal-Mart is the leader in retailing industry and has delivered net sales in its operating segment n also delivered a strong return to its shareholders through dividends. Wal-Mart earnings in 2012 accounted to $15.8billion; net sales amounted to $443.9billion and consolidated operating income increased by 4% and amounted to $26.6billion (Wal-Mart, 2012). The strategy adopted by Wal-Mart can be said to be distinctive which manages as well manages retail outlets all over the global. A high contributing factor is the value chain of Wal-Mart which aims to offer cheap prices as compared to its competitors. It is learnt that the management often visits and meeting takes place every Saturday. Human resource of Wal-Mart is also an ad on factor to its value chain and act as key components in the business model. Wal-Mart has grown significantly in the US market because of the fact it was able to connect symbolically with the ideologies of the American population. Wal-Mart is thus assumed to concentrate on sale in the short run. Also with its concept of everyday low price it was catapulted in the category of leading grocery chain in US and also in international markets. Therefore the key components of Wal-Mart business model which act as competitive advantage in the US are as follows, Value proposition: the value proposition of Wal-Mart is based primarily on the concept of EDLP which is Everyday Low Pricing which forms the core in the business model of Wal-Mart. This value proposition implies that customer do not have to wait for sales in order to have the best possible deal an also with regards to convenience a wide range of product and services are made available to chose from with one stop shopping solution ranging from grocery to clothing to pharmacy. This allows the customers of Wal-Mart to save time as well as money and act as a source of competitive advantage for Wal-Mart in US (Li, 2011). Distribution Channel: Wal-Mart reaches and communicates with its customers through its own distribution channel and thus enjoys higher margins. Wal-Mart also interacts with its customers through mass media along with various other means bearing low cost such as internet (Li, 2011). Customer relationship and customer segment: Wal-Mart customer relationship revolves around the concept of self service and co creation as well as automated service for some of the products. The retail giant reaches its target customer through mass customization. Wal-Mart has targeted three main groups, firstly people who are “brand aspirations” who are customers with low income group but are brand conscious and second segment are the “price sensitive effluents” who love deals and finally the “value price shoppers” who are price sensitive and cannot afford high price (Barbaro, 2007). Key activities: The key activities which Wal-Mart includes in is business model and which cats a competitive advantage for the retail giant includes purchasing goods, delivery and finally the total cost control. In addition to the above core activities of Wal-Mart, other related activities are to create products according to the needs of the target customer’s demand and to control the brand. Wal-Mart also has a technology edge which helps it to move products from one place to another efficiently and quickly while keeping the cost down adding on to the sources for its competitive advantage in the US market (Li, 2011). Key resources: Key resources of Wal-Mart business model are physical resources owned by the company, second is human resources of Wal-Mart which tends to hire experienced managers as well as store managers to assist the customers and culture of the company which is based on restless effort for self improvement, loyalty and discipline in the long run (Fishman, 2006). Key partnership: The suppliers form a close relationship with Wal-Mart and forms part in the value chain and provide opportunity to access to large markets. However the suppliers associated with Wal-Mart are to keep the price to a minimum cost providing Wal-Mart with an edge to control the business and negotiate price and in turn creates economies of scale. Cost Structure: The cost structure adopted by Wal-Mart is based on cost driven model as the retail company aims to minimize the cost and is characterized through economies of scale. Expansion of Wal-Mart has thus allowed it to further benefit from economies of scale adding to the list of sources of competitive advantage. The economies of scale at chain and stores have strengthened the advantage for Wal-Mart (Li, 2011). Thus based on the key components of the business model it can be said that the business model is based on the strategy of cost leadership. Using the framework of Chesbrough’s business model (Chesbrough, 2007), the business model of Wal-Mart can be referred to as adapt platform. Wal-Mart is committed towards experimentation and the key suppliers of the company are the business partners sharing all the business and technical risk associated with the business. The size and the economies of scale which Wal-Mart enjoys were the main sources of competitive advantage for the retail outlet operating in the US market. How sustainable is Wal-Mart’s competitive advantage in discount retailing in the USA As stated above the sources of competitive advantage of Wal-Mart which are derived from the business model adopted by the company to achieve success. The main competitive advantage of the firm is cost leadership strategy for which Wal-Mart has adopted a concept called EDLP, Everyday Low Price. This concept is high sustainable because Wal-Mart target market desires this type of pricing strategy and has been discussed above. The business model of Wal-Mart itself acts as competitive advantage. It is said that a firm tends to possess sustainable competitive advantage when it owns value creating process and thus position it and cannot be imitated or duplicated by its competitors (Oluwole, 2012). Wal-Mart is the leader in discount retail industry and has developed it to be leader in everyday low price adding to its competitive advantage along with its distinctive business practices. The value pricing structure of Wal-Mart is not the only factor that provides it with sustainable competitive advantage their distribution infrastructures is efficient and advanced and because of it they are able to charge low price as compared to its competitors. Wal-Mart was the first to establish in the US market and as a result the strategic choice made by the company gave it first mover advantage. Wal-Mart strategically had placed the stores within the proximity of the distribution centres as a result Wal-Mart was able to keep their inventory cost at a minimal cost. The distribution network of Wal-Mart is based on the concept of hub and spoke, where the company do not places stores nearby locations from the distribution centre and thus can replace the goods within 24 hours (Williams, 2010, p. 661). As per Porter, operational efficiency and effectiveness are the key elements for success in any organisation. An organisation will have the potential and competency to outperform its competitors with superior management and also with efficient control. According to a study it was revealed that Wal-Mart manipulates perception of the target customers. Low price of Wal-Mart is not a strategy but the advertisements displayed by it tend to manipulate the perception of the customers by forcing them to think that the prices charged are lower than its competitor’s price. Wal-Mart thus makes the consumer addicted in visiting the store by convincing the customers that the prices are less by selling themselves cheaper by way of advertising and convincing them that the price offered are less than its competitors. The opening price of the retail store is kept at the lowest that makes the consumer believe that the products are offered at a low price (Mitchell, 2007, p. 131). Wal-Mart just in time inventory practise can also be regarded as sustainable competitive advantage as it allows the company to avoid storing inventory which are not required at a given time. Wal-Mart has a network with about 7800 stores and employs about 2million employees and serves 100 million customers on an everyday basis. As per Fishman (2006), Americans tends to spend about $26million every hour in Wal-Mart which indicates the financial strength of it and is able to combat threats arising from the competitors (Article base, 2009). With its sustainable competitive advantage Wal-Mart has been able to make a mark in the discount retailing industry and is one of the tough competitors. Wal-Mart is leader in low price and has maintained it to be since its inception adding it to its competitive advantage which can be said to be sustainable as till date it follows the low pricing strategy. Wal-Mart focuses on sustainability act as an evolution for values created by the company. It is the recognition which believes in serving the customers that goes beyond providing a high quality but with low cost and does in a responsible and sustainable way. Thus the above factor has contributed towards attaining a sustainable competitive advantage in the US market. It can be said that the most important and essential aspect of sustainability of Wal-Mart strategy is its willingness to address the system change in a practical way. Wal-Mart pioneering approach towards sustainability has all the potential to lead in future the sustainable movement towards a new level. Therefore by improving the business, operation, business networks and by addressing systematic issues the company has implemented sustainable strategy which has the potential to achieve sustainability in the current market environment (Dixon, 2006, p. 6). Wal-Mart core competency is delivering products at the lowest possible price and the business strategy is well aligned with the advantage which is based on cost leadership strategy. The business model also supports the strategy and the elements are also used to improve effectiveness and performance. Wal-Mart success is based on every activity associated with the business model but it has not always proved to be successful such as in Germany. The sustainability of the business model of Wal-Mart depends on the ability to adapt in the changing situation and continuously satisfying the needs and demands of the customers. This strategy has helped Wal-Mart to become a successful brand in US and other international markets. With reference to Dunning’s Eclectic Paradigm of foreign direct Investment (FDI), compare and contrast Wal-Mart’s entry into the German market in 1997 with its subsequent entry into the UK market in 1999. Why was Wal-Mart unsuccessful in Germany, withdrawing in 2006, and relatively successful in the UK? In the theory of Eclectic Paradigm of foreign direct investment, John Dunning suggested three advantages which usually motivate firm to invest overseas. The three advantages are ownership-specific, internationalisation specific and location specific. Wal-Mart entry in German market and in UK market will be determined with the help of the theory of Dunning. According to Dunning theory of Eclectic Paradigm ownership specific advantage refers to those advantages which arises from possession which the company makes and are not made available to the competitors. The advantage can be either transaction based or assets based. Location advantage tends to describe attractiveness of foreign country with respect to retailer and is groped as push and pulls factors where push factors make it less attractive and pull factors make the target location much more attractive. Internationalization advantages are those which company can obtain from internalizing goods and services instead of exporting or licensing (Ungson & Wong, 2008, p. 150). Wal-Mart entered the European market in the year 1997 through Germany by acquiring the brand 74 Spar Handel stores and 21 Wertkauf which was changed as Wal-Mart superstores. In 1999, Wal-Mart further entered UK by means of acquisition of 219 outlets of Asda. Wal-Mart aimed to attain the top market position in the world through its winning formula EDLP which is everyday low price, organisational culture, and high customer service along with efficient operations. This section aims to discuss the performance of Wal-Mart in Europe and in UK and in order to compare and contract entry of Wal-Mart in Germany and UK both the countries need to be analysed. Analysing the German market, it is renowned for its minimal profit margins along with strong competition from the local brands. Wal-Mart entered the German market by acquiring two retail chains which accounted for only 3% of the total retail market. The leading retailer in Germany was Metro group and second was Rewe Group and captured about 30% of the market share along with other retailers accounted in top 10 positions (Jui, 2011). Wal-Mart entered Germany when the grocery market was experiencing saturated growth rate and the top retailers dominated the fragmented grocery landscape. The leading retailer was Edeka followed by Rewe and Metro and other two discount retailers Lidl and Aldi. When Wal-Mart entered the German retail market it managed to acquire 13th place with merely 1.5% of market share. The strategy adopted by Wal-Mart in Germany was to upgrade the portfolio of the store, incorporate high quality of customer services towards the EDLP strategy and act as market spoiler. In contrast, acquisition of Asda by Wal-Mart which was one of the big groceries in UK did mean an initial success for Wal-Mart. The marketing strategy, organisational culture and operation were regarded as strategic fit and thus the strategy of Wal-Mart was to build on to the existing similarities. The EDLP approach of Wal-Mart was successful and Asda was able to achieve impressive market share over its rivals such as Safeway and Sainsbury (Pioch et al, 2008, p. 209). According to Dunning, a firm plans for expansion in order to achieve any of the three kind of advantage. German market at the time when Wal-Mart entered, it was experiencing an oligopolistic market structure where the top five retailers were accounting for 63% of the market share. The profits earned were also less accounting to only 0.8% sales in Germany and can be said that the retail industry in Germany was the least profitable. Returns in the food segment were at 0.5% of the total earnings as compared to 5% in UK and about 3.5% in France. Instead of the then prevailing business market in Germany, Wal-Mart decided to enter the market and hence failed to acquire the desired position in German retail market. Wal-Mart entered the German market through the acquisition strategy out of the two retail firms it acquired Spar was the weakest in German market mainly due to run down stores, heterogeneous size and format and less attractive location which tends to be an important factor for encouraging FDI investment into foreign countries (Knorr & Arndt, 2003, p. 22). Strategically, Wal-Mart found it hard to flex its muscles in the German working environment. The shopping hours in German were short so the retail giant did not have the option to offer 24 hour shopping facility and had to keep close on Sunday. Wal-Mart faced a stiff competition from Lidl and Aldi the two discounting retailers operating in Germany. In addition the culture of German was also different from that of US. Wal-Mart had appointed American boss for the Germans and hence failed to connect with the customers as well as employees. Wal-Mart 95 stores failed to match up with Aldi with respect to convenience and the price difference between the two were less to motivate the customers to shop from Wal-Mart (Needle, 2010, p. 160). The main reason for its failure was that it tried to apply the proven success formula of US in Germany which turned out to be failure for the largest global retailer. However in contrast to it, expansion in the UK market was a success primarily because the culture of UK and US were almost same and the customers were able to relate with it. Wal-Mart in Europe adopted customer oriented organisational culture which was very close with the way Americans looked at its employees and customers. Wal-Mart while making expansion plans in UK evaluated the condition so that it did not have to face failure as in Germany. The legal system and the rules and regulations were compiled by Wal-Mart as European countries tends to have different regulations and rules which were highly relevant to the retailers which concerned some of the social issues and also external shopping areas. In German the restrictive opening hours made it difficult for Wal-Mart but could have been anticipated if the retailer had build string macro level of network in Germany. Wal-Mart tries to used its US strategy with respect to distribution and logistics where the suppliers had to delivery to the distribution canters instead of stores, which kind of worked well in UK but was difficult to implement it on German who were used to delivering in the stores. Wal-Mart entered the new markets with an ambition to learn about the customers and thus introduce new philosophy and concept and thus has acquired companies to enter the German and UK market and shape them accordingly. As a result acquisition of Asda in UK was a success as Asda had similar strategic approach as that of Wal-Mart in addition to developed system for distribution, information and logistic along with management philosophy and organisational culture which corresponded well with Wal-Mart (Ghauri, Elg & Sinkovics, n.d. p. 19-21). Therefore it can be concluded that Wal-Mart entry in Germany and UK both through means of acquisition strategy resulted in success for one and failure for the other. 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