Wal-Mart - Essay Example

1. Wal-Mart started its international operation by entering the emerging markets. Its approach to emerging markets illustrates a link between globalization of markets and competitive strategy. A strategy is the actions that managers take to achieve their goals. Strategic management helps to understand and define the goals, vision, mission, objectives, roles and responsibilities of the organization. It is the application of strategic planning or thinking. The most important goal of any firm is to maximize shareholder value (Hill, p442). This requires strategic financing because it involves focus on increasing the profitability, and measuring the risks in fresh investments before any plans are executed. Wal-Mart initially started out in the United States in 1962 with the cost-leadership strategy, one of three generic strategies described by Porter (1979). Porter’s Generic strategies: Source: Mindtools (2010). Porter’s generic strategy provides a clear linkage between strategic management and strategic finance. Wal-Mart’s decisions had a clear linkage between strategy management and strategic finance. Whether the strategy is to maintain cost leadership or product differentiation, the ultimate strategy is to gain competitive advantage and enhance profitability. This has been demonstrated in the figure below: Wal-Mart focused on cost leadership and their low cost model served them well within the US but the same strategy did not help them in their international operations. In the US they had achieved organic growth but when they decided to expand their ventures overseas, they did not look beyond the low-cost model. According to Mintzberg (1987) a strategy must essentially have two characteristics – it is made in advance of the action undertaken and it must be devised purposefully and consciously. Wal-Mart did not follow this principle of strategic management which caused them to struggle and face losses in Mexico. Even when entering a foreign country, a firm needs to assess which markets to enter, the timing and the scale of entry (Hill, p488). Wal-Mart did none of these and merely tried to replicate the business model that had brought them success in the US. Another important factor when entering another country is the choice of entry mode which must be based on long-term growth and profit potential. There are four different modes of entries - exporting, contracts (licensing) joint ventures (JV) or wholly owned subsidiaries (WOS) and the choice depends upon the level of control required (Brouthers & Hennart, 2007). The level of control and technology risk is illustrated in the diagram below: Source: Osland, Taylor & Zou (2001). Dunning’s eclectic model or the OLI approach (ownership, location and internalization advantages) are taken into account to assess the entry mode decision (Agarwal & Ramaswami, 1992). Moreover, Porter’s Diamond of Determinants explains how a firm can internationally competitive within an industry. This is a complete assessment of the factor conditions including the human resources, infrastructure, the vibrancy of demand, domestic competition and the government support in providing the environment to operate. This is represented in the figure below: Source: Wonglimpiyarat (2006). Wal-Mart did enter Mexico in joint venture with the largest retailer but competition being intense, they did not succeed. They had not taken into account the poor infrastructure compared to the US; neither did consider the demand and local competition. When all attempts failed and when they realized that working environment in Mexico was entirely different to that of the US, they decided to change their strategy. This suggests that the strategy depends on the firm size, the products, the national culture, their lifestyle and the purchasing power of the people. Having incurred losses, Wal-Mart decided to change their partners and entered into partnership with a Mexican trucking company which dramatically improved their distribution system. Wal-Mart had to further change their strategy and customize their offerings before they achieved success in their goals and objectives. They managed to change the shopping habits of the Mexicans and retain profits for themselves. Strategic management implies devising long-term strategies but taking into account the risks involved. The risk factors include high uncertainty during the introduction stage. The demand conditions may differ because the markets have less predictable sales patterns; the emerging markets are not equipped with technology (Bauer, n.d.). Wal-Mart did not consider the financial risks involved in venturing overseas. They did not even formulate a strategy from the customers’ perspective about the prices, quality and other services. Neither were their internal procedures in order including the procurement and distribution This implies that elements of strategic management and strategic finance are interlined and both have to be simultaneously developed to be able to make strategic choices. This was just one example of Wal-Mart’s experience in Mexico but generally any strategic decision is made after evaluating the strengths, weaknesses, the oppurtunities and threats. In fact there are several important tools for strategic analysis that help the organization to arrive at a decision. When Wal-Mart utilized the strategic finance concepts, they could understand where they were going wrong and stall further losses. This then helped them to make strategic choices and change their operating pattern. This is strategic management of the situation and this has to be a continuous and an ongoing process. When Wal-Mart adopted a localized approach in Mexico, they could find the direction for growth and development. 2. With the Mexico experience, Wal-Mart felt it could compete anywhere outside the US and they then entered Canada, Great Britain, Germany, Japan, and South Korea. The mode of entry was through acquisition of the existing retailers and the introduced their own system of logistics and management expertise. However, they miserably failed in Germany and South Korea. Their low cost model did not fetch them the expected returns. Very low cost model comes with disadvantages as it may drive away loyal customers and the firm can start losing revenues (Porter, 1979). Korea has a large, affluent, educated consumer base, and is predominantly a buyer’s market rather than a seller’s market (Kostova, 2007). The Koreans buy in high volumes and more often and Wal-Mart strategy failed to attract the Korean shopper. Wal-Mart could not match the consumer preferences and the shopping habits in these two countries as the local retailers had been able to. Moreover, the low cost model did not work in these two countries because they were not attracted by the discount strategy of Wal-Mart. Consumers in these two countries preferred higher quality merchandise. Wal-Mart in these two countries had taken care of other factors such as transportation and merchandising but they did not have cross-cultural literacy (Hill, p88). They overlooked the fact that cultures are deep-seated and make a difference in how consumers in different regions perceive the same product. Culture according to Hofstede is “the collective programming of the mind which distinguishes the members of one group or category of people from another” (cited by Hope & Mühlemann, 2001). Societies develop a common set of beliefs and a set pattern of behaviour and this becomes deeply embedded into their system. Moreover, different cultures imply different mental programming, which governs activities, motivation and values (Hofstede 1984 cited by Gilbert & Tsao, 2001). Hence, a strategy successful in one country need not be successful in another. Pizam and Eliss (1999) further emphasise that national culture impacts perception problem-solving and cognition. This makes a difference in the satisfaction levels between global consumers on the same product. Moreover, the literacy level also impacts the performance evaluation standards. Since Wal-Mart failed to consider the culture across national borders, they were forced to withdraw from South Korea and Germany. Wal-Mart could succeed in China because the Chinese prefer the low cost strategy and are bargain hunters. Wal-Mart discovered the similarities in China with US and they found it easier to penetrate the Chinese market. An understanding of the local culture in China enabled them to change their business model in several ways. For instance, the operations strategy and the merchandising had to match the local culture. Wal-Mart realised that the Chinese want their food fresh. They do not like packed or frozen meat, which prompted Wal-Mart to display the fishes to enable the consumers to select what they want. Even in the management of human resources, Wal-Mart realised that national culture plays an important role. While Wal-Mart had been rigid in not allowing unions in the US, they had to give in to this policy in China. Wal-Mart realised that in China, the unions do not bargain for labour contracts; they function as an arm of the state and it is meant to collect funds for the political party. China has a culture of guanxi or relationships backed by reciprocal obligations. Wal-Mart realized that to do business in China, it was essential to adhere to these norms and beliefs. This is what urged them to allow unions in China. Lessons learnt Wal-Mart has realised that international operations cannot be the same as domestic operations. National differences in political, economical, social and legal systems influence the benefits, costs and risks associated with doing business in other countries. Culture plays a vital role in cross border operations and the cultural factor is what they had ignored even when they entered Mexico. Moreover, they also realised that the low cost model does not always work because that too depends upon the national culture and the culture in which an individual has grown up. 3. While Wal-Mart ensured that it entered markets that had a fragmented retail industry, dormant competitors and underserved consumers, or where traditional retail practices continued (Rocha & Dib, 2002), the company did face challenges in these markets. However, Wal-Mart’s strategy is considered aggressive by the local competitors in international markets. They have earned the reputation of destroying small businesses forcing the local retailers to reduce their prices resulting in losses. Thus, there is stiff resistance from the local retailers. While Wal-Mart has adopted the local tastes and carries on with its “everyday low prices”, even after three years it encounters challenges in the emerging markets of Brazil and Argentina. Competition being intense, they are unable to achieve the economies of scale (AMC, n.d.). They insist on doing things the “Wal-Mart way” which has alienated suppliers. They are unable to meet the specifications of Wal-Mart. Introducing computerized billing was another mistake in these emerging economies. Besides, global retailers also pose tough competition to Wal-Mart in international markets. Currently, Wal-Mart faces significant global competition from Carrefour of France, Ahold of Holland, and Tesco from the United Kingdom. Even though Wal-Mart entered in joint-venture in Brazil with Lojas Americanas, the largest discount store chain in the country, they faced several operational problems. The number of visitors was huge which forced them to have larger formats in Brazil. The Brazilians shop in huge quantities but want home delivery of goods and they purchase against credit card. Wal-Mart also faces challenges with relationships with suppliers. The Brazilian retail industry is oligopoly – a very small number of companies control almost two-thirds the market share and the bargaining power remains in the hands of the large manufacturers. Their low price model in Brazil backfired as suppliers refused to sell them products. Added to this were problems like irregularities of delivery and problems with inventory control. Carrefour has been the dominant retailer in both Brazil and Argentina. Wal-Mart had to face one of the toughest fights against Carrefour in Argentina specially when it came to dealing with the vendors. They also faced challenges such as changing the product range and the store formats. For instance, frozen food is monopolized by the retail kiosks and these are high margin items but Wal-Mart is unable to leverage benefit from them (Mammarella & Hisey, 1997). The customers do not want goods in multi-packs but in single units. The country lacks distribution structure and Wal-Mart had to educate the suppliers. Mitigating risks and challenges Thus challenges faced by Wal-Mart in its international operations range from aggressive competitors, to demanding customers, the local laws and regulations, lack of infra-structure and uneducated vendors. To overcome the challenges, Wal-Mart had to accept credit cards in Brazil or tie up with banks to offer finance against purchases. To reduce the antagonistic attitude towards Wal-Mart, the company should try to demonstrate advantages that other retailers could derive. For instance, in Brazil they introduced the modern retail formats which became an incentive to the traditional retailers to follow. In other words, Wal-Mart should make its entry a learning oppurtunity for the other retailers in that market, which can neutralize competitors’ reaction. Even in Argentina they had to change their product offerings and packaging to suit local demands. To mitigate the problems in dealing with the vendors, Wal-Mart sources it supplies from global companies such as Proctor & Gamble, GE appliances or Unilever Food Products. Because of its international reach, Wal-Mart can demand deeper discounts because its global suppliers have a base in the countries where Wal-Mart opens up. 4. Wal-Mart believes that their strategy of low prices has brought them competitive advantage. This strategy has generated revenues to the extent of US $13 billion in 2007 and in 2008 they open one new store every day (Knowledge@Wharton, 2009). Having gained confidence from their performance in Mexico and Brazil, Wal-Mart now plans to conquer the rest of America. Wal-Mart has made several mistakes, but they continue to thrive because they learn from their experiences and adapt or change accordingly (Mujtaba & Maxwell, 2007). Despite the challenges, Wal-Mart emerges as a truly global retailer. As far as customers are concerned, Wal-Mart identifies and fulfills the needs of each population. This demonstrates their customer centric approach. Competitors have been creating obstacles like lower prices, product monopolies, and loss of market share but Wal-Mart has been able to overcome all of these in the US. In the other markets like Germany and South Korea, they had to withdraw operations because of continued losses; in China they could not compete against the “Chinese mom-and-pop” stores with their cut-throat pricing (Mujtaba & Maxwell, 2007). Overall, they have been outperforming their competitors. They have been able to meet the force of demographic change through their multilingual marketing campaigns in Vancouver. They constantly upgrade their technology and they use the Just-in-Time inventory management system. Technology has enabled them to remain innovative in foreign markets. However, generating revenues is not the only factor in performance evaluation. While Wal-Mart ranked 10th on Forbes leading 2000 companies, and employs over one million people in the United States and another half a million globally (Mujtaba & Maxwell, 2007), it is certainly not the employer of choice. Even though they claim to have allowed unions in other countries, Wal-Mart has drawn the attention of Argentina law makers because of its anti-union practices and abusing workers’ rights (Trigona, 2007) and have been accused of discrimination against women in promotions and wages (Head, 2004). In a bid to remain competitive, they have destroyed communities, ruined the vendors, and exploited the workers. They have also been accused of running sweat shops across the globe. Even their stores are understaffed. While they have the best labour productivity records, their compensation level is barely above the poverty line (Ghemawat, Bradley & Mark, 2004). They face several class-action lawsuits apart from consumer pressure on other fronts as well. Their strategy of corporate takeovers in other countries has come under question. They even threaten small shops in countries where they do not operate. Their takeover of ASDA in the UK disturbed the retail sector. Specialist shops butchers and bakers are closing in the UK, while suicide amongst the farmers has become common (Rowell, 2003). Of late, Wal-Mart appears to have woken up to the consumer pressure for demonstrating their corporate social responsibility. They are now making an effort to move from being market leaders to environment leaders. Being ‘green’ is no more an element of politics but a viable corporate strategy to sustain competitive advantage (Payton, 2005). They are trying to save on energy, waste and products. Thus, the performance evaluation demonstrates that their HR practices and their vendor relations have only to squeeze profits for the benefit of the end consumers. These very consumers have risen against the company which speaks for itself whether Wal-Mart has achieved success. Success of an organization is not merely in generating profits but it also means to have a brand image, a reputation and be the employer of choice. Currently, Wal-Mart is far from being the employer of choice and its image is tarnished. Their low cost formula is not in the best interest of the society in which it operates. Performance indicator table (extracted from the above discussions): Strategy Performance Cost leadership – low prices Opened one new store everyday in 2008 Customer-centric approach Identifies and fulfills the needs of each population Multilingual marketing campaigns Enabled them to meet the force of demographic change in Vancouver Upgradation of technology Remain innovative in foreign markets Corporate Social Responsibility Environment leaders – saving on energy and waste 5. Strategic choice is the process of choosing from strategic alternatives (Fan, Nyland & Zhu, 2009). The western theories focus on global integration and local responsiveness to be considered in determining the strategy. Global integration helps MNCs to save costs and achieve global efficiencies. International Business Strategy (IBS) can range from global strategy, localization strategy, international strategy, to transnational strategy. In the global and transnational strategy global integration is high where as in the international and localisation strategy, local responsiveness is high. The international strategy suggests that the firm takes over whatever it does well in the domestic market over to the international market and attempts to repeat that success internationally. Wal-Mart wanted to replicate the business model in Mexico. While they succeeded in Mexico, Wal-Mart had to relent under local responsiveness in other countries. Its core competencies were its cost leadership and its logistics were very strong. However, cost leadership does not reap benefits in emerging economies (Baack & Boggs, 2008) because this strategy works when a large segment of price sensitive consumers demand the product. This does not exist in the emerging economies. Moreover, its strength in logistics did not work well either because in countries such as Mexico, the infrastructure was poor. Other competencies like supplier relationships and an efficient distribution system do not work in emerging economies. For instance, in South America, the emphasis had to be on high quality customer service. The customers were allowed to return the products if they did not want it. Their strategies in fact were invented on the spot. Even their strategy not to allow unions did not work in emerging economies. Thus the international strategy that Wal-Mart had initially aimed at, failed to provide the synergies and economies of scale. Transnational strategy on the other hand, combines the benefits of global scale with the advantages of local responsiveness. The performance is higher than the global or the international strategy. This strategy enables the firm to assign responsibilities in a way that it achieves the best of the global integration and local responsiveness. Wal-Mart is attempting to follow the transnational strategy but has failed to do so. They have been forced by circumstances to give in to local demands. Hence, even though its decision-making is centralized, it has to adopt local conditions to survive in the market. This has enabled them to make their purchase on a global scale but it is not always beneficial because each country has its own requirements and specifications. For instance, one country wants single-item packing and another does not want frozen meat. Thus Wal-Mart is not even able to derive the benefit of the transnational strategy. In each nation, Wal-Mart has had to adapt to local demands both at the suppliers’ level and the consumers’ level. This is in addition to adhering to the government regulations for that country. Even though their decision making can be centralized, localisation is the way forward for Wal-Mart. This can help them to maximise the firm’s competitive response and this strategy is the most beneficial when there are high pressures for local responsiveness. Wal-Mart has been facing pressure for local responsiveness in each country that it has entered and has been forced to give in. They had to agree to issues like allowing unions in Brazil and China, an idea to which they are rigidly against, in the United States. Transnational strategy makes no sense and Wal-Mart would fair better with the localization strategy. 6. When the US market started reaching the saturation point, Wal-Mart started expanding overseas (Kitlertphiroj, 2005). This was the vision that the international market would replace the US market. International operations were a part of their long-term strategy. Since 1992, when Wal-Mart began its international initiative, it has come a long way. Its international sales make up about one-fifth of its total revenues (Mujtaba & Maxwell, 2007). Despite some temporary challenges, the international division enjoys tremendous success. Because of its global operations it has been rated as the number one efficient retailer in the world. The main reason for its success at home and abroad is its slogan “Always low prices, Always”. Expanding internationally has allowed Wal-Mart to bargain for deep discounts which benefits the end consumers. They procure their supplies from multinational companies having global presence, which fetches them global prices with local supplies. This facilitated the play with the low-price strategy because they had high gross margins and high inventory turnover (Mujtaba & Maxwell, 2007). Because of their purchasing power and close vendor relations, they could continue with their low-cost model. They could become the world’s biggest retailer in a short time only because of their low cost model. International expansion was a learning process for them. They realized that local culture and local values including government regulations have to be given due consideration. Apart from getting deep discounts and being able to capture the market due to low-cost strategy, Wal-Mart has gained a bad reputation of exploiting workers, causing damage to the farmers and vendors. While capitalizing on its international strategy, Wal-Mart is trying to build retail empires in other countries, particularly India and Russia. Before entering a country, they first build partnerships with local businesses, they work with the government officials and they tap into the burgeoning middle class’s purchasing power (Wal-Mart, Watch, 2008). Intense competition has taught them to always be a step ahead of the competitors. Creating value for their customers became the strongest value-adder. Having learnt this through their first international venture, they could easily adapt this in other countries. They then started attempting to exceed customer expectations (Mujtaba & Maxwell, 2007). International presence has widened their perspective in various issues such as human rights and social responsibility. They have now included these as a part of their strategy and not merely to abide by the laws. As such, to tackle the environmental concerns, they operate fleet with renewable energy thereby cutting back on waste. Wal-Mart has been able to build competitive advantage through efficiency, innovation, quality and responsiveness to local demands. However, it must be noted that their international expansion could bring them benefits only at a cost. In China they struggled with the traditional supply chain while in Japan they had to tread cautiously so as not to destroy the backward retail ecosystem (Mujtaba & Maxwell, 2007). It had to fight against established competitors in Argentina and Brazil and had to quit Hong Kong because of wrong merchandise selection and location. They made mistakes in Germany and South Korea but derived teachings through each mistake. However, they could maintain an organization culture that is passionate about reducing costs and keeping prices low. Most importantly, international expansion has become the company’s growth engine today. In 2008, in Q4, they registered 19% international growth rate while their US sales rose only by 5 percent (White, 2008). Its “Everyday low prices” has helped it to win over the customer groups. Thus, Wal-Mart’s international expansion contributes a significant amount to its overall sales and in times to come, it could even surpass its home sales figures. They have been able to achieve distinction based on their low cost strategy and also changed their strategy as the situation demanded. References Agarwal, S., & Ramaswami, S. N. (1992). Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Iowa State University, Retrieved February 12,2010 from: http://aib.msu.edu/awards/23_1_92_1.pdf AMC. (n.d.). Wal-Mart changes tactics to meet international tastes. Retrieved February 12, 2010 from: http://www.amc.edu.au/system/files/Case-Wal-mart.pdf Baack, D. W., & Boggs, D. J. (2008). The difficulties in using a cost leadership strategy in emerging markets. International Journal of Emerging Markets. 3 (2), 125-139 Baues. (n.d.). Profitability Analysis. Lecture 3. Retrieved February 12, 2010 from: http://www.bauer.uh.edu/globo/downloads/F06/Lecture3.ppt Brouthers, K. D., & Hennart, J. (2007). Boundaries of the Firm: Insights From International Entry Mode Research. Journal of Management 33, 395 Fan, D., Nyland, C., & Zhu, C. J. (2009). Integration-Responsiveness framework for Chinese MNCs: An area for future study. Working paper 5/09. Retrieved February 12, 2010 from: http://www.buseco.monash.edu.au/mgt/research/working-papers/2009/wp5-09.pdf Gilbert, D., & Tsao, J. (2000). Exploring Chinese cultural influences and hospitality marketing relationships. International Journal of Contemporary Hospitality Management. 12 (1), 45-53 Ghemawat, P., Bradley, S., & Mark, K. (2004). Wal-Mart Stores in 2003. Harvard Business School. Head, S. (2004). Inside the Leviathan. The New York Review of Books. 51 (20). Hope, C. A., & Mühlemann, A. O. (2001). The impact of culture on best practice production/operations management. International Journal of management Reviews, 3 (3), 199-217 Kitlertphiroj, P. (2005). Wal-Mart’s Problems in International Market. Retrieved February 12, 2010 from: https://portfolio.du.edu/portfolio/getportfoliofile?uid=22485 Kostova, S. (2007). EUROPEAN CHALLENGES TO THE BULGARIAN RETAIL INDUSTRYAND KOREA’S EXPERIENCE IN INTERNATIONAL RETAILING. Retrieved February 12, 2010 from:http://www.unwe.acad.bg/docs/events/Kostova%20European%20Challenges%20to%20The%20Bulgarian%20Retail%20%20%20%20%20%20Industry.doc Knowledge@Wharton. (2009). Wal-Marts Next Conquest: Latin America. Retrieved February 12, 2010 from: http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=1685&language=english Mammarella, J., & Hisey, P. (1997). Wal-Mart gaining ground in Argentina. Retrieved February 12, 2010 from: http://findarticles.com/p/articles/mi_m3092/is_n2_v36/ai_19064740/ Mindtools. (2010). Porters Generic Strategies. Retrieved February 17, 2010 from: http://www.mindtools.com/pages/article/newSTR_82.htm Mintzberg, H. (1987). The Strategy Concept I: Five Ps for Strategy. California Management Review Mujtaba, B. J., & Maxwell, S. (2007). Wal-Mart In The Global Retail Market: Its Growth And Challenges. Journal of Business Case Studies. 3 (2), 1-10 Osland, G. E., Taylor, C. R., & Zou, S. (2001). Selecting international modes of entry and expansion. Marketing Intelligence & Planning. 19 (3), 153-161 Payton, P. (2005). Wal-Mart Experimental Stores: Environments of scale. EUROPEAN RETAIL DIGEST. 48, 7-12 Pizam, A., & Eliss, T. (1999). Customer satisfaction and its measurement in hospitality enterprises. International Journal of Contemporary Hospitality Management, 11 (7), 326-339 Porter, M. E. (1979). How competitive forces shape strategy, Harvard Business Review, March-April 1979 Rocha, A., & Dib, L. A. (2002). The entry of Wal-Mart in Brazil and the competitive responses of multinational and domestic firms. International Journal of Retail & Distribution Management. 30 (1), 61-73 Rowell, A. (2003). Wal-Mart Brings Inequality and Low Prices to the World. Retrieved February 12, 2010 from: http://www.projectcensored.org/top-stories/articles/25-wal-mart-brings-inequality-and-low-prices-to-the-world/ Trigona, M. (2007). Wal-Mart Faces Accusations of Anti-union Practices in Argentina. Retrieved February 12, 2010 from: http://americas.irc-online.org/pdf/reports/0711walmart.pdf Value Based Management. (2009). Strategy Maps - Strategic Communication. Retrieved February 12, 2010 from: http://www.valuebasedmanagement.net/methods_strategy_maps_strategic_communication.html Wal-Mart Watch, (2008). Wal-Marts International Expansion. Retrieved February 12, 2010 from: http://walmart.3cdn.net/dd4fd53b314948b9c1_98m6beokd.pdf White, B. (2008). Wal-Marts strong international growth a sign of things to come. Retrieved February 12, 2010 from: http://www.bloggingstocks.com/2008/02/20/wal-marts-strong-international-growth-a-sign-of-things-to-come/ Wonglimpiyarat, J. (2006). The dynamic economic engine at Silicon Valley and US Government programmes in financing innovations. Technovation. 26, 1081–1089 Read More