Issues Faced by Wal-Mart in China - Assignment Example

Issues faced by Wal-Mart in China Background Introduction to Wall Mart We will be dealing with the issue being faced by Wall mart in China in this analysis. Wall mart has tried to implement its strategy which were a huge success in USA in to china but has tilled now failed to make a dent in the Chinese retail market. When wall market started in USA; it grew and flourished under the radar of big retailers and never came into direct competition with these big retailers as it would have easily destroyed the new company. Wall mart followed some very innovative practices in China like everyday low prices; focus on customer, relentless cost control followed by the firm, the love-hate relationship with suppliers and the legendary logistics and supply chain management practices which were followed by Wall Mart. These strategies have been described in the next section. These were the strategies which led to Wall-Mart becoming a huge success and it became the largest retailer in the world solely on the basis of its US operations. The next logical step for Wal- Mart was to expand the business internationally. It targeted the billion plus Chinese people. The retail market in China had been recently opened to foreign players. Before this retail in China was a central government controlled activity. China is facing many issues in China such as income disparity, local protectionism, infrastructural deficiencies, regulatory restrictions, lack of IT which made its supply chain so effective in USA and the completely different consumer behavior of Chinese as compared to USAir has been 10 years since Wal-Mart opened business in China but it has not been able to make profits in the Chinese markets. We will be discussing the issues faced by Wal-Mart in this country and what can be the solution to these issues being faced by the company in China. . Wal-Mart Strategies of Success. 1) Everyday Low prices –Wal-Mart distinguished itself from all other retailers in USA who used to offer discounts sporadically by declaring this policy. It claimed that Wal-Mart customers will be able to shop from the retailer at prices which were lesser than the competition on every day. The important thing in this strategy was that Wal-Mart always kept its promise even if it had to sell the goods on a loss. This builds immense reputation among the customers. 2) Customer is No.1 – Customer has been the focus of the world of Wal-Mart’s employees. This legacy was provided by the founder of Wal-Mart -Sam Walton who used to constantly train his employees to treat the customer respectfully. Sam’s ten rules of customer service are still being followed by Wal-Mart in order to ensure customer satisfaction and great customer service. 3) Small Town Locations – During the initial growth phase, Wal-Mart grew under the competition’s radar. They operated in these towns which were considered as unviable by big retailers at that time. 4) Relentless Cost Control – Saving was given as much importance in Wal-Mart as was creating a sale. Wal-Mart relentlessly tried to cut costs to pass on the benefits to the customer. 5) Partnership With Suppliers – Wal-Mart provided big volumes to its suppliers but extracted a lot from them. It was always trying to push them to cut costs. Many processes being followed by suppliers were modified by Wal-Mart in order to reduce costs. 6)Unrivalled Distribution and Logistics Management – The IT infrastructure of Wal-Mart was connected with its suppliers in order to ensure that constant update on inventory requirements reach the customer. It followed Just in time approach and utilized cross docking method to reduce inventory of its stores. Issues faced by Wal-Mart in China. 1) Immediate Issues. A) Market Segmentation Large amount of income disparities in China. The coastal regions have very high per capita income of 2117 $ where the inner and western regions have significantly less purchasing power. China is not one market likes USA – it is a country where different market segments exist because of the uneven economic growth that the country has faced. So Wal-Mart cannot adopt the pan-country policy which it had adopted in USA to succeed. . B) Local Protectionism The State Council of China declared all forms of local protectionism as illegal in 2001 but the effective implementation of the same remains a large concern for Wall-Mart. It has to decide whether it wants to continue fighting the local governments which oppose it as it does not pay taxes to them or collude with them like its major competitor Carrefour has done. C) Financial Control Wall-Mart has always worked on the basis of strict financial control from the central level. Local Protectionism makes this form of financial control very difficult to handle. Local governments do not like the fact that Wall-Mart functions in their area and pays taxes only in Shenzhen where its headquarters are located. D) Employee Morale Wall-Mart has never been known to be a good employer in terms of the salary it gives to its employees. However employees in US have stock options which compensate for their low incomes. The employees of Wal-Mart China do not have that option at their behalf. 2) Basic Issues A) Infrastructure Wal-Mart faces the problem of under developed national highways in China; proper infrastructure support is essential for its model of supply chain network. Wal-Mart can do little to improve the infrastructure of the country; it needs to find ways of meeting its strategic objective by adapting to the local conditions. B) Chinese Consumer Behaviour Wal-Mart’s EDLP (every day low pricing) was based on the fact that US consumers make fewer visits to the store but purchase in large amounts. Chinese Consumers are completely different in this respect, they may visit the store a large number of times but they may purchase very less amount. Some of them might visit the supermarket just to hang out and get away from their homes for some amount of time and may even purchase nothing. Wal-Mart also has to deal with large amount of theft in China. Store thefts may lead to loss of sales to the volume of 5 % of sales revenue. C) Lack of IT Infrastructure. The major problem that Wal-Mart is facing in mainland China is lack of IT infrastructure. This makes connectivity with suppliers difficult. Constant update through IT system f the articles that have been purchased and inventory was one of the major features which allowed Wal-Mart to keep inventory low by following JIT(Just in time ) and cross-docking. D) Government Legislations Chinese retail had long been centrally controlled by the government with steep hierarchical structure. The sector was opened up in phases by the government to foreign competition. Options for Wall Mart At this point of time Wal-Mart has the following options to undertake in China - 1) Continue its present policy of operations which is based on the belief that customers all over the world are same and want good products at cheap prices – try to attain cost leadership in China. 2) Localize according to Chinese customers in order to give them personalized service which will be moving away from business strategy being followed in USA and world-wide. This will require abandoning the cost leadership philosophy and adopting differentiation philosophy. 3) Keep the basic strategy and philosophy of the parent company of attaining cost leadership in the market but localize and achieve cost leadership according to Chinese norms and cultures and not force their own methods of doing business on the Chinese. 4) Create a mix of cost leadership and differentiation according to the geographical needs of Chinese market depending on the per capita income of the particular area. Recommendations Decision Criteria 1) Market share 2) Profit / ROI 3) Competitive advantage 4) Cultural Sensitivity 5) Employee Morale & Productivity 6) Corporate Image Assessment of options. Alternative Market Share Profit/ROI Competitive advantage Cultural Sensitivity Productivity of Employees Corporate Image 1) ? - + - - + 2) + + - + + - 3) + + ? + + + 4) + + 0 + + 0 ( + )----> Alternative will have a positive effect on the decision criteria. (-)------>Alternative will have a negative impact on the decision criteria. (0)---- No effect expected on the decision criteria. (?)---Effect cannot be gauged on the decision criteria. Preferred Alternative. From the above alternative assessment table we can conclude that Wal-Mart should go for alternative 4 i.e. segment the market according to spending power f the buyers and adopt different strategies for each market i.e. cost leadership or differentiation depending on the market. Next Steps 1) The market should be divided in three segments according to the geographical disparity in income of china. 2) The affluent region of China – the coastal region should be targeted for Cost leadership strategy.Wal-Mart should treat the coastal region strategically same as USA but culturally different. 3) A series of retail chains, supermarkets and distributors should be developed in this region to achieve economies of scale and thus drive the cost lower for Wal-Mart. 4)As after 2005 ; retail companies can fully own logistics in China Wal-Mart should take majority stake in some of its suppliers ; improve their IT infrastructure and make it compatible with Wal-Mart’s system. Help the suppliers in implementation of IT infrastructure and reward the ones who implement the required practices for achieving supply chain efficiencies. 5) Centralize procurement and supply chain which will allow economies of scale and drive the cost lower. 6) However decentralize the financial accounting for each store; prepare a separate balance sheet for each store .This will eliminate local government’s opposition to store being opened in their area and taxes being paid in some other area. 7) In order to win over local population and to get the know-how of how the local population behaves in buying staff the store only with local population; even the retail store’s manager should be from the local population. They should be given thorough training on Wal-Mart’s value system and way of doing business. However they will be able to come up with better solutions to increase sales. Decentralize marketing and promotional expenditure to store manager level. 8) Use technology to deal with the high level of thefts in stores. RFID tags can easily detect a customer who is trying to move out of the shop without paying the bill. 9)This cost leadership strategy should be adopted only in the coastal region because the number of customers in this region will be large enough to give Wal-Mart economies of scale in this region and allow the strategy to materialize. 10) The interior region & the western region do not have enough affluent customers to give Wal-Mart economies of scale in order to achieve cost leadership. Here they should go for differentiation strategy. 11) Their stores should target special needs of customer which cannot be met by the local market. They may even cater only to the business customers in this area. 12) The stores should be few and small in size. Return on Investment should be the main criteria for evaluation of store in these regions. Bibliography Rugman, A. M. & Collinson, S. C., (2009). International Business. (5th edition), Prentice Hall. Robbins Stephens (2009) Organizational Behaviour (Twelfth Edition), Prentice Hall Asia Research Centre, Case Study on Wall Mart Stores: Everyday low prices in China Read More