Walmarts Expansion in Africa - Case Study Example

Case 7: Walmart’s Expansion in Africa: A New Exploration Strategy Detail the growth of Walmart and its international experience Walmart is the leader in retail business, operating not only in the USA but also internationally. The company was founded in 1962 by Sam Walton and the first discount shop was opened in Rogers, Arkansas, U.S. Five years after the first store opened its doors, Walmart has grown its number of stores up to 24 locations, and by 2010, the number of its stores has grown up to 8500 outlets in 15 different countries, including: Mexico, Canada, Argentina, China, Germany, UK, etc. (Bhaskaran, 2011). This success was a result of a thoroughly developed and effectively planned pricing strategy as well as perfectly “polished” corporate culture. In order to make it feasible to offer low prices, discounts and special pricing policies, Walmart has build cost effective supply chain network, working directly with manufacturers with no middlemen. This strategy allowed the company to achieve the economy of scales due to high sales volume (Bhaskaran, 2011). Investment into IT technologies enabled company make its distribution and logistics system more effective. The company’s management has practiced doing business in the USA and made a decision to expand business internationally during the early 90s. Mexico, Argentina, Brazil and Canada comprised the first list of “must go” countries for the Walmarlt’s international expansion. Walmart has chosen the option of entering new markets through subsidiaries and joint ventures. The company’ strategy proved to be successful in these markets and top management of Walmart has mapped out new international locations – the Asian countries. In 1996 Walmart entered the Chinese market through the partnership with a Chinese retailer. Doing business in China was not as easy as it was in the US and Walmart was facing significant challenges varying from government restrictions for the number of locations to various cultural diversity issues (Bhaskaran, 2011). During the late 90’s the American retail giant entered the UK, German and Korean markets. Low pricing strategy turned out to be successful in the UK, but failed in Germany and Korea. On the one hand it was a result of government restriction for selling retail products below cost in Germany, and on the other hand it was a result of Walmart’s failure to adapt to the local environment and learn the local consumer behavior (Bhaskaran, 2011). During its expansion to Japan in 2002, Walmart also has faced considerable challenges: Japanese mentality related to low prices and luxurious stores, as well as disability to buy products at lower prices because of traditional Japanese distribution system (Bhaskaran, 2011). By going to India in 2007, Walmart also has come up with certain difficulties and the progress was not as great as expected. 2. Describe the growth strategies of Massmart in the African continent Massmart began its activity as a retailer of general merchandise in 1990. The business was focused on both wholesale and retail distribution of branded consumer goods in South Africa (Bhaskaran 2011, 30). The company’s’ business was quite successful as Massmart group owned nine retail chains and wholesale centers in 14 throughout Africa. The company’s growth was based on the conglomerate diversification strategy, whereas the firm expands its business by creating new business units that are unrelated to its original business (Subba 2010, 88). In case of Massmart these business units included: Massdiscounters, Masswarehouse, Massbuild, and Mascash, whereas all these four business were unrelated to each other. Further, the company’s strategy implied expansion of the product range in clothing, furniture and pharmacy in format stores. Such a model enabled the company to enjoy the benefits common for a conglomerate diversification: reduced risks, economies of large scale operations, increase in profits (Subba 2010), as well as low-cost distribution of branded consumer goods (Bhaskaran 2011). By adopting this strategy, the Massmart took care about setting up a decentralized decision-making, which allowed making decisions more effectively based on the operating needs (Bhaskaran 2011). In addition to the decentralized organizational structure, Massmart had a priority of investing to the enhanced technology. This initiative allowed the company to provide great customer service and thus to grow the number of retaining customers and increase customer’s loyalty. Massmart pursued a low-cost leadership pricing strategy, and that is why there was made a strong focus on lowering of the operating costs (Bhaskaran 2011). The company viewed this strategy to be crucial for business as most of the customers were price sensitive (Subba 2010) in the African continent, despite the growth of disposable income. This strategy has helped Massmart to open 266 stores in South Africa by 2010, and thus to gain its market share from competitors (Subba 2010). In order to enhance business growth over the years, Massmart pursued continued investment as a reasonable plan to move forward. The company stressed the importance of the international development as well, and by 2010 has opened 25 stores abroad (Bhaskaran 2011). 3. Detail Walmart’s acquisition of Massmart and the expected strategic advantages Business model of the Walmart was based on the international expansion and utilization of the emerging opportunities (Bhaskaran 2011). One of such opportunities was viewed to be the African continent, where Walmart headed for its market share. Entrance to the African continent really would offer significant opportunities for Walmart’s business expansion due to: massive growth of the population combined with economic growth and greater access to money, and increasing middle class (Bhaskaran 2011). In 2010 it became known that Walmart was planning to acquire Massmart for around $4 billion (Bhaskaran 2011). As it has been stated in the case study: “Walmart had chosen Massmart … as a route to enter the African continent” (Bhaskaran 2011, 31). Acquisition of the Massmart has been viewed as absolutely logical and right decision because it allowed Walmart to gain access to Sub-Saharan countries (Bhaskaran 2011, 31). The deal for $2, 32 billion for a 51% stake in Massmart has been expected to provide the following strategic advantages: Converting strong competitor into partner Massmart’s business model was similar to the Walmart’s business model, where both were oriented on the low pricing strategy. This made Walmart face fierce competition with the well-establsihed and recognized brand on the African continent. By acquiring share of the Massmart business Walmart has avoided the risk of fierce competition and thus made its entry strategy smoother and safer. Easy growth opportunities Massmart was successfully operating retailer with already existing client’s base and brand recognition. Acquisition of this “veteran” enabled Walmart to get easy growth opportunities on the local market. Avoidance of problems common for new projects Walmart has faced many challenges while entering new international markets. Some project failed at all and the company lost the opportunity of international expansion of such markets as Germany and Japan. Despite its business development experience, Walmart might lack specific knowledge of the African culture and other external factors that have impact on the businesses’ potential to succeed. Walmart will significantly decrease the risk of failure on the African continent through its acquisition of the Massmart. Moreover, acquisition of Massmart enabled Walmart to avoid certain problems common for new projects, including the problem of gestation period (Subba 2010, 87). Capabilities for sourcing and maintaining continuous supply chain management Massmart has developed effective supply chain networks and distribution system throughout the whole African continent. Walmart gain these capabilities for sourcing and maintaining continuous supply chain management and thus will avoid the problem similar it faced in Japan (Subba 2010). 4. Analyse the challenges Walmart will have to face in the African continent In addition to the strategic advantages and opportunities discussed above, Walmart also could face some serious challenges in the African continent. The African continent being the poorest region in the world implies some of obvious characteristics common for developing countries, namely: lack of strong legal system and lack of security (Bhaskaran 2011). Both these challenges impose certain risks on Walmart, the American based company which is used to reliable legal system and efficient security. Some other challenges would relate to the cultural and infrastructural barriers, corruption, currency instability, political risk and bureaucratic red tape (Theunlssen 2013). Difficulties in securing property and lack of infrastructure might slow down significantly expansion of the business (Kew 2013). Diversity of rules, cultures and regulation might be a serious challenge for Walmart in terms of adapting its products and customer service in accordance with the local flavor. Thus, for example, eating habits of the African population varies by ethnicity (Doh, 2009).Taking into consideration the variety of ethnic communities it might be challenging for Walmart to adapt its products to the local tastes. Management of Waltmart working on the development in Africa will have to consider all these challenges and assess the situation in every particular country before planning stores opening (Kew 2013). 5. What happened to Walmart’s operations after taking a 51% share in Massmart in 2011? After taking a 51 % share in Massart in 2011, Walmart introduced new technologies and skills necessary for transforming Massmart into a leading distributor of perishable products, produced locally. This innovation enabled Massmart to improve its fresh grocery operations (Safi 2011). In order to provide assistance to the Masmart’s suppliers both new and existing, the Massmart and Walmart with combined efforts have established Supplier Development Fund (Massmart.co.za, 2013). This initiative enabled the company to improve their supply chain and procurement, and suppliers to improve the quality of products supplied, to reduce input costs, to sell deserving products in both local and international markets; and to strengthen supplier partnership (Massmart.co.za, 2013). Also, Walmart has opened its access to its procurement capabilities making Massmart’s improve its procurement operations, including IT service (Safi 2011). After Walmart took over the Massmart, the financial indicators have shown the following increases in revenue: 50, 795.2 RM, 57,177.8 RM, 66,050.3 RM, and 72, 512.9 RM in 2010, 2011, 2012, and 2013, respectively (Massmart, 2013). This positive trend indicates that the Walmart’s strategy to enter the African market through the acquisition strategy was quite effective. Moreover, the company has managed to mitigate risks and lower potential threats by adopting relevant strategies. References: Doh, E. (2009). Stereotyping Africa [electronic resource] : surprising answers to surprising questions / Emmanuel Fru Doh. Mankon, Bamenda, Cameroon : Langaa Research & Publishing CIG, c2009. Kew, J. (2013). Wal-Mart Brand Favored in Massmart’s Africa Growth Drive (1st ed.). Bloomberg: Bloomberg. Massmart,. (2013). Five Year Review - Massmart. Retrieved 26 May 2014, from http://www.massmart.co.za/iar2013/five-year-review/ Massmart,. (2013). MASSMART SUPPLIER DEVELOPMENT FUND - Massmart. Retrieved 26 May 2014, from http://www.massmart.co.za/iar2013/summary-relating-to-the-supplier-development-fund/ Subba Rao, P. P. (2010). Strategic management [electronic resource] / P. Subba Rao. Mumbai [India] : Himalaya Pub. House, 2010. Saflii.org,. (2011). Walmart Stores Inc v Massmart Holdings Ltd (73/LM/Dec10) [2011] ZACT 41 (29 June 2011). Retrieved 26 May 2014, from http://www.saflii.org/za/cases/ZACT/2011/41.html Theunlssen, G. (2013). Yummy but challenging. Finweek, 28. Read More