How Wal-Mart Entered the Chinese Market and the Factors That Have Influenced Its Entry Mode Selection - Case Study Example

Choice of Entry Mode in China Wal-Mart entered the Chinese market in 1996 in a bid to expand its presence on the global scaleand increase sales. Previously, it had employed such models and had achieved tremendous success in countries such as Brazil and Mexico. Two reasons explain why Wal-Mart considered getting into the Chinese market. Firstly, the Chinese population nearly doubled from 1994. The company reckoned that the high population would provide it with a ready market for its products. Secondly, China’s economy improved greatly. This meant more Chinese were getting into middle-level income bracket, meaning that their purchasing power would improve. Internalization models explain that companies that set shop in foreign countries do better than their counterparts that sell locally (Elsner, 2014, p46). Other reasons that explain why companies consider international trading, include saturation of the domestic market, need for diverse investments, internal and external forces such as competition and economic pressures. Wal-Mart is a great company that has registered steady annual growths and increased sales. A fast growing retailer, the company needed the best entry modes into the Chinese market. The best entry modes would enable the company to increase its profits and market share. Global expansions attract both macro and micro organizations, local and international companies, and Wal-Mart was going to be no exception. Other companies such as H & M (Sweden), Zara (Spain) and Shanghai Tang (Hong Kong) had succeeded in setting shop in foreign countries and these proved motivational to Wal-Mart Company (Elsner, 2014, p67). Entry Modes into Chinese market Wal-Mart employed Foreign Direct Investment (FDI) in China. The company aimed to be a national retailer in China. It opposed the idea of interrelated national distribution system. Prior to getting into the Chinese market, its main retail market had an approximate worth of US $ 750 billion as of 2008. If Wal-Mart succeeded in China, the gains were projected to be huge. In order to penetrate the Chinese market, Wal-Mart employed marketing strategies such as huge discounts and value-added value on all the products it traded in. It had used this strategy in other countries and its chance of succeeding in China was better. Huge discounts would make its product more attractive as compared to those of competitors (Madhok, 2004, p103). As a result, the company would obtain more customers for their products and increase overall sales and profits in the end. Great value meant quality; and maintenance of customers. It maintained low prices for customers, especially those from the middle-class. Wal-Mart also employed interrelated marketing strategies and promotional messages to serve the low-end customers, as opposed to just focusing on the middle-level customers. Wal-Mart used cost leadership to generate more revenues; setting low prices than those of the competitors and gradually increasing them as they gained ground in the Chinese market and maintained most of the customers. It also used differentiation strategy to get into the Chinese market; offering different brands of the same product at different prices (Madhok, 2004, p14). Acquisitions Wal-Mart acquired Trust Mart in a bid to increase its presence in the Chinese market. Sometimes, it is necessary for foreign companies to get into mergers and acquisitions of companies. Wal-Mart reckoned that due to differences in cultures ad perceptions, working with the Chinese companies would be great so as win the trust of the conservative Chinese. It would make them think that the company is owned with the locals as well, eventually leading to improved sales and more profits (Hewitt, 2005, p89). It acquired the Trust-Mart, further improving its capital base. Wal-Mart signed an agreement to acquire a stake at Yihaodian.com, the largest online retailer in China. The success of the acquisition meant that Wal-Mart would expand their businesses in terms of online marketing. This strategy would increase sales in the long run as consumers could order for goods online. In the end, they would generate more revenue. This entry mode did not work, though, as the anti-monopoly authority in China considered it restricting to fair competition (Hewitt, 2005, p45). Wal-Mart had proposed a partnership package where it would, if successful, control the services of Yihaodian.com and in exchange, Yihaodian.com would use systems ad logistic resources of Wal-Mart’s suppliers to track inventories. Offshore Sourcing Strategy China was a major production source for America (source country). The company saw this opportunity and utilized it to their advantage. It buys goods from China and sells them in America, making huge profits in return. Today, Wal-Mart is the largest export conduit of products from manufacturers from China to buyers in the USA (Pan & Tse, 2009, p145). This accounts for about 4% of China’s overseas sales. This entry mode was cheaper as Wal-Mart did not need to have any manufacturing plants in China. It does not have direct control over production processes in China. This is a good strategy since the manufacturers still feel that they are in control of their production plants. This leaves them with the responsibility to set threshold requirements such as quality, cost and delivery. This strategy allows them to achieve the “Everyday Low Price” philosophy. It had a strong bargaining position in terms of capital base. It maintained a high ownership level through this strategy (Pan & Tse, 2009, p151). Joint Ventures Wal-Mart works closely with the Chinese government, associations and suppliers to achieve sustainability goals; it signs cooperative MOUs in cooperative efforts. It signs collective agreements with other organizations and non-governmental organizations as part of their corporate social responsibility. It partnered with suppliers in order to improve efficiency in home appliances and promote safe packaging that is environmentally friendly. The company collaborates with local governments to lead numerous initiatives in many parts of China in preparing exporters to produce products for the domestic market. They help domestic manufactures to overcome economic downturns. Wal-Mart signed an agreement with Chongqing MOFCOM on economic partnerships whose aim was to develop trade cooperation, increase business interactions and expand Wal-Mart’s different trade categories including the New Sam’s clubs; E-commerce; Multi Formats; Direct Farm and Commercial land; Transition and Distribution Center (Hewitt, 200, p63). Wal-Mart has partnerships with close to 20,000 suppliers all over China. 95% of the merchandise in their stores is sourced locally. This is a strategy that the company used to ensure the host country-China-also benefited in terms of employment for the Chinese people. Wal-Mart developed local talent and encouraged diversity. The company employed 99% of Chinese to run its businesses. Wal-Mart focuses on working in partnerships with farmers and other companies, selling their produce for them and offering them advice on how to improve the quality of their products. In the end, everyone gains. The farmer gets the market; Wal-Mart gets cheaper raw products for its stores (Hewitt, 2005, p89). Business Formats Wal-Mart China employed the following business formats to help them reach different segments of the Chinese markets: Wal-Mart Supercenter The main format used at the Wal-Mart China, Wal-Mart Supercenter provides all-under-one-roof shopping experience to consumers at low prices. This format attracts customers for restaurants and small retailers. Customers can buy their favorite products from the retail shops next to them. It is convenient. It is a strategy that the company used to attract low-end consumers. Sam’s Club This membership store combines warehouses and goods together. The stores are stocked with a variety of high quality, popular, domestic and imported products that enable members save time and energy. Members shop in comfortable environments as they enjoy hospitable services at the club. Neighborhood Markets These provide customers with convenient shopping experiences. Now, Wal-Mart China has 2 neighborhood markets in Shenzhen. Discount Compact Hypermarket This format ensures that consumers from the low, middle and high-income brackets are all represented. It is a community-based kind of retail shop and is convenient to the buyers. DCH formats have basic facilities whose aim is to meet demands of low-income families. They have the lowest operating costs. Wal-Mart China used the formats to ensure that it had a significant presence in the Chinese consumer market. The formats also meant that every segment of the Chinese market was well represented (Chan, 2011, p89). Factors that affected Wal-Mart’s Selection of China Internal Factors Size/ Resources Wal-Mart Company is a large company that has done well in home country, America, and had the potential of doing well in other parts of the country. The company had a huge capital base. It had the resources. It could source most of the labor from China, given that China had a huge population. Resource theory argues that a great deal of resources is required in the internationalization of the market. Wal-Mart China had fully owned subsidiaries in other parts of the world as well. It had large investments that had worked in other parts of the world. It was, therefore, better positioned to get into the Chinese market. They had the skills and understood the risks associated with getting into new and foreign markets (Chen, 2000, p34). Wal-Mart had the capability of getting into international ventures with other countries or foreign countries as well. Product Wal-Mart china had dealt in food products, had carried out a feasibility study about the Chinese market. It, therefore, understood the market well prior to entry into the Chinese market. It got into the Chinese market knowing the products that would move. This gave the Wal-Mart company an advantage over other household companies in China. In order to remain competitive, Wal-Mart adopted different marketing strategies that worked well. Such strategies included cost leadership, differentiation and ensuring it sold products that were of high quality. They could only reduce the prices of their products if the produced them locally in China, a factor that worked. They invested in Foreign Direct Investment market entry mode, having set up control over the benefits (Chen, 2000, p45). Wal-Mart needed to be close to the Chinese market; it could, therefore, not use export. It carried out R & D and decided to explore the local mode of production, which was cheaper in the end. Products that needed intensive technology gave the Wal-Mart China the advantage to license its technologies to in China-the host country. Profit Objective Different market entry modes make profits to different levels. Wal-Mart realized that as compared to its investments in the source country, investing in the host country-China would be cheaper. Raw materials were cheaper in China; this offered an additional advantage to Wal-Mart. Labor was equally cheap in China (Blaine, 2008, p92). All these factors made china to be a better target for the company. In the end, profits would be good for the company. The issue of client base was taken care of by the high population in China. Indeed, just a few years after setting shop in China, the Company recorded huge profits, some of which it channeled into mergers and acquisitions. International Experience Before the entry into the Chinese market, Wal-Mart had already invested in Brazil and Mexico. It had international experience that would come in handy in its investment, in China. Financial analysts argue that companies that have more international experience have a higher probability of adopting them in the host countries they choose. Wal-Mart was such. Due to its international experience in Mexico and Brazil, Wal-Mart was able to adopt the models that had been successful in the two countries, in China. It had learnt a lot and could not repeat the same mistakes, in China. As compared to the two, China had a high population, meaning that market for the goods and products that it produced would not be an issue (Blaine, 2008, p67). External Factors Environmental Factors The risks or uncertainties in China were minimal as compared to the risks and uncertainties in Brazil and Mexico where Wal-Mart had already set shop. China proved welcoming in terms of business restrictions and political uncertainties, thus making it a favorite destination for Wal-Mart. In response, it chose the non-equity high investment entry mode. China’s market size was big enough, a major pull factor for Wal-Mart to invest in China. The middle class would provide high sales potential with equivalent high break-even volumes of sale, which was just what Wal-Mart needed. Such huge volumes of sales would be in branches, subsidiaries as well as equity investments in local productions in china. Industrial Feasibility China had no laws restricting joint ventures or fully owned subsidiaries. This made it easier for Wal-Mart to get into mergers and acquisitions with other companies in China; it worked since it made the Wal-Mart Company in China to look like it was “locally owned’. Moreover, the company employed local people to work within the company (Blaine, 2008, p23). It also ensured that most members of its management were local Chinese. Market Growth Rate The Chinese government had less stringent restrictions, limitations or prohibition of foreign ownership. Owing to its population, China had a high market growth rate, which analysts projected to be consistent given its growth in the economy. The entry mode of FDI adopted by Wal-Mart allowed faster expansion; to ensure that the company made profits after recovering the cost of investment (Naughton, 2007, p149). It considered fully owned subsidiaries and joint ventures. Image Support Wal-Mart had done well in the US, Brazil and Mexico. It had become a household name by 1992. Such a reputation helped improve its visibility in China and other parts of the world. To maintain its image, it licensed its products to enhance its role as the world’s largest supplier of household items, enabling it to dictate world standards. Social Cultural Gap Because of the differences in cultures between the source country and the host country, uncertainties arise. As such, companies such as Wal-Mart chose entry modes such as direct investments and joint ventures to take care of barriers such as differences in language and cultures. It adopted an entry with low resource commitment such as local sourcing where it outsourced manufactured products to the US and other markets with minimal control over the Chinese manufacturers. It adopted high flexibility in terms of producing goods that would meet different requirements and budgets of Chinese from different classes (Alder, 2014, p69). Conclusion Before a company considers investing in a foreign country, it is important that they consider a number of factors such as size of market, barriers, capital and socio-cultural gaps. The paper has covered some of these aspects. Selection of entry modes into a foreign market may be dictated by internal and external factors. The Case of Wal-Mart is used as an example. A large multinational company, it was able to invest in the Chinese market as it had a relative advantage including a good reputation, international experience, ready market in China and a huge capital base. References Alder, T., (2014). Retail Internationalization Analysis of Market Entry Modes, Format Transfer and Coordination of Retail Activities. Wiesbaden, Springer Fachmedien Wiesbaden. Blaine, H. G. (2008). Foreign direct investment. New York, Nova Science Publishers. Retrieved from: http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&A N=350 357. Chan, A. (2011). Walmart in China. Ithaca, ILR Press. Chen, J.-R. (2000). Foreign direct investment. Houndmills, Basingstoke, Hampshire, Macmillan Press. http://site.ebrary.com/id/5001658. Elsner, S. (2014). Retail internationalization: analysis of market entry modes, format transfer and coordination of retail activities. http://dx.doi.org/10.1007/978-3-658-01096-6. Hewitt, I. (2005). Joint ventures. London, Sweet & Maxwell. Madhok, A. (2004). Mode of foreign market entry an integrative study. Ottawa, National Library of Canada = Bibliothèque nationale du Canada. Naughton, B. (2007). The Chinese economy: transitions and growth. Cambridge, Mass, MIT Press. Pan, Y., & Tse, D. K.-C. (2009). The impact of equity involvement on the choice of market entry modes. Hong Kong, Chinese Management Centre, University of Hong Kong. Read More