Strategic Management - International Expansion of Wal-Mart - Essay Example

International Expansion Retailing engages establishing a wide range of products from an array of sources and providing them to consumers (Blouet, 2001). The main sources of a retailer’s competitive advantage are their expertise and competence. The major activity of the internationalization of the retail industry is in the operation of their shops and in the other types of retailing, in more than one country. According to Hill (1998) every fiscal year retailers are able to experience a significant progress in several key metrics. Retailer’s inventory was reduced from $55 million to $23 million and inventory turns rose from 12 to 26. The cost of revenues, excluding the benefit from previous special charges and the applicable portion of the amortization of intangible assets, decreased from 72.3% of revenues to 67.8% of revenues (McAuliffe, 2000). The combination of sales and marketing, research and development, and general and administrative expenses was reduced from $ 435 million to $339 million, while at the same time improving on the pace of innovation (Hamel and Pralahad, 1996). The total revenue has approximately grown from $1 million in fiscal year 1995 to $ 871. 9 million in a fiscal year. At the same time, retailers in the United States like Wall-mart represents the largest sales and marketing channel which encompass national and regional office supply stores and mass merchants (Palmer, 1997). Distributors represent the second largest United States channel and generally sell to both traditional and Internet resellers and retailers. In Europe and Asia, Tesco’s market share is still relatively high. It has more than 100 international distributors located worldwide. All these major retailers utilize the store as a venue to sell its products. This is accomplished through the use of e-marketing campaigns and product bundles (Shaoming and Tamer, 2002). The company is able to build awareness of its products and brands through mass media advertising, public relations efforts and branded Internet properties. The company also makes it a point to receive feedback from its customers through market research (Hessan and Whitely, 1996). The company then uses these feedbacks to refine its product development efforts and marketing strategies. International retailers out-source all of its manufacturing and hardware designs of its products to third party manufacturers (Child and Faulkner, 1998). This outsourcing extends from prototyping to volume manufacturing and includes activities such as material procurement, quality control and delivery to distribution centers. The company is assured that there is an adequate supply of components to manufacture its products. The majority of the company’s products are assembled in China and Mexico (Daniels, Radenbaugh and Sullivan, 2004). Distribution centers are operated on an outsourced basis in Tennessee, Ireland, and Hong Kong. With rare exceptions, products just don’t emerge in foreign markets overnight a firm has to build up a market over time (Hill and Jones, 1998). Several strategies, which differ in aggressiveness, risk, and the amount of control that the firm is able to maintain, are available: According to Bartlett and Sumatra in 1989, exporting is a relatively low risk strategy in which few investments are made in the new country. A drawback is that, because the firm makes few if any marketing investments in the new country, market share may be below potential. Further, the firm, by not operating in the country, learns less about the market (What do consumers really want? Which kinds of advertising campaigns are most successful? What are the most effective methods of distribution?) If an importer is willing to do a good job of marketing, this arrangement may represent a "win-win" situation, but it may be more difficult for the firm to enter on its own later if it decides that larger profits can be made within the country. While Beynon and David (2000) believe that licensing and franchising are also low exposure methods of entry, this allows someone else to use your trademarks and accumulated expertise. The partner puts up the money and assumes the risk. Problems here involve the fact that you are training a potential competitor and that you have little control over how the business is operated (Hackett and Hackett, 1963). For example, Wal-mart has found that foreign franchisers often fail to maintain American standards of cleanliness. Similarly, a foreign manufacturer may use lower quality ingredients in manufacturing a brand based on premium contents in the home country. Another market entry strategy is contract manufacturing involves having someone else manufacture products while you take on some of the marketing efforts yourself. This saves investment, but again you may be training a competitor (Jain, 1989). The last strategy is direct entry strategies, according to the study of Palmer in 1995, the firm either acquires a firm or builds operations "from scratch" involve the highest exposure, but also the greatest opportunities for profits. The firm gains more knowledge about the local market and maintains greater control, but now has a huge investment (Hall, 1996). In some countries, the government may expropriate assets without compensation, so direct investment entails an additional risk. A variation involves a joint venture, where a local firm puts up some of the money and knowledge about the local market. Strategic Issues As pointed out by Craig Herkert, Senior Vice President and Chief Operating Officer for Wal-Mart International, “Every day low prices, quality assortment, and exceptional service are Wal-Mart principles that transcend borders, languages and cultural differences.” (Annual Report, 2006). Wal-Mart’s success in China’s market will largely depend on how the company may incorporate its customer strategy in a market completely different from its home business. Wal-mart inevitably find their operations growing more complex. One reason for this is the large number of individual decision makers (buyers, distributors, and store personnel) who have a significant effect on strategy and execution and who add complexity through their everyday actions (Briscoe, 2004). Another is that the high fixed costs of retailing exert continual pressure to add new products and capture incremental revenue. Not only does this ratchet up complexity, it also raises the cost of selecting, buying, and delivering each product. The predictable result: buyers have to make too many decisions for too many different types of store on too little information. Although sometimes Wal-Mart underestimate the cost financial and operational of added retail complexity (Bailey and Schultz, 2000). In financial terms, this complexity is directly reflected in selling, administrative, and other operating costs. Among department stores, the cost gap between good and average performers can be 3 percentage points or more; among specialty stores, up to 5 percentage points. In operational terms, lower sales, slower inventory turns, and lower gross margins occur when buyers cannot cope with the complexity of their business. These effects can readily be seen in the gap between good and average performers markdown rates: a 2.5 percentage point difference among department stores; 4 percentage points among specialty shops. Leading retailers have achieved these performance premiums by reducing complexity. They have stopped trying to be everything to everybody (Briscoe, 2004). Regardless of their format or the market segment in which they compete, each has created a huge competitive advantage by focusing product offerings, narrowing market concentration, standardizing store size and layout, and simplifying the buyers job. Retailer like Wal-mart carries tens of thousands of items: 70,000 stock keeping units (SKUs) is not unusual for a discounter; a full-line department store often carries close to a million. Many of these items require fundamentally different sourcing and distribution methods and are in demand for only a few short months before seasons and hence assortments change (Bonache, 1999). One retailer we studied carried more than 1,200 different styles of knitwear, yet only 5 percent of them contributed almost 40 percent of sales. This retailer was carrying the cost of offering all those SKUs when less than half that number would provide a selection adequate for most customers needs. The best merchandising organizations simplify their product complexity while offering enough of a selection to satisfy their target customers. The Gap and The Limited, for instance, have chosen to compete only in private label merchandise, thus eliminating the need to coordinate the offerings of multiple branded suppliers (Briscoe, 2004) Wal-Mart’s bold expansion strategies during 1990’s left many retailers spread across diverse markets where shoppers have significantly different product and service needs. Since then the industry has had to become more sophisticated about market focus. Evidence clearly shows that store performance deteriorates as retailers stray from their home markets (Shah and Phipps, 2002). A 25 percent reduction in sales productivity is not uncommon. Neither is a rapid decline in advertising and distribution efficiency. These differences matter. One retailer found that raising the performance of more far-flung regions to that of the company average would add between 0.5 and 1 percent of sales to the bottom line. They have been the best performers have learned to focus on a well-defined target market even as they expand geographically (Shah and Phipps, 2002). Wal-Mart, for example, has largely maintained its focus on customers with similar needs as it expanded across regions as diverse in China. The traditional Wal-Mart customer lives in a small town and is willing to drive a great distance to stock up on a wide range of items at the best possible price (Shah and Phipps, 2002). As the search for growth has brought Wal-Mart closer to urban customers, the company has had to support its merchandising performance by making additional investments in systems, communications, and executive travel in order to coordinate its widespread store network. Wal-Mart is considered to be a geographically-dispersed retailer, maintains market focus by expanding its store network region by region, building up enough scale in each one to justify regional buying offices dedicated to the specific needs of local customers (Briscoe, 2004). During the 1990s, Wal-Mart experimented with many new wrinkles in individual departments, as well as in store size and layout. Such diversity made managing the business from buying to allocating to displaying a more complex and, thus, more costly activity (Bonache, 1999). This was particularly true for multi-category retailers like department stores, which may have up to a tenfold variation in store size. Even specialty stores often have a threefold variation. Imagine the poor buyer trying to select a single assortment for a 40,000 and a 400,000 square foot store and everything in between all at the same time. To make the buying and presentation of merchandise more effective, Wal-Mart has standardized store layout and presentation to the point where a consistent retail look is imprinted on their stores and where buyers can accurately buy for hundreds of stores (Shah and Phipps, 2002). This discipline has meant abandoning potential new sites if they could not be made to fit standard models. It has also meant making store layouts modular and coordinating fixtures to make standardization flexible. The benefits speak for themselves: one department store we know well has achieved double digit sales increases in stores where it has modularized its merchandise layout and allowed buyers to tailor assortments to fixtures rather than "buying in bulk." Moreover, to simplifying along the dimensions of product, market, and store, successful retailers simplify the roles and responsibilities of buyers so that they can get very good at what they do. Traditionally, buyers have been generalists, with responsibilities spanning virtually the entire merchandising process, from assortment planning and sourcing through promotions and advertising to sales. A day in the life of a typical buyer illustrates this fragmentation: running from an advertising meeting for next season to negotiations with a supplier over orders and pricing for next year to answering phone calls from stores with stock replenishment problems and then sitting down to work on product design with private label manufacturers. Wal-Mart took a hard look at its assortment mix in shoes and realized it was missing a major opportunity in casual shoes from which its competitors were clearly benefiting (Briscoe, 2004). Focusing on this opportunity led to a 40 percent increase in sales. Similarly, a regional apparel chain found its buyers had overlooked important new trends because they were struggling with the daily complexities of getting their jobs done rather than focusing on identifying key items in the market. This not only led to missed sales, but eroded the chains competitive position with customers, who no longer felt confident they would find the latest fashion items in its stores. By contrast, successful merchandising organizations reduce the scope of the buyers job to enable people to develop deep expertise in a few areas and to support their efforts with much clearer performance measures and personal accountability. Industry leaders often break up the traditional buyers role into as many as five skill-based positions: designer, merchandiser, sourcing specialist, allocation, and flow manager (Shah and Phipps, 2002). The management has further narrowed the scope of purchasing responsibility by reducing the number of stores and/or regions served and the range of product categories covered. One department store, for example, uses regional buying teams that are responsible for developing assortments for only a third of the stores, and it coordinates across teams by assigning lead buyers for key product groups. It may come as a surprise to retailers that this degree of specialization does not necessarily translate into a need for shorter spans of control or more staff. Focus may, in fact, mean fewer people as the productivity of each increase (Ding, 1997). One representative example: divisional merchandise managers at a focused discounter had eight buyers reporting to them; at an average discounter, only four. According to Porter’s Five Forces model, there is connection between financial performance and market concentration. Since the level of market concentration is high, the market leader has ultimate power over other forces. By taking advantage the power, the market leader can develop competitive advantages over other competitors. For instance, Wal-mart can negotiate the prices of its components with its suppliers, and its suppliers have few choices but to accept. However, the high level of market concentration cannot guarantee better financial performance of the market leader. The case of Wal-Mart is the best example. Wal-Mart has applied to achieve its competitive advantages in the U.S. retail industry, and more importantly, to explain how Wal-Mart may achieve future success in the international arena by adjusting its current strategic position. We were explained by boiling down the value chain into the supply side and the customer side to analyze Wal-Mart’s strategies respectively. Then we were found focus on a case study of Wal-Mart’s expansion in China’s retail market to analyze how Wal-Mart could adjust its strategies to find its niche in international market. By improving the non-financial performance, the market leader can develop competitive advantages over its competitors and enhance its market share. According to BCG matrix, high market share leads better financial performance. Moreover, since the non-financial performance reflects the direction of the corporate strategy, the market leader is able to adapt its operation to the environment. The Wal-Mart in 2005 is the best example. Its superior non-financial performance establishes its leader position in the market and increasing the level of the market concentration. It also helps the company develop advantages which enable the company adapt to the dynamic environment. For instance, in order to compete with low-cost products, the company cuts the prices. Because of its better operation management, the company is able to reduce cost and cut prices. As we can see, the level of market concentration influences the financial performance of the company. However, the level of market concentration is determined by the non-financial performance of leading companies. Moreover, better non-financial performance helps the company implement the corporate strategy. Since the company is on the right path, the future of company becomes very clear. Organizational Issues It has been mentioned repeatedly that workplace diversity is a common observance in international businesses. In order to successfully operate an international business, managers must be able to adapt to different cultures. Moreover, adapting to different types of employees from other nations is also necessary as multiple ideas from various points of view can help the augment business growth. Businesses should also do away with gender issues related to workplace diversity as this does not only affect employee morale but it also worsens the problem on inequality. The knowledge on workplace diversity among global managers can help enhance harmonious working environment and effective business relations. Several international businesses have encountered and resolved the issue on workplace diversity through effective strategies. One good example is Wal-Mart. During the time when Sam Walton was still the head of the company, Wal-Mart was operated in various old-fashioned aspects. Women for instance, were rarely given top management positions. Walton then resisted assigning women on the board of directors. However, when Walton passed away in 1992, the top management has been open to women and minorities. In fact, two women are presently working as the company’s directors. Several initiatives have also been instituted by Wal-Mart in order to augment the recruitment and promotion of minorities and women within the company. Among these initiatives include a program involving 750 women and minority managers; a women’s leadership group, in coordination with Herman Miller and ServiceMaster, so as to develop opportunities for high-potential female mangers; and store internships during the summer for college students between their junior and senior years, with 70 percent being women or minorities (Shah and Phipps, 2002). Through these efforts, Wal-Mart was able to do away with discriminatory problems and adapt modern management trends and practices. Managing an international business is indeed a challenging task as it involves a number of issues, requirements and problems. Going global in business requires cultural adaptation as well as the productive management of diversity. In order to address these needs, global managers must then be armed with the necessary skills, knowledge and expertise. In this discussion, some of the important skills a global manager must have in order to operate an international business include transformational leadership skills, communication expertise, strategic management skill as well as the knowledge in workplace diversity. There may be more skills a global manager must have other than the ones mentioned in the discussion. However based from the studies and examples used in this paper, in general, a global manager must be a person who is open to changes. As international business operations involve different situations and people, this major skill will help global managers to adapt and cope effectively. References   Bailey, S. & Schultz, D. (2000). Customer/Brand Loyalty in an Interactive Marketplace. Journal of Advertising Research, 40 (3), 41. Bartlett, C. and Sumantra, G. 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