Wal-Mart's Entry into Chinese Retail Market - Essay Example

Summary In order to make a successful entry into the relatively untapped Chinese retail market, Wal-Mart leadership faced a challenge nearly as great as that which faced Sam Walton during his debut as a budding entrepreneur in a small town in rural Arkansas. In both situations, a business model based on deep discounting or “Every Day Low Prices” was not without its likeminded competitors. In its beginnings in the U.S. as well as in China, Wal-Mart faced the formidable difficulty of creating a multifaceted and integrated marketing strategy based on much more than just low prices. Wal-Mart’s original model was composed of many elements, including strategic geographical locations, a distinct workplace culture and organizational structure, exceptional customer service, across-the-board cost efficiency, and friendly but uncompressing relationships with suppliers (Vance and Scott 1992). This model’s success, however, was due in part to its consistency with the financial and cultural realities it was designed to fit into. Wal-Mart inevitably faced difficulty in applying the same model to the far different realities of the Chinese market. During the course of its decade-long presence in China, various dilemmas that are symptomatic of this underlying problem have arisen for Wal-Mart. To resolve these issues and make the company competitive a new integrated marketing strategy must be created that addresses the economic and cultural idiosyncrasies of the Chinese market, while at the same time exploiting Wal-Mart‘s available resources. To what degree this strategy will appear similar to Wal-Mart’s original model must be determined by a careful analysis of the situation and the relative strength of each possible response. The Current Situation The Market The Chinese retail market is growing at an extraordinary pace, especially in coastal areas. Interior provinces, on the other hand, have underdeveloped markets plagued by low incomes and a lack of sufficient infrastructure and investment (Lai 2002). The Products Food items are the best selling products in existing retail stores. Brand name and high quality products are offered. The overwhelming majority of Wal-Mart’s products are sourced from suppliers around China, but local tastes demand more expensive local products be carried (Farhoomand). Demographics Incomes and purchasing power have risen dramatically on average. A growing middle class is present and many households have minimal living expenses and an increasing interest in consumer products (Hong 1994). Regional differences, however, remain striking in this regard. Social/Cultural Numerous foreign businesses and brand names have become symbols of status, spending power, and class, as larger percentages of income are being spent on such products (Hong 1994). Some social problems related to modernization also negatively affect sales, such as shoplifting due to the presence of migrant workers in otherwise low poverty areas (Farhoomand). Political/Legal Government reforms have actively sought to enhance economic growth and speed the process of modernization since the 1980s, although for most of this period policies have focused disproportionately on the coastal regions. Recent economic reforms have begun to shift the focus to developing the interior (Lai 2002.) Some of these policies are apparently detrimental (such as tax incentives for local government to resist the entrance of retailers with a distant tax-base) but many imminent policy changes will improve conditions by improving infrastructure and promoting economic development. Technological The technology industry and infrastructure is well below the standard of developed countries, with no IT network. A system is underway to connect Wal-Mart to its suppliers electronically (Farhoomand). Advertising methods currently in use are also technologically substandard (Hong 1994). Competition The retail environment is extremely competitive. Chinese retailers with knowledge of local preferences as well as foreign contenders like Carrefour who made an early entry and acted strategically have held an especially strong position in the market (Farhoomand). The Problem Wal-Mart’s business model, in its original form, is not consistent with many fundamental realities of the current market in China, which is far different from the U.S. market its strategies were designed for. Possible Strategies Wal-Mart management has a variety of possible options in confronting this root problem and its resulting negative results. For the most part the range of alternative responses revolves around the degree to which Wal-Mart will modify its original model and practices. At one end of the spectrum, the original model could be followed to the letter, in hopes that the strengths of Wal-Mart’s strategies, particularly its broad resources, will eventually overcome its weaknesses in the context of the Chinese market. On the other hand, Wal-Mart could completely rethink its strategies in light of the unique conditions in China and come up with a marketing plan with little to nothing in common with its original model that maximizes potential areas of leverage such as novel reward systems and changes in culture and leadership. In between these two extremes lies an infinite gray area of middle ground, with various possible combinations of new and retained elements. These three general modes of response: extreme consistency, extreme change, and a moderate position, should ultimately be tested against their potential of fulfilling Wal-Mart’s primary goals in China with maximum efficiency of time, cost, and effort. Criteria The relative strength of each alternative must be measured in terms of its likely net benefit to the company. In order to improve the situation, the chosen strategy must have a high likelihood of success measured by its chances of increasing economies of scale in Wal-Mart’s China operations and bringing about a return on its decade-long investment as soon as possible. Correspondingly, the best strategy will likely give Wal-Mart a distinct competitive edge against its Chinese and foreign competitors. The strategy should minimize the chances of unintended negative consequences, such as a further decrease in sales, increase in costs without a corresponding rise in productivity, or government interference. Furthermore, the necessary changes must be possible in terms of the nature of the organization and personnel involved. By examining each strategy against these criteria, the best possible solution can be more clearly identified. Analysis Extreme Consistency This approach would consist of making little to no changes to the original business model and marketing strategy, which has a number of foreseeable costs and benefits. It is likely that at least in the short term, the harsh competition, fragmented market, localized demand, culturally disparate buying patterns, regulatory obstacles, and logistic difficulties that currently exist in the Chinese market would continue to be insurmountable problems that effectively prevent lowering costs and raising efficiency and economies of scale. Thus, while a return on investments already made would not be likely in the short run, further risks and investments would be avoided in financial, political, and human terms. Due to conditions far different from American society during Wal-Mart’s rise to dominancy, it is impossible to assess whether applying a nearly identical model without making any substantial changes will eventually prove successful in China. And since several aspects of the approach that made it successful in the U.S., especially geographic diffusion in small town areas avoided altogether by its competitors, is impossible to implement in China, the original model may be too incomplete to be a success. Extreme Change Formulating an active response to the unique environment in China could consist of retaining the spirit of the Wal-Mart approach while at the same time creating an entirely new marketing strategy more consistent with Chinese realities. This would include a number of expansive modifications to the traditional Wal-Mart methods, including changes in product selection, store size, geographic location, management techniques, workplace culture, employee reward systems, and advertising methods. Specifically, store sizes would be reduced, product size and selection would cater to local tastes as much as possible, stores would be opened in cities of intermediate size across the country, managers would build relationships with local governments, national advertising would promote brand name items, and in store promotions would be used, possibly using a sales commission system to reward and motivate employees. These actions would involve some additional investment and areas of risk but would lower many existing problematic costs and increase sales of high demand and brand name products. Larger economies of scale could be achieved through greater numbers of smaller stores per distribution center. Creating more enthusiasm among Chinese employees and incorporating their knowledge would allow for competitiveness against other Chinese retailers, while revised management techniques would enable competition with foreign-owned retailers like Carrefour. It is conceivable that some personnel changes would be necessary for the plan’s success to the extent that some high-level leaders may not agree with the new system. Yet a third alternative exists that could strike a compromise between the two extremes. A Moderate Position By merging together areas of consistency and change, a final strategy would keep the elements of Wal-Mart’s model that are advantageous and change those that are clearly ineffective in China. Ideally, this middle ground approach would avoid some of the risks inherent in excessive change while still bringing down costs and enlarging economies of scale. A possible combination of new and retained elements might consist of adhering to the core tenets of EDLP, such as some degree of product standardization and a strict bottom line relationship with suppliers, but still allowing some degree of much-needed change. New, smaller stores would still be added through the building of relationships and connections in local communities of medium to large cities, and a reward system for employees as well as new advertising methods would be incorporated. Thus greater investments in the beginning would still be present, but only necessary risks would be taken. Above all, the organizational structure that Wal-Mart is known for would remain intact, and charismatic leaders already present in China could be brought on board allowing for minimal personnel changes. Because of its reliance on the strengths of EDLP and the financial and human resources available to Wal-Mart as well as its compatibility with the Chinese culture and marketplace, this moderate strategy is preferable to either total consistency or total change. Recommendation: The Moderate Position A solution based on the important aspects of Wal-Mart’s business model but flexible in light of the Chinese environment is the best approach to the current market because it has diverse strengths, exploits valuable opportunities, and contains preventative measures to minimize weaknesses and threats. First, Wal-Mart’s financial, human, and organizational resources play an important role in the successful implementation of this strategy. A study on the performance of a variety of multinational firms in China indicates that established business models and access to capital prove strong assets in the Chinese market. Pan and Chi state that “In the case of wholly foreign-owned operations, firms often duplicate what they have done successfully in an overseas market. Firms already have the appropriate resources and assets, thus incur minimal resource-based costs” (1999). Combining Wal-Mart’s assets and strong organizational structure with a strategy for maximizing leverage through good timing and preparedness can provide the basis for Wal-Mart’s rise above the competition. To maximize economies of scale, Wal-Mart must seize the opportunity to command a geographical advantage while it is still available, creating a strong national presence and allowing for more efficient transportation and distribution. Specifically this means expanding the store’s presence in the interior now that such expansion is possible but before the opportunity is completely monopolized by competitors in the private sector. Implementing this change now will put Wal-Mart in an advantageous position that will become increasingly efficient as the Chinese government increases its efforts to improve infrastructure, transportation, technology, and overall development in the western provinces. Regarding the immanency of such policies, Lai states that “The western region represents a sizable and largely undeveloped market. To tap it and thereby increase domestic consumption, the Chinese government must build the necessary infrastructure, stimulate job growth, and generate sustainable development” (2002). Potential threats in this area, such as low sales, can be minimized by reducing the size of stores and positioning stores in large cities such as provincial capitals rather than small towns, so that each store can serve a large geographic area and make distribution centers more cost-effective. Of course, success in these areas long plagued by state domination and local protectionism is possible only through some change in culture and managerial style. Despite its dangers, any successful company in China must operate in the existing cultural paradigm in order to survive. This includes the use of largely informal systems of business networking rather than formal institutions and a focus on interpersonal relationships in business transactions. The apparent weakness of such a system is largely illusory. In Chinese culture, the use of strategic personal connections, or guanxi, “usually does not carry negative connotations, whereas allowing something to be decided by open competition instead of by using connections may be considered stupid and disloyal” (Xin and Pearce 1996). Xin and Pearce go on to recommend that managers actively “cultivate personal connections to substitute for reliable government and an established rule of law“ (1996). Through a similar, seemingly risky use of relationships with local leaders, Carrefour was able to bend Chinese regulations and establish a presence outside of the coastal region before it was opened to foreign retailers (Farhoomand). Interpersonal trust is necessary in the workplace too, affirming the need for a reward system such as a commission benefit for all Wal-Mart employees. While this would be an additional expense, employee loyalty is crucial to the success of the EDLP model. To strengthen the entire strategy, cultural factors should also form the basis for new advertising methods, such as promotional and brand name product campaigns, as well as be incorporated into the broader Wal-Mart workplace culture. Conclusion In light of serious challenges in implementing its famous low price business model in the Chinese market, Wal-Mart faces a crossroads in deciding whether to wait out the troublesome conditions or make some dramatic changes to its marketing strategy. Becoming competitive in the current market demands a careful analysis of the costs and benefits of a range of possible decisions, revealing that the best course of action probably lies somewhere in the middle. Wal-Mart would do best to retain the core components of its EDLP model that have proved so successful in the U.S., while also making broad changes that acknowledge the unique Chinese retail environment and address the source of Wal-Mart’s struggle to perform in the market to date. Geographic, political, and cultural factors in particular require that specific modifications to Wal-Mart’s current strategy be implemented as soon as possible, while a competitive edge is still attainable. Bibliography Chi, P.S.K. and Y.G. Pan. 1999. Financial Performance and Survival of Multinational Corporations in China. Strategic Management Journal 20(4): 359- 374. http://www.jstor.org/ (accessed July 6, 2007). Farhoomand, Ali. Wal-Mart Stores “Every Day Low Prices” in China. (Hong Kong: Asia Case Research Centre). Hong, Junhao. 1994. The Resurrection of Advertising in China: Developments, Problems, and Trends. Asian Survey 34(4): 326-342. http://www.jstor.org (accessed July 5, 2007). Lai, Henry H. 2002. Chinas Western Development Program: Its Rationale, Implementation, and Prospects. Modern China 28(4): 432-466. http://www.jstor.org (accessed July 5, 2007). Pearce, J.L. and K.R. Xin. 1996. Guanxi: Connections as Substitutes for Formal Institutional Support. The Academy of Management Journal 39(6): 1641-1658. http://www.jstor.org/ (accessed July 6, 2007). Scott, R.V. and S.R. Vance. 1992. Sam Walton and Wal-Mart Stores, Inc.: A Study in Modern Southern Entrepreneurship. The Journal of Southern History 58(2): 231- 252. http://www.jstor.org (accessed July 5, 2007). Read More