Wal-Mart and it's International Business - Case Study Example

Wal-Mart and its Wal-Mart and its International Business Is Wal-Mart a multinational enterprise? Why? Wal-Mart is a multinational enterprise, with its operations spanning many countries across the Americas, Europe and Asia. A firm is treated as a multinational enterprise if its business operations extend beyond its national borders i.e., if the firm is in involved in international business. Expansion of business activities on the one hand and strategizing operations for improved competitiveness on the other, drive firms to international operations. Globalization and liberalization of the economies of the world are the important factors facilitating cross-border transactions. International business is in two basic forms viz., trade and foreign direct investment (FDI) and a multinational enterprise can be engaged in either or both of these activities. Trade involves exports and / or imports of goods and services. One of the most important facets of Wal-Mart business strategy is offering the best quality products at the lowest possible prices. To achieve this objective, Wal-Mart depends heavily on imports from countries such as China, where the productions costs are significantly lower, mainly on account of low-cost manpower. For example, its imports from China during 2003 amounted to $15 Billions (Case study, Rugman & Collinson, 2009, pp.30 &31). In contrast to exports / imports, FDI is investment in foreign countries, with a view to set up operation bases to service the local / regional markets from such bases. FDI helps to expand markets and competitiveness due to many factors such as savings on freight costs, commanding scarce but locally available raw materials, catering to the Wal-Mart and its 2 tastes of local consumers in terms of product specifications and prices etc. Wal-Mart has made significant investments in Canada, Mexico, UK, Germany and Japan, through partnerships or acquisitions. Thus Wal-Mart is a multinational enterprise through it trading and FDI activities. 2. Why is Wal-Mart making foreign direct investments in Europe? Wal-Mart’s strategy of wide coverage of the US market with quality products offered at lowest prices soon found competitors as well as distracters. The factor of cheap imports from China and other Asian region sweat-shops could be easily copied by the competitors. Wal-Mart’s distracters targeted its reliance on imports from China at the cost of local producers and the adverse impact of its massive operations on the survival of small businesses, like the neighborhood stores. In the face of such developments, Wal-Mart had to find new markets for business expansion. The US, European Union (EU) and Japan form the triad of economic regions in the developed world and command a high standard of living and lion’s share in international business. The EU has 27 member countries, all of which are geographically and culturally close. EU has emerged as the world’s largest importer and exporter and its gross domestic product (GDP) is higher than that of the US or Japan (Rugman & Collinson, 2009, Ch.1). The political, economic, social and technological factors of the region give confidence to businesses for direct investment as these democratically governed countries respect international treaties. Investments and intellectual property rights are protected by adequate laws. Wal-Mart and its 3 Thus, the EU region presented a high potential market for replicating its successful US operations. However, European product prices are quite competitive and the only way to enter into this market was through direct investment, either in partnership with the already established players or through acquisitions or through grass-root ventures. Wal-Mart chose FDI route through acquisitions for its European operations. 3. Using the Porter model, what are the determinants of Wal-Mart’s competitive advantage? Porter’s well-known matrix of five forces viz., “bargaining power of customers, bargaining power of suppliers, threat of substitute products or services, rivalry among existing competitors and threat of new entrants” can be used to analyze the industry-wide competition (Porter, January 2008, HBR). Knowing the industry-wide competitive situation, a firm has to strategize its operations to secure competitive advantage for itself vis-à-vis its rivals. The determinants for a firm’s strategic actions therefore are: demand situation (buyers, competitors and substitutes), factor situation (technology, govt. policies, growth rate etc.), support situation (suppliers) and strategy (Rugman & Collinson, 2009, Ch.1). Wal-Mart is in the business of retail marketing and it core philosophy consists of low prices and extensive market coverage. The determinants of its competitive advantage are the support situation, demand situation and the strategy it adopts to meet the other two. It exercises significant buyer-power over suppliers on account of its market reach and size. This buyer-power translates into its ability to negotiate for product improvements and lower supply prices. Globalization and liberalization of the Chinese Wal-Mart and its 4 economy provided opportunities for sourcing cheap products from that country in large volumes. These benefits are then passed on to customers through lower end-user prices. Market coverage has been achieved by setting up huge warehouse style retail stores in the relatively inexpensive suburban areas. Thus the strategy of tight control on input costs on one hand, and attracting more customers through improved products at lower prices, ensures competitive advantage for Wal-Mart. Razor thin profit margins are compensated by high volume sales. 4. Is Wal-Mart’s competitiveness in Europe dependent upon the same determinants listed in Q. 3 above? Why? Wal-Mart’s foray into Europe consisted of its German and the UK operations and in both countries, it acquired existing supermarket chains. Its formula for success in the NAFTA region in general and in the US market in particular was ‘always lowest prices’ and the strategy adopted was to utilize its bargaining power with the suppliers, invest in low cost but large retails outlets in the suburban areas. These determinants are not appropriate for the European market for reasons cited below: i. Competitors in Europe have already adopted the same strategy of offering quality products at lower prices as Wal-Mart. ii. While in the US, Wal-Mart’s market coverage is indeed very significant, it is not so in Europe since the real estate costs (land and development) here are much higher than in the US. iii. Government policies in Europe support local small and medium scale industries. For example, Germany insists that at least 90% of supplies must be outsourced Wal-Mart and its 5 locally and to this extent, the advantage of importing cheaply from China is not available to Wal-Mart. In view of its limited operations, Wal-Mart also can not leverage its buying power as in the US market. iv. Labor costs in Europe are higher and this coupled with higher investment costs, precludes the use of low cost operations as a strategy. v. In terms of management practices, Wal-Mart allows significant freedom of action for its managers in the US and they operate as independent profit centers. The same approach did not succeed in the European operations with differing policies inviting legal and administrative difficulties. To conclude, Wal-Mart’s competitiveness in Europe has to be based on a different set of determinants than those in its home market. Wal-Mart and its 6 References Case study: Wal-Mart. Rugman, A. M. & Collinson, S. C., (2009), International Business, (5th Ed.), Prentice Hall (pp.30 & 31). Rugman, A. M. & Collinson, S. C., (2009), International Business, (5th Ed.), Prentice Hall (Ch.1). Porter, M.E., (2008), “The five competitive forces that shape strategy”, Harvard Business Review, January 2008 (pp.78 to 93). Read More