Wal-Mart International Expansion Strategies - Essay Example

Running Header: Wal-Mart International Expansion Strategies Your QUESTION With reference to the experience of Wal-Mart (case study plus additional information you can gather), provide one example which clearly illustrates a link between two topics or theoretical concepts drawn from two, distinct, previous modules.  One of Wal-Mart hallmarks in its highly successful growth strategy is the use of a very efficient innovative sophisticated supply chain management that is particularly unique in having an inventory tracking system. In illustrating an example of linkages between theoretical concepts in our studies, we look at the use of the supply chain management by Wal-Mart to enhance not only its competitive strategy but also its strategic management accounting approach. This is achieved by improving efficiency, having faster distribution and maintaining quality fresh merchandise in all the regional operations. As illustrated in the case study, Wal-Mart has devised two distinct strategic management approaches that are interlinked and hence compatible to the firm’s overall strategy as set by its founder Sam Walton of providing high quality products at affordable prices. These include competitive strategy and strategic management accounting (SMA). There are four major elements involved in Wal-Mart’s strategic management approach. These include situation analysis, strategy formulation, implementation and evaluation (Bivens, 2006). A company’s main competitive strategy is generally based on devising methods that can bring about a competitive advantage to its market segment (Johnson et al, 2006, Pg.242). On the other hand, SMA is concerned with providing and appraising a company with appropriate accounting information on its business operations as well as its rivals that can be utilised strategically in decision-making. According to the Chartered Institute of Management Accountants (CIMA), management accounting is ‘the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources’ (Caplan, 2004, Pg.1). Hayden et al (2002, Pg.2) identifies four major elements of Wal-Mart’s competitive strategy that can be linked to its strategic management accounting: Control of the retail markets Growth in the U.S. and global market Formation of Positive Brand and corporate respect Diversify into fresh segment of retail trade Irwin and Clark (2006, Pg.2) identify Wal-Mart’s effective utilisation of ‘cost-saving technologies’ and advanced supply chain management is one of the key elements in the firms enviable growth. They also cite Wal-Mart global strategy, which has assisted the firm in its expansion, ease of trading, and technology. Wal-Mart is able to effectively utilise its efficient supply chain systems to gain a competitive advantage over rivals while enabling it maintain low prices through enforced procurement methods that require suppliers to conform to the company’s standards and low prices at all times as well as ‘just on time’ delivery service. Wal-Mart trademark strategy of ‘selling high quality and brand name products at the lowest price’ enhance its competitive strategy and SMA developed through the use innovative sophisticated supply chain management, low production costs, sourcing for goods globally, negotiating directly with suppliers, and adapting to local cultures while exporting its unique efficient management systems (Furman, 2005). Heying and Sanzero (2009) therefore argue that, ‘supply chain management has been the cornerstone to Wal-Mart’s success and remains their primary competitive advantage in the retail/department store industry’ (Pg.1). Wal-Mart’s ‘just in time’ distribution systems that employ electronic tracking using a universal bar code facilitate computerized catalogue and shelf management. Wal-Mart control of the distribution system extends to the suppliers dictating schedules and standards as well as prices hence able to obtain lowest charges on products. Applying SMA, Wal-Mart is able to transfer its cost benefits to the consumers thus gaining ample competitive advantage in its well-structured strategy of lowest prices for high quality goods in all its operational markets. A Wal-Mart commissioned study conducted by Global Insight alleged that the company has saved U.S. consumers $263 billion. However, Bernstein and Bivens (2006) writing for the Economic Policy Institute have disputed this figures as grossly overstated and unreliable. They further argue that Wal-Mart policy of low prices and low wages were unfair on their workers since it enjoyed profit margins that were 50 percent higher than competitors hence can afford to employees better. Nevertheless another study by Ohio State University Extension service revealed that Wal-Mart food prices were 8 percent to 27 percent lower than other large supermarket chains hence saving approximately 20 percent on household food budgets or an yearly saving of $1,335 for an average family of four (NACO, 2009). Wal-Mart strategic management choice of complex inventory systems, global expansion growth, low wages, and direct supply sourcing as wells as pricing innovation strategy has enabled the firm retail its products at low prices and demonstrates a clear link in SMA and competitive strategy. Irwin and Clark (2006, Pg.5) describe the transformation of US business from manufacturer domination to large scale retail networks whereby the latter now source goods abroad in the labour-intensive markets that provide less costly products. These are usually found in the emerging economies like China, India, and Brazil among others. According to Goodman and Pan (2004) 80 percent of Wal-Mart supplies emanate from China while the firm other supplies in diverse countries have erected factories in close proximity to Wal-Mart stores. Wal-Mart huge size and immense purchasing capacity enables the company executes its strategies. There is therefore a distinct linkage demonstrated by Wal-Mart’s supply chain management system that emphasise the firm’s strategic management goals through the pursuit of competitive strategy and strategic management accounting that is exemplified by the efficient distribution and procurement sector [see summary Table 1 below]. Figure 1 QUESTION 2: Compare Wal-Mart experience in countries such as Germany and South Korea on one hand, and China on the other. What determined Wal-Mart’s success or otherwise in these markets? What lessons should Wal-Mart learn from these experiences?  One of the key elements of Wal-Mart strategic management has been international expansion (Hayden et al, 2002). Wal-Mart international expansion, development has been exceptional however, in Germany and South Korea it was unable to replicate its success in these two countries due to stiff competition from established local rivals. The Wal-Mart International division operates in 14 countries and Puerto Rico accounting for 25.7 percent in total sales adding to its over 200 million customers per week in more than 8,000 outlets and a market capitalization of $204.53 billion (Google Finance, 2010); (Yahoo! Finance, 2010) [see Table 1]. Wal-Mart discount policy was not well appreciated by consumers in Germany and South Korea who were more inclined towards higher quality goods and products provided by other rival outlets. Wal-Mart’s unique competitive strategy of pricing strategies was therefore misplaced in some markets that were suspicious of cheap merchandise equating them with low quality. The company was therefore unable to match the local tastes due to the high cost of market entry required hence eventually withdrew from the unprofitable markets. Table 1 Conversely, in China, Wal-Mart was able to overcome initial apathy by successfully adapting to the local cultural preferences like having recently harvested food products and live meat products displayed. After a slow start in the first decade from 1996 operating only 66 stores in 2006, Wal-Mart has since rapidly expanded to emerge as the biggest retail chain with almost 200 outlets after acquiring Trustmart, the Taiwanese based superstores with 101 stores in 34 cities and expanding out into the western regions of China. China has served is the main reservoir for Wal-Mart supplies with estimates indicating that over 80 percent of merchandise are sourced from the country. Similarly, the country with its resurgent high growth and emerging middle class has become the new frontier for many global enterprises keen to tap in on the wealth generated. Wal-Mart has therefore earmarked China as a major strategic segment particularly in the untapped western regions. The Chinese preference for discounted merchandise has served the company’s strategy well while the region provides most of Wal-Mart’s supplies hence becoming its most important international investment destination. Although Wal-Mart has often displayed a latent opposition to industrial unions, the fact that in China unions are mostly used for political funding and organisation made the firm reconsider its policy and embrace the unions. This assisted the firm gain a foothold in Trust-mart chain in 2006. QUESTION 3: What are the challenges and risks that Wal-Mart faces when entering other retail markets? How can the challenges be dealt with and the risks mitigated?  Hayden et el (2002) describe Wal-Mart development ‘expansion strategy internationally has been aggressive and powerful’ (Pg.12). The company’s entry in hostile market or countries involves aggressive corporate takeovers of large local retailers, which are consequently converted into Wal-Mart stores. Some of the acquisitions include 122 Woolco stores in Canada purchased in 1994 converted to Wal-Mart and expanded further to more units, German’s Wertkauf‘s 21 units, 229 units of ASDA chain in UK, and Seiyu Ltd in Japan purchasing a six percent stake (Walmart.com, 2009). Wal-Mart expansion both domestically and internationally has however been plagued by hostile elements especially in small towns and communities. Most of this bias has been fuelled by adverse publicity and distorted reports. Although here have been several claims of Wal-Mart’s market entry negative impacts on small business, Dean and Sobel (2008, Pg.8) refutes these charges asserting that there is minimal empirical data to support the allegations while the few that are run out of business are duly compensated by newer established enterprises through the process of creative destruction. Likewise, Wal-Mart like other major superstores has been accused of practising gender imbalance in the workplace. A study by Drogin (2003) on Wal-Mart workforce revealed that although a significant number of the employees (64 percent) were women, most of them were found in lower hierarchy posts and were comparably paid lower wages. A majority of the women are engaged on hourly basis (over 70 percent) with very few on salaried jobs though they had superior performance ratings and lower turnover rates (Drogin, 2003, p. 46). Although Wal-Mart has continuously enjoyed top spot in Fortune magazine 500 most admired companies, its perceived gobbling up of small enterprises and unfair labour relations has not endeared it to many local communities. Bianco and Zellner (2003) allude to the growing ‘movement’ to hinder the firm’s expansion hence constituting its greatest threat in its expansion strategies. To overcome this negative perception, Wal-Mart can embark on measures to improve the firm employee’s benefits which studies reveal to be lower the industrial average (31 percent) with only a mere 23 percent under the firm’s health insurance scheme (Irwin and Clark, 2006, Pg.7). Nevertheless, since the firm has been enjoying massive profit margins, it can easily afford to accommodate the employee pay demands while avoiding its entry bottlenecks. In its expansion programs, Wal-Mart has also been accused of running out of business the ‘mum-and-pop’ businesses. According to a report by leading anti-Wal-Mart organization Wal-Mart Watch in 2005, the firm’s expansion in Iowa led to the closure of many such stores including 555 grocery stores, 298 hardware shops, 293 construction dealers, 161 variety stores, 158 ladies shops and 116 pharmacies. Dean and Sobel (2008, Pg.39) nonetheless dispute such findings, alleging that despite its phenomenal expansion and low price strategy, many small business continue to flourish while many of those studies lump in subsidiaries stores from many from Wal-Mart rivals including Kmart, Target and Home Depot hence overstating the results. Wal-Mart can counter these analyses by initiating its own studies using reputable research firms to disown the allegations while also highlighting the economic benefits on household’s budgets due to the lowered costs and employment of local citizens. Another hindrance encountered by Wal-Mart in its expansion particularly in international markets is matching local shopping tastes and cultures to those practised or used successfully elsewhere. In Mexico and China, Wal-Mart had to compromise to suit local customs and food requirements while gradually integrating its efficient supply chain management systems on the local stores in addition to changing the shopping preferences of the local consumers. Wal-Mart also hired local staff that had better understanding of local cultures while negotiating directly with local suppliers who are forced to adapt to the firms stringent high standards efficient and low price strategy. In regions that have more ingrained local customs like Japan, Wal-Mart has employed its market ingrained penetration acquisition strategy of buying out nationally spread successful chains that are later gradually changed to Wal-Mart stores. Wal-Mart has also been accused of harming the environment in its erection of megastores that require large tracts of land usually single story buildings with expansive parking lots. This often led to drainage problems of flooding and land filling. Such violations have cost the firm $5.5 million in 2001 in damages to 17 stores and $3.1 million for breaching the Clean Water Act by destroying storm water drainages for 24 stores in nine states (USEPA, 2004). The firm has also been accused of aggravating traffic gridlocks (Irwin and Clark, 2006, Pg.10). Although these are normal consequences of large stores expansions, Wal-Mart is actively countering these negative assertions by enhancing its ‘going green’ initiatives. According to Wal-Mart’s CEO, Lee Scott, the company has affirmed to ‘be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain Wal-Mart’s resources and the environment’ (Heying and Sanzero, 2009, Pg.5). Wal-Mart has also been accused of exacerbate poverty levels of its employees due to meagre remunerations. A study by the University of California Berkeley Labour Centre approximated that 38 percent of Wal-Mart employees’ families were more likely to subsidize their survival using food stamps and school lunches, which in effect additionally cost federal taxpayers $2,103 (Dube and Jacobs, 2004). Goetz and Swaminathan (2004) likewise argue in their study using County-level socioeconomic data from US Census that Wal-Mart aggravated poverty levels in several counties by 0.2 percent. However Irwin and Clark (2004, Pg.10) disputes these findings which they argue are based on assumptions of such employees been employed in higher paying jobs while not assessing the effect of their poverty levels on been unemployed. Nevertheless, Wal-Mart can easily counter these sometimes-biased studies by engaging in reliable feasibility studies that can be jointly conducted with local authorities wary of Wal-Mart intended expansion into their domain to assuage their fears. Conversely, the company can choose to enhance the benefits appropriately hence reduce the negative perceptions. QUESTION 4: Through your own research on Wal-Mart, identify appropriate performance indicators. Once you have gathered relevant data on these, undertake a performance analysis of the company over the last five years. What does the analysis tell you about the success or otherwise of the strategy adopted by the company?  This analysis of Wal-Mart performance is based on both the qualitative and quantitative data mainly from its financial statements and other relevant industry information. The report has incorporated data from October 31, 2004 to October 31, 2009 to establish a veritable analysis. The analysis involves three divergent components: fiscal, comparative industrial analysis, and organisation analysis. Stock performance variance has been attributed to systematic market influence (over 50 percent), industrial influence (13 percent), and the balance due to the firm’s own performance (Arnold, 2002). Although monetary statistics are a good indicator of the financial health of a company, additional extensive investigation among the fiscal and financial journals give a more balanced portrayal of the company status. Key performance indicators therefore encompass both financial and non-financial data illustrating a company’s actual performance as evaluated on set targets. The company analysis therefore required a thorough qualitative and quantitative company analysis. Wal-Mart Inc. qualitative analysis as outlined in question 1 and 2 illustrate how the company has achieved its strategic plans, commercial set-up, strength and weaknesses, potential, and risks envisioned. The analysis summarised by our Gap Analysis (Table 2) and a SWOT Analysis (Table 3) accordingly demonstrate that Wal-Mart has successfully implemented most of its strategic plans hence its performance in that area was above average. The four major targets were: 1) control of the retail markets, 2) growth in the U.S. and global market, 3) formation of positive brand and corporate respect, 4) diversification into fresh segments of retail trade. Wal-Mart has aptly accomplished most of the objectives with the only dent on the firm been on the continued negative public image particularly on its employee relations and impact on small firms in its expansion programs as targeted in the third objective. See summary in the Gap Analysis of the firm illustrated below [Table 2] and SWOT Analysis in the Appendix Table: 3. Table:2 Wal-Mart - Gap Analysis End State Current State Gaps/Action Control of the retail markets Has effective control of most markets (7 percent of total US domestic budget sales). Unable to penetrate in Germany and S/Korea. Aggressive Corporate takeover of established local firms Growth in the U.S. and global markets Domestic US market saturated but global growth possible Slow growth domestically/Growth in emerging development markets like China/India promising Formation of Positive Brand and corporate respect Negative perception in many growth areas due to poor brand image Poor public relations/Engage in aggressive PR campaigns and improve labour relations Diversify into fresh segment of retail trade Lethargic growth into fresh retail trade due to poor economic conditions Overreliance on food products/Develop and improve new growth areas like fuel, technology and telecommunications. In analysis of financial performance, Wal-Mart total sales over the preceding third quarter of fiscal 2010 rose by 1.1 percent but decreased by 0.3 percent during the first nine months compared to previous year [see Table 1]. This was a reflection of the general slump in global consumer spending and negative currency exchange rates (between $2.6 billion and $11.7 billion on the International sales), lower gas prices and price deflation on some products (Yahoo! Finance, 2010). Wal-Mart Return on Investment (ROI) was 18.3 percent and 19.3 percent for the annual period ending on October 31, 2009 and 2008, correspondingly [see, Table 3]. However total net sales only rose by 1.1 percent for the third quarter of fiscal 2010 and declined by 0.3 percent during the first nine months of fiscal 2010 contrasted to the subsequent phase in the previous year [see Table 1] (Yahoo! Finance, 2010). Return on Investment (ROI) declined to 18.3 percent in 2009 from 19.3 percent in 2008. This was attributed to the negative currency trends. [The method used to calculate the ROI is illustrated in Appendix Table 3] The 5-Year average ROI was however maintained at 20.0 percent, the Return on invested Capital at 13.2 percent and the Gross Profit Margin at 25 percent. Nevertheless, Wal-Mart’s gross profit margin improved by 24 percent due to enhanced merchandising and inventory systems mainly in the domestic US operations and Sam’s Club segments (Google Finance, 2010). The 5-Year average Total Debt/Equity Ratio was preserved at 0.67 while the current pricing earning ratio (P/E) as a percentage of 5-Year average P/E was 90 percent. It is therefore fair to describe the company has been performing extremely well even in the face of hostile global economic forecasts and difficult expansion strategies (Forbes.com, 2010). QUESTION 5: What strategy is Wal-Mart pursuing—a global strategy, localization strategy, international strategy, or transnational strategy? Does this strategic choice make sense? Why?  Although Wal-Mart has most of its stores concentrated within the US market (more than three quarters), the company has been a major beneficiary of globalisation. This is exemplified by its enhanced global spread and more particularly, the outsourcing of its merchandise in China, which account by some estimates for over 80 percent of total procurements. To assess its strategy, we first define the different approaches and how they are related to Wal-Mart metrics. In the figure below, Svensson (2001) illustrates the diverse layers that ultimately lead to a global strategy from local strategy approach, international, multinational and global strategy approaches. Figure 2: International Strategies Source: Svensson, 2001 Global strategy approaches encompasses companies having a centralised control in the base headquarters with most of the resources and capacity under the central command. This strategy enables the firm exploit economies of scale by ensuring bulk procurement and negotiating for the entire firm. The strategy also enables the firm have standardised merchandise, operational processes, and marketing methods. In the multidomestic strategy, resources are distributed through the diverse domestic markets the company is operating. This diversified approach enables the branches pursue individual standards hence can customise products to be relevant to local consumption patterns. In the third category of transnational approach, firms capitalise on both global and multidomestic strategies. This means that companies integrate the global with domestic local management whereby the central command office partially exerts control on branches while exporting the advanced technologies employed there while still extending some degree of autonomy to the regions. In the final stage of international strategy, firms adopt neither the multidomestic, transnational nor the global strategies. In our case study, Wal-Mart initially seems to have adopted a multidomestic approach since it allows the various diverse branches to practice some form of autonomy in their decision-making particularly in regards to local consumer tastes and preferences. Nonetheless, Wal-Mart still practices a distinct universal approach that requires all her branches to conform to some standardised inventory tracking system. This management structure is extended to the procurement and supply chain segment that has to conform to the company’s universal standard including low prices, fast delivery while maintain high quality merchandise. This global approach is used by Wal-Mart to maintain its unique brand and standards. For a company to initiate a global strategy, it demonstrates its dependency on foreign markets for clients and source material as well as geographical spread of these markets (Carpenter and Fredrickson, 2001). Wal-Mart has however pursued both multidomestic and global methods hence can be classified as transnational approach but since it has incorporated neither the multidomestic nor the global approach concurrently, the company can in essence be said to be pursuing an international approach, which has all the diverse approaches integrated in the system used by Wal-Mart. This approach by Wal-Mart makes sense since the firm is uniquely indisposed to the supply of merchandise from overseas (China) while it aims at enhancing its brand with its trademark discounted low price regime as well as high standards and technologically driven supply chain management. To ensure that all the factors are integrated, Wal-Mart has therefore adopted a hybrid international system that incorporates both diversified and centralized systems. QUESTION 6: How did expanding internationally benefit Wal-Mart?   From the case study, we discern that international expansion has enabled Wal-Mart to garner considerable economies of scale due to its immense global purchasing power. The major suppliers to the company are also globally positioned hence able to dispense their products to Wal-Mart in diverse regions. The company bulk purchasing allows it to demand significant discounts by directly sourcing supplies from producers hence eliminating intermediaries. The other main benefit highlighted in the case study is the advantage accrued from the flow of ideas from the main countries the company operates. These are replicated in other branches hence enabling the firm to keep ahead of its rivals. International expansion also enhance the company’s profit and diversification when the domestic market got congested or saturated as other international rivals invaded their turf thus the only alternative was to pursue other markets globally. The company’s main international competitors are French based Carrefour, Netherlands’ Ahold and Tesco from the UK. France’s Carrefour has more global presence dispersed in 26 countries, reaping more than half its profits internationally while Wal-Mart only has a quarter of its operations sales generated abroad. With the top retailers only controlling 20 percent of global sales, the potential for international growth is enormous as many emerging markets including Latin America, Southeast Asia, and Eastern Europe register impressive economic growths. One of the main benefits of international expansion for Wal-Mart has been the advantage of globalisation. Irwin and Clark (2006), describe globalisation as ‘increased mobility of goods, services, labour, technology and capital throughout the world ‘(Pg. 2). Wal-Mart has been able to capitalise on these advances by incorporating innovative sophisticated technology to improve its inventory systems as well as the enhanced movement of goods and services to internationally source goods while embarking on large-scale expansion abroad. International expansion has also eased the pressure on domestic development as the anti-Wal-Mart groups fuelled by activists groups and politician persisted in the local US market. By venturing abroad, Wal-Mart is able to maintain its sales growth while diversifying from overdependence on the domestic market. As the global leader in terms of sales, Wal-Mart can actively pursue international expansion as the most viable growth strategy hence improving its presence particularly in the new growth markets that less congested and can still benefit from the company’s low price model and employment. References Bianco, A and W Zellner (2003) Is Wal-Mart Too Powerful? Retrieved January 18, 2010, from BusinessWeek Online: Bernstein, Jared and Josh Bivens (2006). The Wal-Mart Debate: A False Choice Between Prices and Wages. Retrieved January 18, 2010, from Economic Policy Institute (EPI) Online: Caplan, D (2004) Management Accounting: Concepts and Techniques. Retrieved January 12, 2010, from Oregon State University Online: Carpenter, M and J Fredrickson (2001) Top Management Teams, Global Strategic Posture, and the Moderating Role of Uncertainty. Retrieved on 18 January 2010 from EBSCOhost Online Dean, Andrea M and Russell S.Sobel (2008) Has Wal-Mart Buried Mom and Pop? West Virginia University. 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Retrieved January 18, 2010, from Google Finance Beta: Hayden, Patrick , Seung Lee, Kate McMahon and Mike Pereira (2002) Wal-Mart: Staying on Top of the Fortune 500: A Case Study on Wal-Mart Stores Inc. . The Graduate School of Political Management, George Washington University. Washington DC Heying, Adam and Whitney Sanzero (2009) A Case Study of Wal-Mart’s “Green” Supply Chain Management. Irwin, Elena G. and Jill Clark (2006) The Local Costs and Benefits of Wal-Mart. The Ohio State University. NACO (2009) New Wal-Mart in town? Ohio State University study shows community impact likely to be mixed. Retrieved January 17, 2010, from National Association of Counties: Svensson, G (2001) ‘Globalization’ of business activities: A ‘global strategy’ Approach. Management Decision Vol.39 No.1 Pg. 6 - 18 USEPA (2004) U.S. Announces Major Clean Water Act Settlement with Retail Giant Wal-Mart. Retrieved January 18, 2010, from US Environmental Protection Agenc: Yahoo! Finance (2010) Form 10-Q for WAL MART STORES INC . Retrieved January 18, 2010, from Yahoo! Finance: APPENDICES Figure 3 SWOT ANALYSIS Table 3: Calculation of Return on Investment Read More