Wal-Mart’s Global Expansion Established in Arkansas in 1962 by Sam Walton, over
ID: 425483 • Letter: W
Question
Wal-Mart’s Global Expansion
Established in Arkansas in 1962 by Sam Walton, over the last four decades Wal-Mart has grown rapidly to become the largest retailer in the world with sales of US$330 billion, 1.8 million associates (Wal-Mart’s term for employees), and almost 7,000 stores. Until 1991, Wal-Mart’s operations were confined to the United States. There it established a competitive advantage based on a combination of efficient merchandising, buying power, and human relations policies. Among other things, Wal-Mart was a leader in the implementation of information system to track product sales and inventory, developed one of the most efficient distribution systems in the world, and was one of the first companies to promote widespread stock ownership among employees. These practices led to high productivity that enabled Wal-Mart to drive down its operation costs, which it passed on to consumers in the form of everyday low prices, a strategy that enabled the company to gain market share first in general merchandising, where it now dominates, and later in food retailing, there it is taking market share from established supermarkets. By 1990, however, Wal-Mart realised that its opportunities for growth in the United States were becoming more limited. Management calculated that by the early 2000s, domestic growth opportunities would be constrained due to market saturation. So the company decided to expand globally. Initially, the critics scoffed. Wal-Mart as a company, they said, was too American. While its retailing practices were well suited to America, they would not work in other countries where infrastructure was different, consumer tastes and preferences vary, and where established retailers already dominated. Unperturbed, in 1991 Wal-Mart started to expand internationally with the opening of its first stores in Mexico. The Mexican operation was established as a joint venture with Cifera, the largest local retailer. Initially, Wal-Mart made a number of missteps that seemed to prove the critics right. Wal-Mart had problems replicating its efficient distribution system in Mexico. Poor infrastructure, crowded roads, and a lack of leverage with local suppliers, many of which could not or would not deliver directly to Wal-Mart’s stores or distribution centres, resulted in stocking problems and raised costs and prices. Initially, prices at WalMart in Mexico were some 20 percent above prices for comparable products in the company’s US stores, which limited Wal-Mart’s ability to gain market share. There were also problems with merchandise selection. Many of the Wal-Mart stores in Mexico carried items that were popular in the United States. These included ice skates, riding lawn mowers, leaf blowers, and fishing tackle. Not surprisingly, these items did not sell well in Mexico, so managers would slash prices to move inventory, only to find that the company’s automated information systems would immediately order more inventory to replenish the depleted stock. By the mid-1990s, however, Wal-Mart had learned from its early mistakes and adapted its Mexican operations to match the local environment. A partnership with a Mexican trucking company dramatically improved the distribution system, while more careful stocking practices meant that the Mexican stores sold merchandise that appealed more to local tastes and preferences. As Wal-Mart’s presence grew, many of Wal-Mart’s suppliers built factories near its Mexican distribution centres, so that they could better serve the company, which helped to further drive down inventory and logistics costs. Today, Mexico is a leading light in Wal-Mart’s international operations. In 1998, Wal-Mart acquired a controlling interest in Cifera. By 2005, Wal-Mart was more than twice the size of its nearest rival in Mexico with some 700 stores and revenues of US$12.5 billion. The Mexican experience proved to Wal-Mart that it could compete outside of the United States. It has subsequently expanded into thirteen other countries. Wal-Mart entered Canada, Great Britain, Germany, Japan, and South Korea, by acquiring existing retailers and then transferring its information system, logistics, and management expertise. In other nations Wal-Mart established its own stores. As a result of these moves, by mid-2006 the company had over 2,700 stores outside the United States, employed some 500,000 associates, and generated international revenues of more than US$62 billion. In addition to greater growth, expanding internationally has bought Wal-Mart two other major benefits. First, Wal-Mart has also been able to reap significant economies of scale from its global buying power. Many of Wal-Mart’s key suppliers have long been international companies; for example, GE (appliances), Unilever (food products), and Proctor and Gamble (personal care products) are all major Wal-Mart suppliers that have long had their own global operations. By building international reach, Wal-Mart has used its enhanced size to demand deeper discounts from the local operations of its global suppliers, increasing the company’s ability of lower prices to consumers, gain market share, and ultimately earn greater profits. Second, Wal-Mart has found that it is benefiting from the flow of ideas across the 14 countries in which it now competes. For example, a two-level store in New York State came about because of the success of multilevel stores in South Korea. Other ideas, such as wine departments in its stores in Argentina, have now been integrated into layouts worldwide. Wal-Mart realised that if it didn’t expand internationally, other global retailers would beat it to the punch. Wal-Mart faces significant global competition from Carrefour of France, Ahold of Holland, and Tesco from the United Kingdom. Carrefour, the world’s second largest retailer, is perhaps the most global of the lot. The pioneer of the hypermarket concept now operates in 26 countries and generates more than 50 percent of its sales outside France. Compared to this, Wal-Mart is laggard with less than 20 percent from its sales in 2006 generated from international operations. However, there is room for significant global expansion. The global retailing market is still very fragmented. The top 25 retailers controlled less than 20 percent of worldwide retail sales in 2006, although forecasts suggest the figure could reach 40 percent by 2010, with Latin America, Southeast Asia, and Eastern Europe being the main battlegrounds.
Benefits/advantages gained from international expansion;
Competitive pressures facing international business;
The four strategic alternatives (strategies of international business) for international operations.
Explanation / Answer
BENEFITS/ADVANTAGES GAINED FROM INTERNATIONAL EXPANSION
Walmart has identified its winning strategy as Competing on low cost. The company is widely accepted as a low cost provider because they sell goods in much lower price of up to five percent less and hence known for its cost leadership. This is a generic strategy of Walmart in terms of their cost.
As a result of the substantial international expansion to various countries, Walmart could reap the following benefits.
In terms of the economies of scale, the company had a competitive advantage. As a result of expansion, there was a proportionate savings in cost with an increase in production of goods. Since the suppliers of Walmart like GE, Unilever were established long back at a global level, Walmart had a fair advantage of the buying power in order to demand a substantial amount of discount. Subsequently, the customers were benefited as they could get the products at a lower price, which enabled Walmart to gain more market share and an increase in profits.
These could be counted as two major benefits that Walmart gained through its international expansion.
COMPETITIVE PRESSURES IN INTERNATIONAL BUSINESS
Along with numerous benefits, Walmart is also facing significant competition from players of other countries. In every country, Walmart has a different competitor. For example, it faces competition from Carrefour of France, Ahold of Holland and Tesco from the United Kingdom. In order to sustain its market share along with these competitors is not an easy task for Walmart. It has to devise different strategies identifying the strengths and weakness of different competitors and come up with winning ideas for maintaining its leadership position.
On a competitor analysis, it is found that the competition is very strong in the retail industry. There are numerous firms of different sizes competing in this industry. The competitive pressures from external market is very significant for Walmart to maintain its competitive position. Firstly, there are large number of firms in the retail market. Secondly, there are large varieties of retail firms. Finally, the aggressiveness of the players in order to gain a significant market share is also strong. The pressures from these three factors is so strong that Walmart experiences a high competitive pressure in the retail industry.
The intense competition has forced Walmart to lower its prices. Though Walmart has the reputation of low cost retailer, it continue to face severe competition from discount stores like Aldi. It led to a lower price gap to Walmart which it once had. This means that competition has limited the power of Walmart to increase the prices. With another competitor Lidl planning for a store launch in US in 2018, Walmart has been planning to invest in lower prices for the whole year.
In terms of customer service, the company has devised strategies to provide a better customer service than its competitors. The company has plans to lower the prices to attract new customers.
Walmart is also taking initiatives to improve its operations. Analysts say that expansion of Lidl into the mid-Atlantic region of the US has led Walmart and other retailers to improve their operations. Thus the pressure to overcome the price deflation that the competitors create in the market is another challenge for Walmart to sustain in the international business. This state of deflation that erodes margins is already being experienced by Walmart in the United Kingdom. As a counter action, Walmart has identified its areas of improvement and has focused on its operations. The company must continue to be aggressive to remain competitive. It must continue to strive in its growth pace to maintain its position as an industry leader.
FOUR STRATEGIC ALTERNATIVES FOR INTERNATIONAL BUSINESS
It is a profitable mode of expansion for companies as the capital for expansion is majorly borne by the franchisees. Here the investors who are interested to buy an outlet of the company, invest to the company. While the company could expand to new markets saving its time and a large share of money.
Direct exporting involves selling of goods directly to the customers in the international market. In order to implement this strategy, the firm must have representatives in the international market. This can be achieved by numerous ways. Firstly, by sending sales representatives to the foreign market. Secondly, by selecting local representatives and agents for the new market. Thirdly, by choosing local distributors who will buy the products and resell in the local market. Finally, by establishing a local subsidiary to have control over local players.
A joint venture is a contractual and strategic partnership between two or more business entities to pursue a business together. One of the partner should be a foreign partner which is well established in the foreign market. The partners in a joint venture contribute to their human resources and capital in exchange for a share in their profits.
Licensing is another way to enter into a foreign market with minimum risk. It is business agreement which grants special permissions such as to use patents, copyrights in exchange of payments. Licensing help the firms to reach new markets which are restricted for trade without much risk or investment.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.