Reference no: EM132229829

International Planning and Strategy

Competing in a Global market Place - Wal-Mart

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 2005 sales of $315 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 upon a combination of efficient merchandising, buying power, and human relations policies. Among other things, Wal-Mart was a leader in the implementation of information systems 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 operating 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, where it is taking market share from established supermarkets. By 1990, however, Wal-Mart realized 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, they said, was too American a company. 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 centers, resulted in stocking problems and raised costs and prices. Initially, prices at Wal-Mart in Mexico were some 20 percent above prices for comparable products in the company’s U.S. stores, which limited Wal-Mart’s ability to gain market share. There were also problems with merchandise selection. Many of the 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 centers 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 $12.5 billion. The Mexican experience proved to Wal-Mart that it could compete outside of the United States. It has subsequently expanded into 13 other countries. Wal-Mart entered Canada, Great Britain, Germany, Japan, and South Korea, by acquiring existing retailers and then transferring its information systems, 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 more than 2,700 stores outside the United States, employed some 500,000 associates, and generated international revenues of more than $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 Procter & 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 to 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 realized 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. In comparison, Wal-Mart is a laggard with less than 20 percent of its sales in 2005 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 2005, although forecasts suggest the figure could reach 40 percent by 2010, with Latin America, Southeast Asia, and Eastern Europe being the main battlegrounds.

Case Questions

1. Outline the benefits derived from Walmart’s international expansion.

2. List and explain any 3 international business risks that Wal-Mart faces when entering other retail markets? How can these risks be mitigated?

3. Explain why Wal-Mart first entered Mexico via a joint venture? Identify reasons why Walmart later purchased its Mexican joint venture partner in 1998?

4. Identify and explain the strategy Wal-Mart entered Mexico with and which strategy it later pursued; a global strategy, localization strategy, international strategy, or transnational strategy. Does this strategic choice make sense? Why?