Wal-Mart’s Global Strategy Overview * In the past two decades Wal-Mart has been the leading domestic retailer. In 2002, Wal-Mart stood atop the Fortune 500 for the first time. Wal-Mart’s top ranking reflects the rise of retailing as one of the most important global industries, as well as the company’s individual excellence and consistent performance. In 2001 the company had higher sales than the next four largest global retailers combined. The sales differential against U. S. based retailers is even more pronounced, as Wal-Mart top line in 2001 was more than four times that of the second largest retailer Home Depot.
Its primary success has come from its excellence in customer service, supply chain management, and ability to keep prices low. The problem facing Wal-Mart is determining how to sustain its dominance in the industry. The underlying strategic factors contributing to this problem are the United States’ retail market becoming very saturated and Wal-Mart’s inability to be profitable globally. * Its core retail business can be divided into four retail divisions: Wal-Mart Stores, Super Centers, Sam’s Club Warehouses and Neighborhood Markets.
Wal-Mart stores and Super Centers provide “one-stop family shopping”; combining groceries and general merchandise departments. Sam’s Club is the nation’s leading members-only warehouse club providing discounted prices for members by buying directly from suppliers. Neighborhood Markets offer a convenient shopping experience for customers who need groceries, pharmaceuticals and general merchandise. * Other competitors in the domestic retail environment are; Sears, Costco, K-Mart and Target. Internationally, each country has a domestic equivalent to Wal-Mart with few spanning outside of their borders. Carrefour (France), Tesco (U.
K), and Metro (Germany) are the exception with retail locations in several countries. * Keeping their stores no-unionized is also a key success factor in the company’s low cost provider strategy. With all of their competitors unionized, Wal-Mart enjoys a substantial low cost salary differential. Another contentious low cost strategy employed by Wal-Mart is to only hire part-time workers. By using only part-time “associates”, Wal-Mart is not liable to pay any benefits thereby saving millions of dollar in benefit payroll costs. Financials * Year- to-date (case date 2002), Wal-Marts comparable store sales have increased 7. % with a 7. 8% increase for the Wal-Mart Stores segment and 4. 7% for Sam’s Club. Wal-Mart holds 7% market share of the US retail industry and continues to gain share in both the discount and food/grocery channels. Wal-Marts domestic operations continue to grow faster than the overall retail market and faster than its major competitors. In 2001, Wal-Mart had its biggest gain in market share in the past five years. * The supercenter’s account $65 billion-$70 billion in sales in 2001 or 30% of total company sales. On average a supercenter carries about 100,000 items.
The International segment contributed more than 16% of 2001 company revenue and 12% of 2001 company operating income, has made significant progress in improving its profitability. By 2002 one-third of company sales growth is projected to come from this segment. * Wal-Mart has become adept at leveraging the buying power behind its $218 billion in global sales (2001). Through its’ global supply logistics and procurement program, its general merchandising margin has risen 9% in total. Wal-Mart can maximize its strong position with suppliers to combine the best prices with a very high quality products offering. Year over year sales have grown between 12% and 16% while inventories have been averaging between 5%-6% an indicator of Wal-Marts strong inventory controls. * With the U. S. retail market becoming more saturated, Wal-Mart knew that to sustain its leadership it would have to expand globally. Wal-Mart entered Mexico with a joint venture and later entered Canada (199 stores), Puerto Rico (18 stores), Argentina (11 stores), Brazil (22 stores), Japan (409 stores), Korea (12 stores), China (20 stores), Germany (96 stores) and the United Kingdom (249 stores).
Despite Wal-Mart’s numerous efforts, its international division’s profitability lagged well behind that of domestic operations. This is mainly due to Wal-Mart’s inability to adapt to local cultures, maintain its excellence in customer service, and maintain low prices. Internal Analysis Tangible Resources * Wal-Mart operates the world’s biggest private satellite communications system. This system allows it to track sales, replenish inventory, process payments, and regulate store temperatures all in real-time. Wal-Mart has already built many stores in foreign countries.
Now it just needs to manage them efficiently and adapt to the local culture. Intangible Resources * Wal-Mart has exceptional brand reputation in the U. S. which is primarily due to emphasis on customer and community service. Wal-Mart also has excellent employee loyalty because it gives its employees profit-sharing and stock ownership plans. This helps employees to think and behave like an owner of the company. Financial Resources * Wal-Mart has plenty of financial resources because it is the United States’ leading retailer.
Profits produced by the domestic stores will help Wal-Mart improve its global operations. Capabilities * Wal-Mart’s core competencies are its supply chain management and customer value focus. The hub and spoke distribution system allows Wal-Mart to quickly replenish stock in its stores and to minimize unproductive space. Wal-Mart’s state of the art information systems track in-store sales and transmit the information to the suppliers. The customer value focus puts emphasis on customer service which helps to improve brand recognition.
Wal-Mart can transmit its supply chain abilities overseas but customer service and product placement in a foreign country requires extensive research into the local culture. External Environment * The U. S. retail market is becoming very saturated, so Wal-Mart needs to compete globally to sustain its leadership in the industry. * The pressure for local adaptation in foreign countries is high. Wal-Mart prides itself on its excellent customer service. In order to have excellent customer service in a foreign country, Wal-Mart needs to understand the local culture very well. Local regulations and laws need to be clearly understood and followed. In Germany, Wal-Mart got bad publicity because they did not follow some important German laws and regulations. * Wal-Mart answered the question of Arena’s by expanding into geographically nearby countries first followed by distant regions. This allowed a measured approach to local adaptation. An analysis of the external environment and Wal-Mart’s success and challenges with their strategy, is provided by applying the CAGE framework. * Table one provides an analysis of the distance factors within the host country.
A plus (‘+’) represents the successful strategy implementation and a minus (‘-‘) indicates areas of challenge in the host country environment. Economic Logic and Differentiators * Due to the saturation of its’ domestic market and maturing revenue growth, Wal-Mart embarked on a global strategy as a catalyst for international brand and revenue growth. Emerging markets are experiencing double digit growth with a corresponding transition of underserved low wage consumers into middle and upper middle class consumers with exponential buying power. Wal-Marts low price differentiator translates well across most borders as global consumers seek low cost quality merchandise. For example, its’ Japanese venture faced typical problems as other foreign entrants namely “fastidious Japanese consumers” with a reputation for rejecting inferior quality merchandise. The ability to tailor their strategy to local customs will prove critical to Wal-Marts future success. * The potential for economies of scale from global expansion are enormous for Wal-Mart.
Using its’ proven distribution network, Wal-Mart is well positioned to spread fixed costs over a larger sales and asset base and increase purchasing power. * Scope economies are also achievable by sharing resources across different products. Environment, Staging and Pace * Using the CAGE framework, Wal-Mart’s initial expansion strategy appears to be organic in nature. By staying close to home, (Canada, Mexico, and Puerto Rico) Wal-Mart was able to leverage its’ brand to familiar consumers (relatively similar culture, administrative heritage and economics).
This low risk strategy facilitated a “test” case allowing Wal-Mart to examine the challenges of global expansion. Before venturing further afield. Implementation and Vehicles * The entry vehicle strategy used by Wal-Mart to expand globally ranges from alliances with local retailers, to mergers and wholesale acquisitions. The strategy of international growth through acquisition allows Wal-Mart instant access to proven local strategic locations (sometimes hundreds of stores per purchase), distribution networks and demographic sensitivity.
This is also the fastest form of entry, buying fully staffed existing businesses, some already successful. * Targeting struggling businesses, such as Canada’s Woolworth/Woolco brand, provide substantial economic advantage allowing foreign direct investment below market prices. * Wal-Mart needs to obtain a transnational strategy to facilitate and mitigate the pressures to adapt locally and keep prices low. This international strategy will also allow Wal-Mart to obtain economies of scale, adapt to local markets, and locate activities in optimal locations, and increase knowledge flows and learning.
Wal-Mart’s knowledge and learning of foreign markets is very important if it wants to have excellent customer and community service in foreign countries. * In addition to obtaining a transnational strategy, Wal-Mart should only enter into joint ventures until their knowledge of foreign markets is strong. Joint ventures with companies in foreign countries will help Wal-Mart to adapt locally. The foreign company can help Wal-Mart understand the country’s laws and regulations as well as customs and culture. International Strategy * Entry vehicle through acquisition of existing brands (struggling entrenched dominant player).
Advantages include speed to market, fully staffed business, and utilizing and improving existing distribution systems and strategic retail locations. * Identify locations with synergistic opportunities which complement existing Wal-Mart core competences (brand value low prices, customer service, scale economies, supply chain management, advanced IT systems and management expertise). * Leverage Wal-Mart purchases to maximize scale economies. * Diversify market specific business opportunities. * Build own stores and go head to head with existing competitors. Issues/Challenges
Wal-Mart’s international expansion had succeeded in 2002 by contributing more than 16% of 2001 company revenue and 12% of 2001 company operating income. Wal-Mart re-affirmed their strategic goal of continued international expansion in 2003 by stating, “Simply put our long term strategy is to be where we’re not. ” However, Wal-Mart had several issues during their expansion that needed to be addressed. * Inability to Deliver Competitive Advantages of Supply Chain Efficiency – Wal-Mart’s economies of scale and every day low price competitive advantage is based on a highly efficient supply chain supported by advanced computer systems.
Wal-Mart intended to leverage their processes and technologies internationally to implement similar efficient and streamlined supply chains. In several countries, Wal-Mart was unable to streamline the supply chain or leverage their IT systems effectively resulting in a competitive disadvantage to local retailers. This issue was most prevalent in South America with its’ inefficient supplier structure and compatibility issues with Wal-Mart systems. * Localization of products and format to cultural preferences – Wal-Mart’s international strategy used the domestically successful U.
S. products and store formats in an effort to leverage scale economies. This strategy didn’t always translate globally however. Wal-Mart had inconsistent implementation and adaptation of local products and customs for country specific markets specifically Japan and Brazil. In China, products were localized and the stores were more successful in meeting consumer needs. In Germany, the basic large store format, with hands on staff, did not meet cultural norms. Also, Wal-Mart was unable to compete against entrenched local competition and eventually withdrew from the market. Inability to respond to price wars with entrenched competition – Wal-Mart’s country by country strategy over the decade provided ample opportunity for competitors to prepare competitive responses in the form of price wars.
Wal-Mart had to manage their entry expenses and support the initial learning process while entrenched competition quickly responded to Wal-Mart’s entry with competitive pricing and promotions. In Germany and Japan the price war competition was fierce and resulted in stalled international expansion in these countries. Conclusions and Recommendations A critical success factor for Wal-Marts global expansion should center on identifying high growth emerging markets where its brand recognition (and appreciation) can grow with the prosperity of its citizens. Its’ difficulty in Germany, Japan and South Korea can be summarized by examining their mature markets and cosmopolitan consumer tastes. Consumers from high GDP countries have high purchasing power and enjoy exercising this privilege. Wal-Marts low cost, inferior quality commodity products, generally don’t factor into their purchase decisions. Wal-Mart needs to spend valuable time understanding local conditions and customs.
We see this trend in Mexico – no Spanish language labels on products in a predominantly Spanish speaking; Canada, – English only flyers in Quebec, a fiercely French speaking province; Germany, – consumers don’t like buying everything under one roof, don’t like greeters, found associates intrusive, are “green” (like to bag groceries with own bags); and, Japan – consumers rejected what they perceived as inferior product quality, high labor costs and difficult distribution system. Wal-Mart also cannot ignore the regulatory environment they are entering. Missteps in Germany caused unnecessary headwinds. * Global adaptation of their low cost provider model, efficient distribution system, advanced IT adaptation and proven management skills should bode well for future profits. This is international strategy will enable Wal-Mart to adapt to local markets, locate activities in optimal locations, attain economies of scale, and increase knowledge flows and learning.
Specifically Wal-Mart should review their differentiators within the value chain for operation components and develop expertise/knowledge center. * Wal-Mart should identify a subset of core products and processes that benefit from global economies of scope and scale and prioritize these for adoption by the local country. * Wal-Mart’s ability to deliver the low prices and respond to price wars, can be greatly improved by moving to a regional strategy.
Specifically for Europe Wal-Mart can establish a U. K. distribution facility to achieve economies of scope and arbitrage opportunities throughout the region. A similar model can be applied to South America, Asia, India and the Middle East. Utilizing this approach, Wal-Mart will have greater product variability/options, multiple supply chain opportunities, and provide lower pricing in multiple countries.