The global economy is facing a downturn due to looming oil prices. The US economy is in recession and it has hit the corporate America. Even in such a scenario, Wal-Mart Inc.’s, United States’ sales and profit surged in the first quarter of 2008. even then the giant discount chain is cautious for it is not immune to the economic slowdown, even though Wal-Mart showed an increase in profit by 6.9 percent in the first quarter of the fiscal year, 2008, which, according to the company’s management, was due to belt-tightening consumers flocked to its bargain prices.
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With the slowdown of the US economy, Wal-Mart needs a different strategy other than their core strategy of being the price leader. Recently Wal-Mart has gone global and has entered European and Asian markets. In this phase of slowdown, could global expansion be the company’s strategy to maintain its growth momentum?
Today, Wal-Mart is the largest retailer in the world, and is spreading its power throughout the world, starting with nine countries in Asia, Europe and South America. The expansion has planned for more in the near future. With its attempt to penetrate hypermarket culture in every country which it enters, the company is facing numerous bottlenecks. Acquisitions and joint venture with local businesses became a problem in nationalism country.
Thus, strict governments’ rules and regulations blocked business operations. Misreading competitors and late entry destroyed location opportunities, as well as harmed relationship with local suppliers. Inadaptability to local culture has become a big problem in global business for Wal-Mart.
Moreover, low wages, unions and sex discrimination brought Wal-Mart to be an evil in employees’ perspective. Where is Wal-Mart going wrong? Is its globalization strategy right? By successfully adopting a cost leadership strategy over the decades, Wal-Mart has emerged as the largest company (in terms of revenues) in the world. The case examines in-depth the key elements of the cost leadership and globalization strategy followed by Wal-Mart and how they are causing conflict of interest to the company’s stakeholders.
Wal-Mart is the world’s largest retailer with $374.526 billion in sales for the fiscal year ending Jan. 31, 2008. Wal-Mart Stores, Inc. includes Wal-Mart supercenters, discount stores, Neighborhood Markets and Sam’s Club warehouses. It operate more than 4,100 facilities in the United States and more than 3,100 additional facilities in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom. Wal-Mart has established a joint venture with Bharti Enterprises to establish wholesale cash-and-carry and back-end-supply management operations in India. Through their relationships with 56,000 U.S. suppliers, we spent $200 billion on merchandise in 2007 and supported more than 3 million American jobs. (Corporate Fact Sheet, 2008)
Wal-Mart became an international company in 1991 when a SAM’S Club opened near Mexico City. Just two years later, the Wal-Mart international division was created to oversee growing opportunities worldwide. Wal-Mart has 7,250 stores, including about 975 discount stores, 2,800 combination discount and grocery stores (Wal-Mart Supercenters in the US and ASDA in the UK), and 590 warehouse stores (SAM’S CLUB). About 55% of its stores are in the US, but Wal-Mart is expanding internationally; it is the number one retailer in Canada and Mexico. It also owns a 95% stake in Japanese retailer SEIYU. Wal-Mart also has operations in Asia, Europe, and South America.
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According to the Fortune 500 index of the wealthiest and most powerful corporations in the world, Wal-Mart holds the number one spot, ranked by its total sales. The company is ranked as the second most admired company in the world by Fortune (www.fortune.com).
In this section we do an analysis of Wal-Mart’s previous strategies. One of the prime strategies that Wal-Mart employed was cost strategy. The secret of Wal-Mart’s meteoric rise over the past five decades has been its obsession with low prices. Wal-Mart’s corporate management strategy involves selling high quality and brand name products at the lowest price (Vance 1994). In order to keep low prices, the company reduces costs by the use of advanced electronic technology and warehousing. It also negotiates deals for merchandise directly from manufacturers, eliminating the middleman (Vance 1994). It got into trouble in 2005-07 when it focused less on “always low prices” (its longstanding motto) and more on expansion.
The three basic belief and two key rules that differentiated Wal-Mart from the rivals were proposed in “The Wal-Mart Culture” (2004). Gilman, (2004), and Menzer, (2001) described the reason why Wal-Mart expanded its intensity to international market. They believe that in the future this division will replace the US market. However, expansion through world market does not seem easy to Wal-Mart, it also faced some problems both from external and internal.
Sources tend to agree that Wal-Mart itself has less consideration in international market when compared to competitors (Groeber, 2002; Wal around…, 2001). It has also been accused of misreading the competitors. Another problem that the company faced in its global expansion strategy is cultural differences, which the company initially overlooked (Lewis, 1998; Anderson, 1994).
Even though Wal-Mart has close relationships with American suppliers, it failed to make connection with local suppliers (Bianco & Zellner, 2003; Lohr, 2003). Wal-Mart tried to use the same standard and concept as in United States but unfortunately failed miserably. Moreover, Gilman (2004) and Zellner et al. (2001) agree that Wal-Mart is too concentrated in expanding their concept. Another external factor that comes into play is government regulations. Both Groeber (2002) and Molin (2004) agree that these restrict regulations lead monopoly market in some countries.
Although some source states that one of the biggest problems of Wal-Mart is Human Resource Management (HRM) (Biddle, 2004), sex discrimination is the most controversy topic not only in the United States but also in the international market as well (Rock, 2001).
As a result of private consideration in expanding hypermarket culture into international markets, Wal-Mart faces management problems as well as external problems, which causes severe problems to Wal-Mart in the global Market.
Wal-Mart’s strategy for global expansion was through acquiring local superstores or engulfing the small local retailers (BBC News 2005). For instance, in Brazil it acquired Sonae in 2007 (BBC News 2005) and ASDA in Great Britain in 1999 (Cowell 1999). It has 3100 stores spread globally (Wal-Mart Report 2008). The first expansionary adventure began in Mexico City with Sam’s Club in 1991. The Company operates in Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United Kingdom and, through a joint venture, in India (Wal-Mart Report 2008). Wal-Mart’s overseas business is now a bigger piece of the pie, accounting for 23 percent of total sales last year, up from about 19.6 percent two years ago (Kavilanz, 2007).
Wal-Mart is eyeing the eastern markets by penetrating Japan China and now India. in Japan it acquired In Japan Seiyu Ltd. In India, the retail chain has gone into a joint venture with Bharti Enterprises to set up a cash-and-carry business in the country. (Reuters 2007)
Wal-Mart’s international sales jumped 17.7 percent in 2007-08 compared to a growth of 9 percent for the whole company and only 6 percent in the US (Wal-Mart Report 2008). The retailer’s international push has not come without setbacks. Its discount store model has clashed with foreign customs, and in a rush to expand, it did not always make the right acquisition.
Last year, Wal-Mart quit Germany after acknowledging that it misunderstood the country’s regulations, shopping habits and tastes. It also pulled out of South Korea after failing to gain market share. Wal-Mart continues to struggle in Japan, where it’s local unit Seiyu Ltd.
Wal-Mart is the world’s largest retailer with $374.526 billion in sales for the fiscal year ending Jan. 31, 2008. it experienced a growth of about 9.4 percent in 2007-08 (Wal-Mart Report 2008). In 2007-08 fiscal years Wal-Mart experienced commendable growth in most of its international markets except for in Japan where it has been facing certain cultural acclimatization problems (Wal-Mart Report 2008).
the above table shows that the growth of Wal-Mart’s international ventures are stronger and have posted maximum growth even in the face of looming global recession and spiraling inflation and oil prices. “We continue to be pleased with the sales results of our international businesses,” said Mike Duke, vice chairman, Wal-Mart International (Wal-Mart Report 2008).
Problems in expansion to International Market
The larger Supercenter hypermarkets put in fresh foods. The Neighbourhood Market stores supply a smaller food, pharmacy, health and beauty, offering for convenience-oriented customers. This standardization of format types has helped the expansion and branding of Wal-Mart in international as well as U.S. markets. Wal-Mart, the number one retailer in the world, would not have been possible to expand its market without a strong retail proposition.
This plan is based on low price strategy, wide variety of goods, customer service, and community support. Indeed, Wal-Mart can play with low price strategy because of its competitive gross margins and high inventory turnover. Low costs are achieved by economies of scale, purchasing power, close vender relations, effective information systems and efficient supply chain logistics. The concept works on the global and regional level with the goal being to lower costs, improve quality, lower prices and increase volume. The rapid rise of Wal-Mart to the position of the World’s largest retailer occurred in a relatively short time frame.
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The company believes that there is no choice but to expand rapidly abroad. The company expects that when the U.S. experiences a slow down the international will be the growth vehicle for the company. Wal-Mart had used joint venture and acquisition the local retailer chains as an international expansion policy.
Employees’ low payment, sex discrimination, restriction in suppliers, and small business destroyer are the example reasons that make Wal-Mart be an evil in retailer business. But it seems that Wal-Mart does not recognize this, it still using the same way of doing business in the global market. Along with this misstep in overseas operation, it was later destroyed and brought big problems to Wal-Mart itself.
Wal-Mart is the world’s largest retailer and the largest company in the world based on revenues, ignoring profits (income), assets, and market capitalization. The primary focus of the company is price leadership, better customer service and operational improvements remained the primary drivers of sales growth worldwide, even in light of economic headwinds caused by higher energy costs and food inflation. “Walmart’s clear price leadership position continues to meet the needs of our customers in a difficult economy,” said Eduardo Castro-Wright, Walmart U.S. president and chief executive officer (Wal-Mart Report 2008).
While Wal-Mart has been tremendously successful running its business in the U.S. market, it also enforces expanding throughout the international market. However, the achievement in the U.S. market cannot always guarantee that Wal-Mart succeeds everywhere. Wal-Mart’s international expansion holds the key to the retail giant’s sustained growth in the future. As for its international expansion strategy, Mark Husson, an HSBC analyst said, “Wal-Mart has historically kind of reacted to opportunity, rather than planned a long-term strategy” (Reuters 2007). The question that lingers is that is Wal-Mart going to adopt the same strategy of opportunity seeking and of “no-strategy” in future?
Wal-Mart’s international business faces several problems as has been discussed earlier. Both external and internal problems which Wal-Mart is facing currently are the primary reasons. The external problems are late entry, overlook competitors, destroy small business, joint venture and nationalism, culture different, house brand and price differentiate, suppliers, and government regulations. On the other hand, the internal problems which it still confronts in the operation systems are unique culture and concepts, and human resource management. These critical problems provide the difficulty for expanding in this new market and competing with its competitors in the global market.
It is critical for Wal-Mart to analyze these external and internal problems and find the solution to overcome them, so that this will help to create the opportunity for it to glow in the market and be the globally competitive in the future. Moreover, expanding to the unfamiliar market which contains a different culture, environment, and pattern, the company needs to be flexible to adapt the new environment in order to survive and accomplish in its market.
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