The history of Wal-Mart retail chain began in the 1940s, when Sam Walton started working in one of the stores in Iowa, with a salary of $75 per month. In 1950, he was able to buy his first store in Bentonville, Arkansas. Nowadays, the headquarters of Wal-Mart is located in this town (Brunn, 2006).
By 1974, the company had 78 stores in smaller cities in the U.S. It had been established a clear computerized system of supply of the right products. Within three years, sales increased three times and reached nearly $500 million, and the number of stores has grown to 153. This allowed diversifying the companys business and opening a chain of repair shops for cars, pharmacies and jewelry departments. In the 1980s, the company changed its regional strategy and moved to the southeastern states of the USA. In the 1990s, the company has become transnational: the first overseas store opened in Mexico City.
The company continues to expand its international presence, primarily in major developing countries - China, Brazil, etc. The company has created its own system of communication and television for operational communications between departments and advertising products directly in stores. About 40% of goods sold are made specifically for Wal-Mart, with almost 70% of the goods manufactured in China (Brunn, 2006).
1. Wal-Mart initiated its expansion abroad in 1991, entering the market of Mexico. Wal-Marts international division has always tried to reach the profitability level of the U.S. branch. However, it was difficult for the company to maintain customer service, adapt to local markets, and keep its prices on a low level at the same time. Basically, Wal-Marts strategy was disrupted by location-bound differences. Therefore, it is necessary to conduct an analysis of various countries markets in order to find out the most appropriate region that Wal-Mart should further invest and grow as part of its global expansion plans. Currently, available regions are Mexico, Brazil, Russia, as well as countries of the European Union, India, and China (Brunn, 2006).
Distribution in Mexico was crippled by weak infrastructure, resulting in raised prices and costs.
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Undeveloped markets (Russia, India, Brazil, etc.).
Unsuccessful implementation of the discount model in Japan.
Local culture must be studied thoroughly in order to provide an excellent customer service.
European retailers heavily rely on local suppliers. Such an environment tends to favor long-established companies. The necessity of relationships with suppliers means Wal-Mart must compete by merging with well-known European firms.
Wal-Mart lacked partnership with local suppliers in Mexico, with many of them not delivering goods directly to distribution center and stores. However, this situation was improved by a partnership with a local trucking company.
Physical and human resources:
Europe is known to possess rather expensive land and high wages. Most European cities do not have expansive suburbs and free spaces required for Wal-Marts warehouse-style shops (Brunn, 2006).
Wal-Mart has to compete with already established retail firms during their international expansion.
In India, the leaders of the retail market are small retail shops run by family businesses. India FDI Watch decided to stand for the interests of such small stores after the formation of the Wal-Mart/Bharti joint venture. Series of large rallies and demonstrations were held against Bharti and Wal-Mart (Brunn, 2006).
Various barriers to foreign business in China.
Wal-Marts activity may violate some important laws and regulations of the European Union.
In India, the company was forced to team up with Bharti due to the restrictions on foreign ownership.
According to Transparency International, the anti-corruption group, Russia occupies 147th place on its corruption perception index. For example, IKEA, Swedish furniture manufacturer decided to halt further investment in Russia, due to the unpredictability of administrative processes (Brunn, 2006).
Considering all these facts, it is possible to conclude that China is currently the best choice for Wal-Mart expansion, due to the presence of large suburbs in the cities, low corruption level, and the fact that about 70% of the goods offered by the company are manufactured in China, allowing to utilize Wal-Mart low-price policy.
2. The main competitors of Wal-Mart in China are Chinas largest hypermarket retailer, Sun Art Retail Group, Carrefour SA and Tesco Plc (Chan, 2011). According to the assumption that competition accompanies all stages of expansion onto a new market, it is possible to assume that at each stage, the company should choose a particular strategy of behavior in relation to its competitors. Depending on the capabilities of the competitor, its strategy, the type of goods or services, the company can use the following competitive strategies: blocking, advancement and cooperation (Hill & Jones, 2012).
1) The strategy of blocking.
This strategy can be used when a company enters a new market and seeks to extend a period of profit maximization by blocking access to competitors in this market. Wal-Mart can restrict access to competitors in two ways:
First, it can use unique technology and know-how that are not known to competitors, and closing access to this information.
Second, in a situation where other companies also possess new technology and have similar capabilities, Wal-Mart may signal of future price reductions for its products in the case of goods peers. This measure usually leads to failure of potential imitators, oriented to receive windfall profits from market introduction.
The efficiency of blocking access to the market for competitors depends on how unique and complex is knowledge possessed by the company.
However, the strategy of blocking can be used in a situation where most of the potential competitors possess similar opportunities, as well as have access to new technology and marketing know-how (Hill & Jones, 2012).
Prerequisite for the use of this strategy is the assumption that from the economic point of view, potential competitors will try to enter the market only if they believe not only in cost recovery, but also hope to obtain high profits. Profitability of competitors depends not only on their capabilities, but on the pricing policy of the company as well. The difficulty of predicting actions of the company greatly increases the risks and uncertainties for its competitors. The only way to predict the actions of a leader is projecting a previous practice of its response to the emergence of competitors. Accordingly, if the company previously with decreasing prices for its goods, potential competitors are likely to take a negative decision to enter a new market (Hill & Jones, 2012).
Thus, a single strategy to respond to the market penetration of simulators is an innovator for the possibility of extending the period of taking advantage of every new project.
Blocking the penetration of potential competitors by lowering prices is particularly relevant in the case when the company protects a technology that can be utilized in its future projects. In this case, the possible reduction in profits from the current expansion project is compensated by future excess profits from new projects (Hill & Jones, 2012).
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2) The strategy of advancement involves planning of the expansion on the basis of permanent innovation. The company must be able to develop and bring new products to market faster than its competitors (Hill & Jones, 2012).
However, despite its attractiveness, this strategy has a serious problem of its implementation - the problem of cannibalism in the product range. The cannibalism term means exclusion of old products from the market, because of the appearance of new product range (Hill & Jones, 2012).
Methods of implementing the advancement strategy can be classified depending on the degree of cannibalism accompanying it and the nature of required resources (scientific and technical knowledge, production technology, and marketing know-how) as follows:
The company is launching a new product, which replaces the old one, using the existing resources;
The company brings new products to the market, ousting the old ones, and attracting new resources;
The company produces new products based on new technological and marketing resources while old products of the company still remain competitive;
The company brings new products to the market, using existing resources while old products of the company remain competitive.
The second type of the advancement strategy is the most difficult for the company. Fear of cannibalism and focus on existing capabilities and resources is often an obstacle to the implementation of the permanent innovations in the firm. However, the successful implementation of such innovation opens great opportunities for the company.
3) The strategy of cooperation is the exact opposite of the blocking strategy. In order to prevent the penetration of competitors in the market, a company encourages their entry into a new market. There are several rational reasons for choosing such strategy. The first reason for a company to positively refer to the copying of its products is the desire to establish a certain technological standard. By extending the license to use the new technology, a company activates the innovative activity of other firms. The more analogues of new products appear, the greater is the output of related new products to market, and the more likely is the growth of consumer interest in new products (Hill & Jones, 2012). Thus, transforming its innovation in the market standard, a company gets serious advantages. The second reason for choosing the strategy of cooperation lies in the intention to increase the so-called counter demand, which is an incentive to increase the demand for new products. Quite often companies are forced to license their inventions to gain access to markets and business areas where they are not competent enough (Hill & Jones, 2012).
A similar strategy can be used when entering new geographic markets. In this case, cooperation with a potential competitor gives the possibility of obtaining the necessary competence in the field of marketing and neutralizing protectionist barriers on certain types of goods and services (Hill & Jones, 2012).
After analyzing the listed types of innovation strategies, it can be concluded that Wal-Mart should use the cooperation competitive strategy during its expansion to the Chinese market, due to a large number of competitors and the presence of barriers for international business in China (Chan, 2011).
3. During expansion to Chinese market, Wal-Mart management must take into account the following factors and challenges:
1) The language barrier is the first and most obvious difficulty.
2) The low level of qualification of Chinese managers and workers. Therefore, it is extremely important to assess the level of detail for each task and monitor its implementation (Chan, 2011).
3) Chinese mentality. Very often, it is difficult to get a straight answer to the question for the reason that a representative of a Chinese company does not want to lose face or does not tell the truth in order for his partner not to lose face. Incidents arising from such dialogue can be quite costly both in terms of time and money (Chan, 2011).
4) A system of government currency controls. Payments in foreign currency are prohibited in China, but a company may have foreign currency accounts to make currency transactions, forward currency abroad and receive payments in foreign currency from foreign contractors (Chan, 2011). Chinas foreign exchange control authority is the State Administration of Foreign Exchange Control and its field offices. Companies that engage in import and export operations can open a bank account for the foreign currency. In addition, each income money from abroad or transfer of currency abroad must be justified (through contract or invoice). Upon receipt of currency required to complete an application, which stated purpose of these currency funds (payment for goods, services, etc.). Upon receipt of currency transfer from abroad, the bank will automatically transfer funds into Yuan currency at the current official exchange rate. However, not all banks will be able to implement it. In particular, the Industrial and Commercial Bank of China, upon receiving transfer for a company that does not have a foreign currency account, will send it back while Bank of China will be able to enroll it. Therefore, it is best to make payments through the Bank of China as this bank is the most experienced in the implementation of operations related to international business (Chan, 2011).
5) Many Chinese business representatives show inattention while reading documents and contracts, as well as in the preparation of documents for the shipment. Therefore, a control over the correctness of understanding of documents and contracts by the Chinese partners is required. Fortunately, in the case of non-compliance of any obligations, such as delays in the shipment, it is possible to get the compensation if it is pointed in the contract (Chan, 2011).
6) A large number of intermediary businesses in China can cause not only extra costs, but also distort information and the final result. Export and import market in China is mostly the market of intermediaries. In some cases, it can be useful, in other - harmful and dangerous. In any case, an understanding of whom the company is dealing with is necessary.
7) Law of China has its own characteristics. For example, the decision of the arbitral tribunal outside China will not be valid on its territory, so even an indication of the arbitral tribunal of another country in the contract does not mean that there is no need to sue in China.
As a conclusion, it can be said that unpleasant situations during negotiations, and even the failure of the negotiation process, because of differences in cultural values is a major challenge not only for American, but for Chinese businesses as well, due to serious problems that hinder the development of the economy, like the discrepancy of the existing legal system to international practices. Liberalization of thinking that began with the economic reforms in China led the country on the road forced institutionalization and legal modernization. Over the past twenty years, much in this regard is imported from developed Western countries. However, various cultural rules and traditions are still strong in China, so the management of Wal-Mart must thoroughly study the Chinese culture in order to perform excellent customer service, which is necessary for successful expansion to Chinese market.