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Future Of Wal Mart In Indian Financial Market Management Essay

Summary

For past few years India has grown as one of the rapidly developing retail industry in the world. Wal-Mart Stores Inc., better known as Wal-Mart, the biggest retail chain in the world, and second largest company in the world in terms of revenue after Exxon Mobil Crop, plans to establish its stores in partnership with Bharti Enterprises Ltd, a leading Mobile telephony provider in the country.

In November 2006, Wal-Mart and Bharti jointly announced to operate their stores in two formats:

a) A joint venture wholesale cash and carry operation, and b) a franchised retail operation,

Since Indian government does not allow any 100 per cent Foreign Direct Investments in retail industry. So Wal-Mart devised to operate through franchises and handled the wholesale, while Bharti managed the front end.

Despite the world economies faced the liquidity crunch, the retail sector in India was least affected. The performance of retailers like Morrison’s and ASDA in the UK is another case in point. They continued to make hefty profits all this while (Guardian, 2009; Independent, 2009).

Wal-Mart finally succeeded to make their mark on the Indian retail scene in the year 2009, thanks to their joint venture with Bharti. Most important aspect to be noted is that Indian retail sector which, till 2000, was the domain of small local players like 'Mom and Pop Stores, experienced a boom after the arrival of the multinationals in the retail sector. The most interesting point is that Wal-Mart entered the Indian retail sector at the time when India was facing highest inflation of their times. The time was on Wal-Mart side. They got the better of small businesses, as the imposing shopping malls with their dazzling displays, alluring sales gimmicks, and price advantages, took the Indian consumer by storm. The poor oldies of the retailing arena saw themselves beating the retreat. Their success was phenomenal, and was unseen earlier in the case of their ventures in Germany and South Korea.

Major part of this proposal investigates Wal-Mart’s future plans and strategies to develop and expand further in the Indian retail, keeping in view their failure in Germany and Korea.

Wal-Mart is used as a case-study for the purpose of this research. Factors that influence such retailer’s while taking decisions and making choices are discussed and illustrated.

While comparing the theoretical framework to that of the Wal-Mart’s case, some discrepancies have been identified. According to Eclectic Model, if the firm's size and their specific know-how are high, then the firm will prefer full-control entry mode. However, Wal-Mart had to choose low-control mode and had prioritised other factors like high country risk, huge cultural difference over the other factors in Eclectic Model.

Cases of Wal-Mart’s failures in Germany and South Korea have been analysed to understand critical success factors of Wal-Mart in India. Some of the critical factors identified are understanding local market and the shopping patterns of the locals, management and training of local employees, adapting to local rules and regulations, and cultural do's and don'ts and investigating the regulations well in advance in order to plan ahead, building synergic relationship with the suppliers using local PR, earmarking local products that are of value and in demand in that country like fruits and vegetables in India.

The study concludes by inferring that Wal-Mart is relatively successful in India as compared to their ventures in Germany and South Korea and that the Joint Venture is the best entry strategy for emerging markets.

Research Background

 

 In recent times, the multinationals have been on the offensive as the retail industry of the emerging markets has been growing in geometric progression. A couple of decades ago, the international sales of the world's top five retail chains accounted for less than 5% of their total turnover (Akehurst and Alexander, 1996). However, this trend is undergoing a dramatic change, as the multinationals are beginning to recognise the global appeal of their brand image, their vast and ever increasing product range, as well as their cutting-edge merchandising techniques.  So here they are, beginning to exploit these advantages through international expansion. If the study of Anderson (2002) is anything to go by, the world’s stop ten retail chains have been observed to be growing faster internationally vis-a-vis their performance in their respective domestic markets, and most of them have been operating in no less than ten emerging overseas markets.

 

Wal-Mart is one of the multinational retail chains that have shown a significant growth in their overseas operations over the years.  At a time when businesses the world over have been reeling under global economic meltdown, the Wal-Mart’s international sales was registering significant growth (Wal-Mart Annual Report, 2005; 2010). As a case in point, we single out their operations in Germany, Korea, and India to investigate and illustrate their penetration methods.

 

Literature review

Now we embark on reviewing  existing literature, theories, researches, and findings  relating to retail globalisation and entry mode strategies of the multinationals. To start with, we study the  concept and evolution of retail industry, to be  followed by discussions on the motives and objectives of the multinational retailers in their quest for expanding their operations into developing countries. We will also look into the entry mode strategy of retail giants  and the frameworks associated with the entry modes

 

The concept and evolution of Global Retail Industry

The concept of Global Retail Industry was born when retail giants of the developed nations decided to expand their operations into the markets of the developing countries (Burt 1993). The concept was first introduced by Hollander (1970) who defined it as 'initiative taken by companies to venture into international markets'.

Globalisation of the retail industry is a recent development as compared to other industries (Da Rocha and Dib, 2002). According to Akehurst and Alexander (1996), only a few retail businesses managed to go international before 1970s, while most retailers by that time concentrated on expanding their market share in the local markets. It was only a decade later (1980s) that some European retailers like Auchan, Carrefour and Promodes (French hypermarkets) and Aldi, Lidl and Swartz (German food retailers) expanded their operations in other European countries.  US retailer Wal-Mart and Staples, Home Depot were the pioneers who decided to going global by venture into the markets of the developing nations (Doole and Lowe, 2001).

Over the years this trend has gained momentum and European retailers like Tengelmann (Germany), Ahold (Netherlands), and Delhaizae Le Lion (Belgium) have been generating more sales and profits from their foreign markets spanning US, Central Europe and Asia (Doole and Lowe, 2001). Metro, the German retail chain, is one such success story, having expanded their business into developing countries like India and Korea (BBC, 2007).

Motives of the Retail Industry Multinationals

 

Hollander’s (1970) interpreted that According to Fernie and Fernie (1997), a company’s motives behind going global is an important factor in determining the company’s strategies. As per studies by Wrigley (1989) and Alexander & Myers (2000), the motives behind retailers' expansion  were monopolizing of the world resources 

 

Hollander’s (1970) interpretation of motives behind retailers' expansion drive also included their desire to internationalize their brand. According to Alexander (1990), internationalization  was also a  reactive response to negative internal market conditions from the late 1980s onwards, such as spiraling competition  and declining domestic sales resulting in declining sales and profits also spurred them to go global. 

However; Williamson (1996) suggested that for the majority of retail businesses, the underlying motivation for going global was proactive in nature, such as  targeting higher profits, gaining from their technological  edge, and benefiting from local business advantages. Other researchers like Meyer (2001) suggested that a retail company’s motivations for internationalization may be legion.

 

However, the classical approach to the motivations behind retail industrialisation has been aptly described  in terms of 'push and pull' factors (Kacker, 1985). In agreement with Kacker (1985), McGoldrick and Davies (1995) have identified push and pull factors as the key motives to expand a business internationally. ‘Push’ factors refer to the limited opportunities available in local/home market due to saturation by other competitors and government regulations; whereas, the ‘Pull’ factors refer to those opportunities in markets outside the local and home market where the conditions are favourable to the retailers (McGoldrick and Davies, 1995).

Entry Modes 

The decision for entering in an international market is very critical for any business. It is a very important strategic decision for firms in their international expansion (Agarwal and Ramaswami, 1992; Hermann and Datta, 2006; Werner, 2002). It determines the extent to which the firm gets involved in developing and implementing marketing strategies in the foreign markets, the level of control the firm enjoys over its marketing activities and operations, and the degree to which it succeeds in foreign markets (Anderson and Gatignon 1986; Root 1994). Hence the retail businesses need to be careful not only about which foreign markets to enter, but also about their entry mode in the targetted foreign markets.

 

There are many ways in which a company can enter a foreign market. These include exporting to the foreign country, licensing, franchising, joint venture, Greenfield projects and mergers and acquisitions (Anderson and Gatignon 1986). 

It can be concluded that all entry modes have their advantages and disadvantages. All the entry-modes are tabulated below highlighting the advantages and disadvantages of  the various entry mode options.

However, depending upon the internal and external factors in the host country, i.e. their rules and regulations, some entry modes can be more appropriate than the other. It is noteworthy that retail internationalisation varies from one company to another (?) Also, within one company, there can be different approaches to entry mode of retail internationalization. The company may choose more than one method as it develops the scale and variety of its international operations. For example, Marks and Spencer (UK) acquired the local retail companies in Canada before opening their own stores. They acquired Brooks Brothers in USA, organically developed their operations in France and Belgium and undertook a joint venture in Spain, used franchise-type arrangements in Greece and Hong Kong, entered Hungary through a joint venture before moving to a franchise-type arrangement (Sanghavi, 1995).

 

According to Weia et al (2004), it is difficult to rank or prioritise entry modes in a specific order of importance for the following two reasons. Firstly, it is impossible to forecast or predict which entry mode will lead to more resource commitment and control by foreign investors. Secondly, in many cases, control may not be all that important. As a result of these two considerations, companies normally tend to make the best combination of their firm-specific advantages coupled with the location-specific advantages in order to be successful in their retail internationalisation endeavour. It must be noted that a company’s business model and business strategy are also key factors to a entry mode decision.

Research strategies and methods   

Research strategy is an overall approach to conducting a research. According to Saunders et. al. (2003), there are six research strategies. Case-study is the most appropriate research strategy. Case-study involves proving hypothesis at the end of the study – this coincides perfectly with the hypothesis developed for the purpose of this study. The theory which will be tested in this study is Dunning’s Eclectic Paradigm, while Wal-Mart will serve as the case-study. Further to this, India is the specific country that has been chosen as the host country within the context of‘Wal-Mart’ case-study in order to give more focus to this specific research.

Selection of the data

As described in the foregoing paragraph, we have chosen case-study research strategy, while Dunning’s Eclectic Paradigm is being used as a framework to evaluate Wal-Mart expansion strategy in India. Because there is huge amount of information readily available on the subject, secondary data will be used.

 The main resources for collecting the secondary data include journals and books covering university databases; news websites i.e. BBC news and Business Standards for the purpose of referring to any articles that were published when Wal-Mart entered into India. In addition, many other websites were referred to i.e. Wal-Mart website for access to relevant information for the purpose of this study. The various sources form where secondary data will be obtained for this research is detailed as below –

 

· Wal-Mart company website: The company web-site is considered as a valuable resource for gathering Wal-Mart specific information i.e. Company Size, company’s international experience, company’s specific tactical strategies. Some of the documents obtained from the company's website include Wal-Mart Annual Report 2006, Wal-Mart’s trading statements, public and press statements by Wal-Mart management, in analysing the company’s entry strategy in India.

·Published academic journals and library databases: Academic journals have been of key importance in gathering in-depth and detailed information about Wal-Mart’s strategies.

·Internet Websites: Internet has been a very crucial tool to gather information relating Indian market, such as gathering information on Indian government policy, political scenario, cultural issues, market trends and market demands, the presence of competitors in local market. Other information gathered from the internet includes Indian Ministry of Statistics and Programme Implementation – regarded as most reliable and respected sources. It is noteworthy that most of the data on economic and cultural information was obtained from the Indian national statistics websites.

· Most of the economic data and cultural factors in this study come from this national statistical offices websites. The Government of India is the source of government policy and regulation. Indian Investment Centre provides information on Indian market demands and business opportunities. World Bank, IMF, Library of Congress Country Studies, and CIA World Fact book also provide relevant information.

 Research Limitations and Further Scope of Study

One of the limitations of this research is that it uses only the secondary data. Further scope of this research may include interviews with Wal-Mart’s senior management to gain insight about the company’s move into retail internationalisation. Obviously, the opportunities were limited and difficult to come by.

Another limitation of this research was that an extensive survey with more retail firms including Wal-Mart, for more accurate and conclusive results, called for more time and money, and was abandoned for obvious reasons.

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