Objectives of study
The objectives of study are to understand the reasons of Wal-Mart why it chosen joint venture as the entry mode strategy to enter China. Understanding the mission and objectives and identifying the performances, competitions and challenges faced by Wal-Mart in China. According to the finding, give recommendations on future direction for Wal-Mart China.
I use the primary and secondary information get from the National Library, MDIS's Library, internet and the database provided by MDIS. The primary information mostly acquire from the official website of Wal-Mart such as annual reports and substantiality reports. The secondary data is acquired from the library and the database which include journals, textbooks, and etc. The database which is EBSCO Host Database and OneSource Database is provided by MDIS's Library.
Background of Organization
Wal-Mart Stores, Inc. was founded by Sam Walton in the year 1962. Wal-Mart is the world's largest retailer according to 2009 Global Power Retailing (Deloitte) and the world's third largest corporation after Royal Dutch Shell and Exxon Mobil, with over $400 billion in sales (Fortune, 2009). See also Appendix L & M. Wal-Mart operated into four segments includes discount stores, Supercenters (hypermarkets), neighborhood stores, and Sam's Club (membership warehouses). Now, Wal-Mart successful expanded internationally in 11 countries and having over 7000 units. It has wholly-owned subsidiaries in Argentina, Brazil, Canada, Mexico, Japan, Puerto Rico and the United Kingdom; and joint-ventures in India and China ("Wal-Mart Annual Report", 2009). While the ventures in Germany and South Korea was unsuccessful and it is forced to pull out.
Mission and Objectives of Wal-Mart
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The founder Sam Walton, his goal is understanding people what they needed and the importance they place on value to help them to save money so they could live better. Today, it became the mission of Wal-Mart, "Saving people money so they can live better."
Three beliefs of Wal-Mart are respect for individual, service to the customers, and striving for excellence. Wal-Mart is aware of the important of customers, which is customer-focused and offer authenticity low prices products and quality customer service to customers. Additionally with the support of two rules: the Ten-foot Rule that is providing greetings and attentions within 10 feet of a customer any time; and the Sundown Rule that is fast responding to customers' requests when received. It is because of the values and cultures Wal-Mart makes a difference with its rivals by exceeding what customers' expected. These assist Wal-Mart to reach the objectives everyday-low-prices strategy to deliver on this promise and remain number one among the middle-class customers (Robber Slater 2003, p.49-55).
Overview of Global Development of Wal-Mart Business
- Fast, Friendly, Clean
With more than hundreds of thousands of surveys on customers, Wal-Mart promised of fast checkout, friendly associates and cleaner stores for customer to experience which will bring more customers.
- More Brand Than Ever
Wal-Mart offered more top brands such as Sony, Dell, and etc. for customers to have new experience and choices in Wal-Mart.
- Improved Customer Experience
By remodel Wal-Mart stores, to make the stores easier for customers to shop and to ensure the efficiencies of operation.
- Strong Growth
Net sales rose 6.8 percent to $255.7 billion, while segment operating income boosted up to 7.1 percent as $18.8 billion (also refer to Figure 1 & 2). See also Appendix N.
- Expanding in Asia
Wal-Mart opened a Hong Kong regional office to facilitate long-term opportunities in Asia, to support existing operations in Japan, China and India, and to further build our leadership team.
- New Market
Wal-Mart entered Chile through the acquisition of a controlling interest in Distribución y Servicio (D&S), Chile's largest food retailer.
- Consistent Growth
Net sales increased to 9.1 percent as $98.6 billion, while segment operating income grew to 4.6 percent to $4.9 billion (also refer to Figure 1 & 2). See also Appendix N.
Entry Modes in Global Expansion & Factor influencing the choices of Entry Strategy
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Marked to Standard
The mode of entry is a fundamental decision a firm makes when it enters a new market because the choice of entry automatically constrains the firm's marketing and production strategy. The mode of entry also affects how a firm faces the challenges of entering a new country and deploying new skill to market its product successfully (Gillespie, Jeannet, and Hennessy 2007). A company entering a foreign market faces a series of choices to serve the market. In an in-depth survey of the different market's entry modes, Root (1994) recognize 15 different forms. According to Hill, firms use basically six different modes to enter foreign markets:
- Export: goods or services produced by a firm in the home country and sold in the host country through an entity in the host country.
- Turnkey projects: the contractor agrees to handle every detail of the project for a foreign client, which is exporting process technology to host countries.
- Licensing: an agreement between licensor and licensee who has to pay a royalty free to licensor, for a specified period.
- Franchising: a specialized form of licensing, a formal right offered a firm in a host country to use a home country firm's technology know-how and management know-how.
- Joint venture: establishing a firm that is jointly owned by two or more independent firms, which located in both home country and host country.
- Wholly owned subsidiary: a firm owns 100 percent ownership of a new operation in a host country and uses that firm to manufacture its products.
A firm can choose any of these entry modes or some combination of them to enter a host country. The key attribute that distinguishes the different modes of entry is the degree to which they give a firm control over its key marketing resources (Anderson and Gatignon, 1986). Export of goods which give the lowest degree of control for a firm. Licenses, franchises, and joint venture provide more degree of control for the firm, whilst wholly owned subsidiaries afford the highest control.
Two opposing theories suggest alternative outcomes as control increases: the resource-based view and the transactions cost view. The resource-based view holds that as the degree of control arise, because of the firm can deploy key resources which are essential to success, thus the firm's chances of success increase (Gatignon and Anderson 1988; Isobe, Makino, and Montgomery 2000).
The more resources the firms can control, the more success the firm will be. It is important to hold the resources, such as access to local distribution channels, as this gives a firm the freedom to deploy resources flexibly. Thus, flexible resources enhancing firm chances of success.
The transaction cost view holds that costs rise with increasing control of the mode of entry. Control and commitment are inevitably linked in mode of entry (Luo 2001). High control in entry strategies requires high commitment. Transaction cost theory signifies the higher the resource commitment and desired control of an entry mode, the higher is the cost. Joint ventures and wholly owned subsidiaries are high costs entry modes due to the level of resource commitment needed to set up operations (Pan and Chi 1999).
The role of market entry timing is critical in emerging markets (Pan and Chi 1999). Following Pan and Chi, there could be favor or hurt success when having early timing of entry into international markets.
On the one hand, early entry has many advantages. First, the early entrant can secure the access to key resources, such as distribution channels and suppliers. Second, early entrants can set the industry's standard (Mitchell 1999), which may disadvantage later entrants.
On the other hand, Golder and Tellis (1993) find those early entrants are not always the long-term winners in a market. In facts, the best always defeats the first. The reasons of why the early entrants fail. First, firm get in the new market too early when the window opportunity still closing. Second, the current technology might be replaced by the new technology. Third, late entrants can learn from the early entrants' errors (Fujikawa and Quelch 1998).
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There are few reasons that small firms cannot compete with the larger firms. First, larger firms have recourse to more resources or can commandeer more resources than smaller firms (Bonaccorsi 1992). For example, Coke was able to purchase the leading brand, cola in India, Thums Up, to open its entry into India (Ramaswami and Namakumari 2004). Second, smaller firms cannot compete to the larger firms is that large firms are more likely to possess a greater wealth of both product and marketing specific knowledge. For example, Nestlé has a portfolio of 7695 brands to choose from and a large organizational history of international expansion to assist it exploit any new market that it enters (Parsons 1996). Third, larger firms are able to sustain during the periods of negative performance on entry into a host country compare with smaller firms.
On the other hand, the experience of many large firms exhibits that size is no guarantee for success. For example, the withdrawal of Wal-Mart first from Korea and then from Germany is a case in point (The Economist 2006). Researchers have discovered some clarifications for this result. Large size does not have much organizational flexibility due to the increasing bureaucracy (Hitt, Ireland, and Hoskisson 2003). This bureaucratic effect also diminishes innovative ability (Chandy and Tellis 2000).
Economic distance is a benchmark of economic difference between two countries. Firms from home country find it is easy to deal with host countries that are in close economic distance. The following are the several reasons of why close economic distance is easy to deal with.
First, countries that are in close economic distance have developed similar market segments that can manage to consume similar kinds of goods and services. Accordingly, it is easy to integrate the knowledge about market demand between home and host country.
Second, countries that are in close economic distance have developed similar physical infrastructure, such as roadways, railways, seaports, and airports. Hence, a firm which serves a host country with an infrastructure similar to the home country will be more efficiency in its operations, and thus lowering costs.
Third, firms develop competencies or knowledge-based resources that are related to the markets they serve (Madhok 1997). Because the skills learned in one market can be duplicated in or adapted to the new markets, hence the resources can be best leveraged in countries that are similar in economic development. Firms entering countries that are widely different economically from their home country need to adjust to the new market conditions, thus reducing their likelihood of success (Dunning 1998).
Erb, Harvey, and Viskanta (1995) define country risk as uncertainty about the environment, which has three sources: political, financial, and economic. Political risk is the risk that laws and regulations in the host country will be changed negatively opposed to a foreign firm. Financial and economic risks are obviously in several ways. They could take the form of recessions or market declines; currency crisis; or unexpected bursts of inflation. Imbalances in the underlying economic fundamentals of the host country, such as a balance of payment crisis, are the reasons of those factors arise. Recessions result from business cycles inherent in any economy (Lucas 1987).
Openness means that the lack of regulatory and other obstacles to entry of foreign firms and it could either increase or decrease entry success. On the one hand, openness could increase success for three reasons. First, it drives demand by increasing the types of products offered for sale in the market. Second, it enhances competition on quality and hence improves the level of quality supplied. Third, as the economy opens up, competition rises and prices are lower, cause further increases in demand.
Additionally, an open economy is a double-edged sword. Even though openness makes entry easier for a target firm, it raises the competition from other new foreign entrants. Raising competition influences market success in various ways. First, even a small degree of competition is enough to lower prices significantly (Wallace 1998). Thus, competition keeps margins low, permitting only the most efficient to survive. Second, competition increases costs of purchases, the employ of talent, and the marketing of products and services. Competitive pressures are a factor firm profitability has been shown to be lower for international markets than for domestic markets (Gestrin, Knight, and Rugman 2001). Third, if they make any strategic mistakes firms to lose leadership in competition, such as addressing the wrong sector or pricing the product too high, both of which are common mistakes in entering emerging markets. Competitors are quick to swoop on any mistake and avoid firms from recovering lost ground. Hence, increasing openness increases competition and lowers success.
Advantages and Disadvantages of Joint Ventures
Joint Ventures have a number of advantages. First, a firm benefits from a host partner's knowledge of the host country's competitive conditions, language, culture, political systems, and business system. Thus, for many U.S firms. Joint ventures have involved the U.S Company providing technological know-how and products and the local partner providing the marketing expertise and the local knowledge necessary for competing in that country.
Second, a firm might gain by sharing costs or risks with a local partner when the development costs or risks of opening a foreign market are high.
Third, political considerations designate joint ventures the only appropriate entry mode in many countries. Research pointed out those joint ventures with local partners face a low risk of being subject to nationalization or other forms of adverse government interference. This appears to be because local equity partners, who may have some affect on host-government policy, have a vested interest in speaking out against nationalization or government interference.
Regardless of these advantages, joint ventures have major disadvantages. First, a firm having risks of giving control of its technology to its partner when it enters into a joint venture. Hence, a proposed joint venture in 2002 between Boeing and Mitsubishi Heavy Industries to build a new wide-body jet raised fears that Boeing might unwittingly give away its commercial airline technology to Japanese. Nevertheless, joint-venture agreements can be assembled to minimize risk. This allows the dominant partner technology that is central to the core competence of the firm, while sharing other technology.
The second disadvantages are that joint venture does not give a firm the tight control over subsidiaries that it might need to realize location economies or experience curve. Besides, it does not give a firm tight control over foreign subsidiary that it might need for engaging in coordinated global attacks against its rivals. Indeed, many joint ventures establish a degree of autonomy that would make such direct control over strategy decisions all but impossible to establish.
A third disadvantage joint ventures is that the shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be. For example, in the case of ventures between a foreign firm and a local firm, as a foreign partner's knowledge about local market conditions increases, it depends less on the expertise of a local partner. This increases the bargaining power of the foreign partner and ultimately leads to conflicts over control of the venture's strategy and goals. Some firms have sought to limit such problems by entering into joint ventures in which one partner has a controlling interest.
Findings on Wal-Mart's operations in China
In 1996, Wal-Mart began its retail operation in China through joint venture agreement with opening of a Supercenter and Sam's Club in Shenzhen. Over pass 13 years of development, Wal-Mart now has 146 stores in China, across 89 cities, including 138 supercenters, 3 Sam's Clubs and 2 Neighborhood Markets. Beside, Wal-Mart brought out 70,000 job opportunities for China. Wal-Mart is also striving hard on environmental protection and also encourages its suppliers to work jointly with it. About 95 percent of local products are sold in Wal-Mart China store. It is because Wal-Mart built up relationship with nearly 20,000 suppliers. Moreover, Wal-Mart China won quite a number of awards such as Leading Multi-National Enterprise in Asia by Asian Wall Street Journal Awards. See also Appendix D.
Joint Venture as entry strategy into China
Wal-Mart is the world's largest retailer with a powerful retail position to make it possible to expand its market. Because of Wal-Mart's competitive gross margins and high inventory turnover, and enjoyed the economies of scale, efficient supply chain logistics, high purchasing power. So that it can enforce everyday low price strategy.
Due to rapid growth of Wal-Mart, it could not constrain its operation in U.S. as the limitation and the lowered trade barrier of the market itself. Wal-Mart had no choice to go for globalization to meet the competition.
The United States is 37% of the world's economy, which leaves 63% for International. If Wal-Mart does their job, International operations should someday be twice as large as the United States. That is a great challenge, but that is the opportunity in front. Someday the U.S. will slow down, and the international will be the growth vehicle for the company (Business Week 2001).
By 1996, Wal-Mart felt that it is real-time to take on the Asian challenge. It targeted China with a population of exceeding 1.3 billion, continued economic of growth, and a large supple of labor forces. Middle-class purchasing power of the Chinese customers exhibited great potential for low-price retailer like Wal-Mart.
However, large cultural differences, too many players, local protectionism, backward infrastructure, government restriction on foreign ownership and import barriers, brought difficulties to Wal-Mart when considering to enter China.
The largest obstacle faced by Wal-Mart was the government regulation that permitted foreign retailing only in certain Chinese cities. Wal-Mart was only allowed to set up business in only eleven Chinese cities (for examples Shenzhen, Beijing, Shanghai), and it was limited to three stores per city.
In December 2001, China joined the World Trade Organization (WTO); it became obligated to waive many limitations on market access. That means removing barriers for foreign competitors to compete in China. This allowed Wal-Mart to open up stores in any Chinese cities. After all the challenge of integrating the Wal-Mart's culture into its stores in China seem to be the great obstacle for Wal-Mart.
Late entry also was a non-barrier to Wal-Mart as its main rival - Carrefour had entered into China earlier than Wal-Mart in 1995. It became a major difference between Carrefour and Wal-Mart. As Carrefour was mainly trying to do things at the Chinese way by empowered the local stores decision making, building local supplier contracts, amplifying local rules and regulations, and using local promotion marketing schemes, while Wal-Mart was more focused on doing things the American way.
As of this consideration, Wal-Mart used joint venture as entry strategy to acquire local retailer chains to expand its business and be more local adaptation in shorter period of time.
Performance of Wal-Mart in China
When Wal-Mart began its operation enter China in 1996 with a store in Shenzhen. Wal-Mart had 31 stores with nearly sixteen thousand employees by 2003. As of the mid 2000s, it was mostly in major cities like Shenzhen, Beijing and Shanghai.
In 2006, Wal-Mart had about 60 stores in nearly 30 Chinese cities. Its sales increased 30 percent to $2 billion, which drive Wal-Mart to China's 10th largest retailer. Wal-Mart planned to set up 18 stores in 2006. One Sam's Club store reported $100 million in sales in 2005.
In 2006, Wal-Mart had employees of 30,000 and planned to obtain 150,000 more employees in the next five years; the turnover rate is lower than the United States where it usually remains in 50 percent.
However, Wal-Mart was unable to integrate the efficient logistical system it has in the United States in to China. Besides, The Sam's Club warehouse stores both in Beijing and Shenzhen did not operate well as most Chinese homes do not have large storage facilities for bulk supplies.
According to OneSource, Wal-Mart brought over a 35 percent stake in Trust-Mart for US$ 264 million from BCL. Bu now, Trust-Mart, a major Chinese discount chain, has 101 chain stores in 34 cities in China. See also Appendix G.
In 2008, Wal-Mart has achieved annual sales growth in China of at least 25 percent and this strong growth will continue, a company executive said on Tuesday (Reuters 2008).
Now, Wal-Mart has total 243 units' stores in China. It totally rose to 41 units from 2008 to 2009 (also refer to Appendix N). Besides, Wal-Mart China won numerous awards.
Current challenges faced by Wal-Mart
Last year, the cases of infant consumed the melamine-contaminated powdered infant formula, and caused over 6240 infants has kidney problems and three reported death (World Health Organization 2008). Also, according to the Greenpeace report, more than 50 kinds of pesticides have been discovered in fruits and vegetables delivered in big cities. See also Appendix C & I.
As a result, food safety becomes one of the biggest challenges for the company. Due to the food safety issues are recently often cited in the media, China's government is forced to take action to stop the problems become more seriously. Now, China is more serious about the quality and safety of the products, including the products that are imported and exported from China.
As reported by Business Daily at 15 April 2009, Wal-Mart has launched a job optimization and regrouping program to reduce labor costs in China. Leally Huang, public relations manager, Wal-Mart China said with Asia Pulse in 15 April 2009 that "Those who are unsatisfied with the program and want to leave would be given adequate compensation, but we will try and see if we can retain them." See also Appendix B,F & H.
In addition to the reported from Datamonitor (17 April 2009), Wal-Mart China cut down the labor cots affecting 1,400 employees. Along with the local trade unions are go again for this (South China Morning 2009).
As a consequence, employees are not happy with the low-paid wages by the Wal-Mart and may resent of the action of Wal-Mart. In short period of time, it may seem not be the big problem for Wal-Mart but in long-term it may become the "cancer" for the Wal-Mart China. In additionally, workers will not be loyalty to the company and this will result in the performance of the Wal-Mart or even destroy the reputation. Besides, from the reported news above, because Wal-Mart's target is everyday low price, so what make Wal-Mart to reduce the labor cost, it is because the competitions in China between local and foreign companies are too intense and stiff. Furthermore, Wal-Mart everyday low price practice is easily replicated by its competitors.
According to Reuters (8 Sept 2009), a customer of Wal-Mart was suspecting of shoplifting, and she dead after sustaining injuries caused by the employees of Wal-Mart China. The customer was a 37-year old female and her husband complained that Wal-Mart did not apologize or offer any compensation after this incident has happened. See also Appendix E.
This shows that the employees are not being trained well enough. Because the employees who at the front line drive the company's reputation. This case may have bad influence on the Wal-Mart reputation, if Wal-Mart cannot handle it well may destroy the image it built up along the years in China or global.
In the past two decades, Wal-Mart has developed an exceptionally and efficiency supply chains that connected the globe. These supply chains are designed on the low price of energy, it will reduce the costs of transportation and relatively negligible.
However, things are changing today. According to the Deloitte, energy prices are likely to be essentially high in the next few years and transport will be much more expensive than in the recent past. Wages in China's large cities are also rising, as is China's currency, which will likely rise further. General, the cost of sourcing in China is going to increase. The global supply chains were designed to take advantage of low transport costs and low wages, but the wages are rising, and as the transport costs increase in China.
Comparing performance of Wal-Mart in China and Japan
Wal-Mart had spent over four years in study the Japanese retail market, and concluding that its best option was to search for a local Japanese partner to run the Wal-Mart business. Accordingly, in 2002, Wal-Mart paid $46.5 million for a 6.1 percent interest in Seiyu Ltd., Japan's fourth-largest supermarket (Slater 2003, p.143).
In 2005, Wal-Mart took over 51 percent of share of the Seiyu Ltd., and had totally 400 stores and its sales rose by 0.6 percent in the following year. Still, this figure was indicated by analysts that it become insignificance when one taken into accounts the $479.5 million that the stores have lost to date.
Even though the media believed that Japan will slowly accept the culture of Wal-Mart, however Wal-Mart was facing the basic culture clash in Japan. With just engaged a simple standardization acquisition strategy to enter the international markets, Wal-Mart was found to be successful. It obtains the major player as partners in the host business, and introduces the "American ways" of operation based on its everyday low price strategy to run the stores. Critically, it works in the country such as China sensitive with the prices. However, in Japan, due to the culture different, the customers are prepared to pay for quality products, as result this strategy did not work as well as in China.
Thus, the fact is the management team if Americans introduced by Wal-Mart has not verified favorable in Japan. As Fortune magazine point out, the US companies that doing well in Japan because they understand the Japanese's culture and the need of liberty for employees in Japan, so they appointed Japanese senior managers in management. In 2004, Wal-Mart encouraged the Seiyu company to dismiss 1,500 employees, but this decision did not go well as the social of Japan is against it, also due to the culture of Japan is on averse of this.
Earlier in 2007, Fortune believed that investors were waiting to see what Wal-Mart would when it had to decide whether to acquire more Seiyu shares. If it declined then it would have been seen as a vote of no confidence for future investment in the region. However, Wal-Mart retained an option to buy the other two-thirds by 2007. Seiyu's shares rose 60 percent on the news of Wal-Mart investment (Slater 2003).
During March 2008, Wal-Mart made Japanese subsidiary Seiyu a wholly-owned unit, this decision increasing its stake from 96% to 100%. The supermarket chain has been unprofitable for a period of time and Wal-Mart plans to turn this situation around; yet now Seiyu is viewed by retail analysts as a weakness in the Wal-Mart stable. Wal-Mart initially invested in Seiyu in 2002 but Japan's fifth-biggest retailer (by sales) has since struggled in an increasingly saturated market. It has not recorded a net profit since 2002. At February 2008, Seiyu posted a net loss of JPY20.9bn (US$193.7m) due to a series of asset write-downs. Seiyu said it had missed its sales and earnings targets after seeing operating profit decline 87% to JPY434m and sales fall 0.9% to JPY952.3m.
Comparing between Wal-Mart and its competitors, Carrefour in China
Carrefour is the second world's largest retailer after Wal-Mart according to 2009 Global Power Retailing (Deloitte). Carrefour founded by Marcel Fournier and Louis Defforey at France. It was an initial test of the one-stop shop formula where customers could get almost all of their shopping needs satisfied at one location. The store provided self-service grocery shopping at discount prices and stocked items such as clothing, sporting equipment, auto accessories, and consumer electronics.
In China, Carrefour sales increased by 7.1% but were down 3.6% like-for-like, because of the trends of H1N1. Food was resilient, driven by significant growth in volumes in a strongly deflationary environment. Non-food sales continued to contract, but showed slight improvement in Quarter 3. Continue expansion at a steady pace with five hypermarkets and fourteen hard discount stores.
Carrefour has different strategy from Wal-Mart when entered China by building up partnerships with local retailers. Carrefour believes that flexibility matters must be concerned when the market is new, so that Carrefour is more rely on local distributors to deliver directly to the stores. Besides, Chinese customers more prefer to consume fresh food rather than freeze food, and Carrefour purchased nearly 60 percent of products from local suppliers.
On the other hand, Wal-Mart purchased lower percentage of the local products than Carrefour and it is more centralized as the main decisions mostly are made by headquarter in Shenzhen. Moreover, Wal-Mart is famous for its highly efficiency supply chain, but Wal-Mart does not enjoy this advantage in China as the government restriction. After all, Carrefour is more flexible to the customers more than Wal-Mart does.
Wal-Mart's advantage is everyday low price strategy, but it seems to be not that powerful in China as well as it worked on United States. In addition, the price of Carrefour and Wal-Mart does not seen to have much different between them.
According to China Chain Store & Franchise Association, Carrefour ranked in 6th position before Wal-Mart in China Top 100 Chain Retailers 2007. In fact, Wal-Mart was in 13th place but it having sales increased 42 percent more than Carrefour which had only 24 percent. In addition, location number which Wal-Mart has rose 20 percent more than Carrefour (see also Appendix O).
In 2008, Wal-Mart grew to place 9th in China Top 100 Chain Retailers 2008, however Carrefour still remain the same position at 6th. Yet the growth of Carrefour in 2008 was decreasing compare with 2007, with 14.1 percent increased on sales and 19.6 percent increased in expansion. Also, Wal-Mart did decrease in both sales and expansion, with 30.6 percent and 20.6 percent. See also Appendix P.
Despite of the ranking, Wal-Mart has huge growth compare with Carrefour in year 2007 and 2008. Besides, Wal-Mart has won the bid on Trust-Mart over Carrefour in 2007.
Recommendation of strategies for the way ahead
Readjust the Chinese market
Because of the cultural differences, it is necessary for Wal-Mart to understand the Chinese customers' consumer habits and American customers' consumer habits. To the Chinese consumers, going shopping is not about buying things, but just to get out of the houses. The Chinese consumers are aware of the brand products but they are not so loyalty to those products. In order, Wal-Mart requires to understand deeply more who the consumers are and also what they are looking for. However, the different characteristics between the Chinese consumers and Americans consumers, Wal-Mart China might be more relevant to focus on the shopping experience and salesperson fleet using aggressive promotion methods. Wal-Mart may remodel the structures of the stores to make it feel like wet-market that is to adapt to local taste.
At the United States, Wal-Mart brand is identified as low price rather than quality. But in China, local retailers are going for low prices and providing low quality, Wal-Mart's own brand was the authenticity for low prices with quality. The suggested strategy in the 2008 Wal-Mart supplier meetings shows that it's heading in that direction (Business Week). This also follows Gome's (Gome the top one retailer in China) strategy of reorganize its suppliers' brand to their own brand (Business Week), but goes beyond it as the foreign brand in China is already identified as a higher reliability and quality authenticity. This actually holds true were retailers done a better job of enforcing supplier quality than the local regulations in China. With that, Wal-Mart is still able to use its expertise and knowledge in supplier negotiation and distribution system to keep costs down.
Partnership with the local retailer to meet the needs of local market
Working together with the local partner to understand where and how the local regulations can be adopted or modified for Wal-Mart's success and acquiring a stronger hold of the potential customer's heart might benefit Wal-Mart's growth and dominance in the Chinese market (The Economist).
Furthermore, Wal-Mart should joint-ventures with local retailers as local retailers are more understanding to the local customers' needs and tastes. As well the local retailers are more flexible to the local as they only specify on certain provinces not like Wal-Mart needed to take care more geographically. Forming partnerships with local retailers also reduced the competition faced by Wal-Mart with the local retailers. Due to the size of the local retailers, they can be more focus on certain group of customers at local, and they know ways to get low prices goods, it may not be good quality but is cheaper than what the price Wal-Mart offered. And, the local customers were used to buy the good from local retailers, even not at good quality but in a much cheaper price. If Wal-Mart cannot compete with the local retailers on prices, it will lose customers.
Additionally, joint-ventures with local retailers not only create flexible to customers but also reduce the costs in development than having joint-ventures with Investment Company. As deeply understand of the customers around, local retailers have more experiences and information about the customers which are more accurately than foreign companies like Wal-Mart.
Understanding the customers are important today, customers nowadays are more concern about the reliability and quality of goods and of course low prices products due to the switching costs of customers are low, and there have a numerical choices for customers to choose and the prices of differences are not much such as Metro and Carrefour.
Find more suppliers locally that sell safe and reliable goods
As the cases of melamine formula found in the powder of infant last year, the China government restrict on the quality and reliability of the products.
Wal-Mart China should accept the goods only from the suppliers which are certified by the government food safety authorities. Also, accept the quality standard goods certified by authority third party organization such as World Health Organization, to ensure the safety of the goods that imported or exported from different countries. For example, the products that have gone through the safety check and have a logo on the products will be the choices for customers to consume. According to this, Wal-Mart China must acquire the goods approved by the authorities when import products from any countries.
Business Daily reported that Wal-Mart is going on Direct Farm Program, which will benefit both Wal-Mart China and farmers of China. Wal-Mart China cooperate with the farmers not only upgrade their abilities to adapt to the market, stimulates the production and supports environmental protection in the agriculture sector. Besides, this also improves and ensures the food safety standards, and increases the income of the farmers. It is win-win situation for both parties.
Furthermore, transaction costs are always the matter for Wal-Mart China. Wal-Mart successful to increase numerous numbers of farmers to join the program, it may reduce the problems of getting low prices and safety goods, and also the transaction costs faced by Wal-Mart China. If Wal-Mart succeed in the Direct Farm Program, it can enjoy lower prices and economic of scale than the prices given by the suppliers of Wal-Mart now. So Wal-Mart should put more effort on this program.
Reduce cost by having more part-time employees
Wal-Mart has launched a job optimization and regrouping program to reduce labor costs in China according to Business Daily. This mean that competition for everyday low price, now become harder for Wal-Mart, and it needed to cut jobs to reduce the cost. But employees of Wal-Mart China has paid low wages and now Wal-Mart China required them to accepts lower paid or go off.
Wal-Mart needs to reduce cost to maintain the strength of it that is everyday low price. Wal-Mart China can hire more part-time workers than the full-time employees. As every day the stores should have peak hours and non-peak hours, be flexible to the flow of the customers. In addition, in some occasion such as Chinese New Year, Christmas, or National Day, for different occasions place different numbers of part-time employees accordingly. This may reduce quite a large proposition of the costs, and Wal-Mart China can offer customers better prices. Also, it reduces the unused work force and from that to prevent the waste of the resources.
Be more innovative to attract new customers
Wal-Mart is famous in low price strategy, but world is changing, the tastes and needs of consumers change rapidly accordingly. As the consumer is having higher wages and standard of living, it is necessary for Wal-Mart to review its current strategy of low price and see how value can included in its products. The fast growth in China's retailing industry, bring up the wages cost and transportation cost, and it is no more being low wages sources in global.
As a consequence, Wal-Mart China must be innovative to capture the market. For example, very minor of suppliers of top branded products such as Louis Vuitton and Prada, sell these brands in China. Thus, it is very expensive selling in China. Wal-Mart China is world's largest retailers, it can try to sell those brands in stores as it can achieved economic of scale, so the prices will be cheaper than selling in the specialty stores. This may capture the new customers groups that aware of branded products but not willing to buy at high price or customers groups that can afford but could not find the brand they desired in China.
Be innovative, let the customers feel Wal-Mart China is different from other retailers, make customers be excited to shop at the Wal-Mart's stores. As result, it keeps customers to Wal-Mart and to be more loyalty to Wal-Mart.
Restructure the training system and recovery system
From Reuters, a female customer of Wal-Mart was injured to death. She was suspecting of shoplifting but she refused to show the receipt as the employees asked did not wear the uniform of Wal-Mart. Besides, Wal-Mart did not take any action like apologize or offer any compensation after this incident has happened.
What happened to the Wal-Mart China employees? They did not carry out the beliefs and culture of the Wal-Mart, service to customer with "Ten-foot Rule" and "Sundown Rule". The reason caused the incident might because the employees did not get through the systematic training or even they were not being trained.
As the happened of the case, Wal-Mart should immediately reinforce the employees to go for training, including full-time and part-time workers. It may have bad influence on the image of Wal-Mart.
Wal-Mart make quality service a point to address customers' varied needs. But the problem is the employees could not perform it, and worse destroy it. Thus, company should come out with steps for employees to follow, and train them how to perform out with the steps just like McDonald the greeting sentences are same for every employees.
The centralization model has helped the Wal-Mart in American but it seems to hold back Wal-Mart in China. China is less homogeneous than America thus the company have to be more decentralize, empower the local managers and their supplier-networks ("Bringing best practice to China", The McKinsey Quarterly).
Employee's commitment always is the heart to success for enterprise. Value the employees as customers make them pleasure, and they will make customers pleasure, and bring loyalty to company.
Lastly, Wal-Mart should have a good recovery system. For example, after the cases of China Wal-Mart employees detained in shopper's death, with a good recovery system, Wal-Mart might know what actions the company should have to react, and how to response to the incident and how to solve it. This makes Wal-Mart to improve in performances, productions and services.
Wal-Mart is the largest retailer in the world which has everyday low price practice. Wal-Mart had expended to widely eleven countries included China. Wal-Mart entered China by joint venture at 1996. From one supercenter in Shenzhen grow to now 146 stores in different cities in China, so Wal-Mart is successful at China. However, when Wal-Mart first entered China, it faced some challenges in China. Even till now, some of the issues such as transportation costs faced by the Wal-Mart are still existed.
The retail industry in China is changing rapidly. Besides, the competition is hash in China; Wal-Mart China should be flexible to the environmental change. Carrefour, the main competitor of Wal-Mart is the big challenge to Wal-Mart. Wal-Mart ought to learn from its competitor, in order to compete with Carrefour.
Moreover, Wal-Mart's strong position in the world is double-edged sword. As the customers trusted the quality and reliability products that sell in Wal-Mart China, but on other hand the public focus heavily on the Wal-Mart that Wal-Mart must always see to its image and reputation. Wal-Mart has to build up a good recovery system, so that it could response quickly to the problems happened. Also, Wal-Mart needs to be more decentralization, empower employees to be more responsive to customers. It has a significant meaning for Wal-Mart to be innovative in such a competitive retail industry for future development.
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