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Before delving into the details of Wal-Mart’s ‘international business strategy’ of its venture to India, and our investment advisory on this case as Merrill Lynch, consideration of the company history is vital to our analysis.
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Wal-Mart Stores, Inc.
Wal-Mart is a U.S based Multinational Corporation, which operates chains of warehouse stores and discount departmental stores in the U.S and 15 other countries. The company is listed on the NYSE, and is reported to be the world’ largest public corporation by revenue (Forbes Global 2000).
Wal-mart has 8500 stores in 15 countries, and has been mostly very successful into its venture into the global markets. Once asked if Wal-mart was trying to take over the world, the reply from one of the senior heads from Wal-Mart, with a smile on his face was, “I don’t think so, all we want to do is grow”. This has been evident from the aggressive growth and expansion strategy adopted by Wal-Mart both within and outside the U.S. It has been expanding with massive momentum, with the strategy of “Always Low Prices. Always” and has taken over the retail industry in many countries. However, it has stumbled in its smooth expansion in countries like Germany, where Wal-Mart became a text book case of “how not to enter a foreign market” (Mike Peng, 2009). The success of Wal-Mart in its home country, and a variety of other markets like Argentina, Brazil, Britain, Canada, China, Japan, Mexico and Puerto Rico does not seem to have translated into the German market, and therefore Wal-Marts expansion plans must be carefully evaluated before giving them a green signal.
Wal-mart knows that venture into India will not be an easy feat because of the market dynamics.
Firm motivations for internationalization
Going abroad is not always the best strategy for the businesses to adopt, and a careful analysis of the market scenario and prevalent conditions is vital to the success in the international markets. The premature expansion into foreign markets can be very detrimental for firms, both small and large. Wal-marts failure in Germany or its initial struggle in Mexico clearly indicates that expansion abroad should be carefully evaluated whether going abroad is warranted.
Source: Global strategy by Mike Peng
Wal-Mart falls in cell 3 and may be termed as a slow internationalizer. It is a huge chain of retail stores, operating in the U.S. The company is still in the process of opening its store in the U.S. For Wal-Mart, the domestic market still can be exploited, and there in so dearth of new locations in the U.S. However, in 2010, it opened about 600 international stores, while only about 150 in U.S. The pace of internalization of Wal-mart is slower than some of its competitors, like Carrefour in France, or Metro in Germany.
“India is a price sensitive market and therefore we will be devising our strategy for her very carefullyâ€¦Retailing is like a game of three dimensional chess where we operate as a local, regional and global player, so depending on the needs of the market we shall change our format and adapt.” (John B Menzer, President and CEO, Wal-Mart)
Although india represents a huge emerging market with a lot of retail potential, venturing into a market that does not favor FDI and is against the retail chain business might aswell be a very potent risk.
Mode of entry and Corporate Strategy
Wal-mart has always carefully chosen its mode of entry into foreign countries. Walmart entered Canada through acquiring a local player Woolco. In Mexico, the entry was done through a 50-50 joint venture with Mexico’s largest retailer, Cifra. The entry into Latin America was also through joint ventures. Therefore, the entry mode is therefore chosen with specific consideration to the region, and is a not a ‘one size fits all approach’.
“Wal-Mart operates with multiple private brands around the world. In each market that we operate, we look to be local. We treat each market as unique and India, in this respect, is no different.” (Arti Singh, vice-president of Corporate Affairs)
Wal-Mart opened its first store in India through a partnership with telecom giant, Bharti enterprise. The reason for this partnership is that India does not allow FDI in retailing. “In India, the Government presently does not allow foreign investment in multi-brand retail. It allows 51% FDI in single-brand retail and 100% in wholesale venture. In 2007, Walmart Stores and Bharti Enterprises entered into a joint venture and began cash & carry stores under the brand Best Price Modern Wholesale.”( Dharmendra Rataul,2009)
Walmart has a 50-50 jint venture in India in the whole sale, cash n carry segment. It has also established partnerships in Indian farmers through the ‘Direct Farm Program’ so that healthy and high quality fruits and vegetables can be grown for the stores.
Wal-marts corporate strategy rests on its key goal to dominate the retail industry with the lowest possible prices. It also has an aggressive expansion strategy both in the U.S and abroad. It also aims at creating a positive brand image where ever it operates, and is diversifying into other areas of retail like grocery and pharmacy.
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“The key features of Wal-Mart’s approach to implementing the strategy put together by Sam Walton emphasizes building solid working relationships with both suppliers and employees, being aware and taking notice of the most intricate details in store layouts and merchandising techniques, capitalizing on every cost saving opportunity, and creating a high performance spirit. This strategic formula is used to provide customers access to quality goods, to make these goods available when and where customers want them, to develop a cost structure that enables competitive pricing, and to build and maintain a reputation for absolute trustworthiness” (Stalk, Evan, & Shulman, 1992).
Wal-Mart stores operate according to their “Everyday Low Price” philosophy. Wal-Mart has emerged as the industry leader because it has been better at containing its costs which has allowed it to pass on the savings to its customers. Wal-Mart has become a capabilities competitor. It continues to improve upon its key business processes, managing them centrally and investing in them heavily for the long term payback.
Wal-Mart has been regarded as an industry leader in “testing, adapting, and applying a wide range of cutting-edge merchandising approaches” (Thompson & Strickland, 1995, p. 860).
Walmart’s strategy has always been to manage well oiled value chains with which it can offer its consumers the lowest possible prices and dampen the effects of inflation on prices. Inflation in India is at an all time high of the decade presently. While India is one of the most lucrative markets for Wal-mart, with a $375 billion retail business, ranking as the 8 the largest of the world, and with a growth potential of about 7% by 2011, the question of whether Wal-Mart would be successful in India still remains unanswered. Since the operations in India are under a joint venture, Wal-mart’s role in India would be limited to providing ‘back-end support’ to Bharti enterprise’s grocery stores called Best price. This is has two major implications. Neither, the original business model of wal-mart is being used, which has proved to be a recipe of success in many of the international ventures, nor the Wal-mart brand name would be used to dominate the market and to command consumer loyalty. The branding and business consequences of this strategy are yet to be seen because all global businesses and international operations have worked to retain and maintain a consistent brand image and identity in all countries where they are operating. Wal-mart, due to regulations in India, will not be even be able to use their brand name, let alone the brand communications and experiences. Wal-mart is known for its low prices, inventory management and efficient logistics. The ‘brand name’ would be absent in India.
As Merrill Lynch, the appraisal of the opening of Wal-mart takes into account many considerations. India is, indeed, one of the biggest retail markets of the world, but the ‘Wal-mart’ culture is not very prevalent there. Wal-Mart is facing severe opposition from local retailers. In the past, Wal-mart has suffered at the hands of competitors, and the threat may materialize as a major deterrent to Wal-mart’s success. Competition in germany and South Korea have driven out Wal-mart out of the market before, and the same can happen in India. Moreover, india is steeped into an economic recession.
For starters, the Indian market is dominated by a huge number of local retail shops, which cater to the consumer buying patterns. Moreover, the future presents competitors like Tesco and Carrefour to Wal-mart in India. However, Wal-mart has a clear strategy in hand.
“India is not a homogeneous market, so ours is not a cookie-cutter approach from the U.S. â€¦Wal-Mart is in no hurry to unfurl the Wal-Mart flag nationally. The easiest thing is to roll out stores, but the most difficult is to sustain and feed them.” (Raj Jain, President of Wal-Mart India, 2009)
Wal-mart’s formula of success has always been its low prices. However, India’s restrictive policies do not allow foreign giants such as Wal-mart to set themselves directly against the local players and small shops, and that is why Wal-mart has entered India with the 50-50 strategic alliance with Bharti enterprise. The Indian retail market is characterized by mom-and-pop businesses and poor distribution channels, yet, Wal-mart a $375billion retail market has a lot of potential which can be exploited.
“The Indian marketplace is one of the most complex in the world with so many variables in the marketplace across India, traditional retailer one-size-fits-all store strategies just won’t work.”(Michael Bergdahl, Wal-Mart director). Wal-Mart is likely to face many obstacles in India. Apart from the cultural, religious and languages barriers, the government of India is stringent in its policies and does not facilitate Wal-mart in any way. The politicians are not convinced that retail chains can bring any benefits, and even contemplate a ban on foreign retailers entering in the retail trade industry. Wal-mart, and its front-end stores, Easy Day, will have to operate under strict compliance on the Indian retail law.
Whatever conclusive opinion that we form, or the appraisal that we do as Merrill Lynch of Wal-mart’s venture into the Indian retail markets, the fact that India is a tremendously huge market cannot be ignored. The consumer spending in India is growing due to aids such as the credit cards, and the GDP per capita is on the rise. Such statistics indeed present a very favorable picture. Moreover, we cannot forget the aggressive way in which Wal-mart strategizes to capture its markets. With its supply chain and logistics systems which are technically efficient, and a right marketing plan to accompany them, Wal-mart can conquer any international market that it ventures into. Wal-mart also has the strength and resources to bear a lapse in strategy, and if the proposed strategy does not work in India, Wal-mart can go back to its front role, and operate with its original business model and strategies in India. Overtime, the government and consumers of India will see for themselves the benefits of a true low price store in their midst, and will be more willing to support Wal-mart in their earnest.
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