IBUS 7302 International Operating Business

Group 6

IBUS 7302 Operating International Business

Case title: Wal-Mart Global Expansion

Type of submission: Group Report

Total number of pages: 5

Word Count: 1490

Group Number: 6

Group members’ full name and student IDs:

Danisa Gandhi 41793770

Wenjing Li 42231354

Chunxiao Qiu 42415284

Zhi Lian 42266833

Jen-Yveh Chang 41990047

Rufei Sun 42160089

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Question 2: What at are the risks that Wal-Mart faces when entering other retail
markets? How can these risks be mitigated?

Wal-Mart had begun expanding internationally in the early 1990s in an effort to rejuvenate
sales growth. This global expansion has enabled Wal-Mart to become the largest retail
operator spanning over 7300 retail units worldwide (Dowling et al 2009). Nonetheless, the
growth has not been without costs and still encounters a range of ongoing risks when
entering other retail markets. Such risks include: political, financial and economical,
local responsiveness.

Firstly, local regulations, such as land-use or employment, unrest social situation, like
strikes, government corruption in some countries can be considered as a serious obstacle
for expansions. Germany is a critical market to Wal-Mart, however, it withdrew in 2006
after an eight-year attempt to make it profitable. One of the big reasons is that the land-use
regulations which were unfavourable to Wal-Mart’s development approach, because the
inabilities to scale effectively make it hard to decease fixed costs (Christopherson 2007).

Secondly, local responsiveness also puts a lot of pressure on Wal-Mart. The differences and
the likelihood of changes in consumer tastes, preferences and distribution channels create
critical aspects. For example, Wal-Mart entered South Korea in 1990s and Korean
consumers had preferences for fresh food and were also willing to make daily trips to local
retailers for the purchase of groceries, given their limited storage space. On the contrast,
Wal-Mart offered dry-food with its layout aimed to serve infrequent bulk shopping leading
to financial drawbacks (Kim 2008).

Thirdly, competition in overseas market can be fierce as well, since competitors like
Carrefour has penetrated in those markets earlier and outperformed Wal-Mart (Colla &
Dupuis 2001).

Lastly, economic and financial risks are both dangerous. The East Asian Financial Crisis
during 1997 caused countless Asian currencies to fall by 50-60%, and property values to
drop (Cnelson, 2008). However, in 1998, Wal-Mart had announced its purchase of a

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majority stake in 4 stores and 6 additional development sites in Korea, and expansions in
other Asia countries. Although this was one year following the crisis, it was still seen as a
serious problem for Wal-Mart in which it had assets in Asian countries because the growth
rate (GDP) and the risk of further currency depreciation would result the value of
receivable cash flows to fall. This kind of exposure had clearly played a part in Wal-Mart’s
sales figures which was just 6.4% of overall sales during the 1998 fiscal year (Reference
for Business 2011). Moreover, an analysis of the case revealed that the initial missteps of
Wal-Mart in Mexico were due to the costs pressures with local suppliers. Such kind of cost
pressures is common for international businesses in competitive global markets (Dowling
et al, 2009).

Here come recommendations:

Finance, investment and money mismanagement are crucial economical risks of

international business. Therefore, to manage foreign exchange exposure effectively, Wal-
Mart must exercise hedging activities, forecast future exchange rate movements and use
tactics such as forward contracts and currency swaps (Dowling et al, 2009).

Moreover, it is recommended for Wal-Mart’s risk and assurance managers to undertake

deep research on the country’s political and economical status, and consider capital flows
across borders and the different business activity norms when making decisions on how to
best manage the firms’ assets and protect it from adverse consequences (Dowling et al,
2009).

A further reasonable suggestion for Wal-Mart is analyse and learn from local competitors’
experiences and to hire local employees. Understanding the customer and the market is
highly important, because customers have unique peculiarities for tastes and buying
preferences, and therefore Wal-Mart should make adjustments to its American formats.
Furthermore EDLP strategy of Wal-Mart can not always be the best choice in some areas
of the countries, since it has great chances to trigger price wars and harm its reputation.

Question 3: Why do you think that Wal-Mart first entered Mexico via a joint
venture? Why did it purchase its Mexican joint venture partner in 1998?

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Wal-Mart first entered Mexico via a joint venture with Cifera, the largest local retailer.
Demonstration of a long and good private friendship between the Mr. Jeronimo Arango
(CEO of Cifera) and Sam Walton (founder of Wal-Mart) provided basis for business co-
operations. Furthermore, forming a joint venture allowed Wal-Mart to gain local partner’s
knowledge of the competitive conditions, culture, language, political systems and business
systems of Mexico. Moreover, Mexico was an emerging market and whilst the
development costs in a foreign market are high, Wal-Mart could share these costs and risks
with a local partner (Zhen 2007).

Conversely, Wal-Mart’s American retailing practices initially did not work efficiently in
Mexico as it was dominated by several large regional retailers and had infrastructure,
supply chains, consumer tastes and preferences that were different. As a result, prices at
Wal-Mart Mexico were 20 percent above prices for comparable products in US stores,
which limited its ability to gain market share. There were also problems with merchandise
selection such as ice skates, riding lawnmowers, leaf blowers and fishing tackle.

On the other hand, in an effort to extend its reach and profitability in Mexico, Wal-Mart
announced to take a controlling stake in Mexican joint-venture partner Cifera in 1998. The
North American Free Trade Agreement (NAFTA) also played a significant role in this
acquisition and provided Wal-Mart with good prospects for further development such as
lowering trade barriers and tariffs between the two countries. Another reason for the
acquirement was due to the dramatic peso devaluation in 1994-95 which offered Wal-Mart
a unique opportunity to buy the controlling share of Cifra at an extremely low price (Chris
2005). Therefore; Wal-Mart with its expertise knowledge and full control adapted its
operations to match the local environment (Chris 2005).

The difficulties of operating as a joint venture could also have been seen as a reason to alter
the ownership structure of Wal-Mart in Mexico. In term of joint venture disadvantages, it
could lead to conflicts and battles for control between the investing firms if their goals and
objectives change or if they take different views (Dowling 2009). These conflicts tend to be
greater when the venture is between firms of different nationalities which often end in the
dissolution of the venture.

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Question 4: What strategy is Wal-Mart pursing— a global strategy, localization

strategy, international strategy or transnational strategy? Does this strategic choice
make sense? Why?

From this case study, it is clearly evident that Wal-Mart pursued not only a localization
strategy but also a transnational strategy from the periods of 1962 to 2008. Specifically
speaking, before the mid-1990s, Wal-Mart took an international strategy to operate the
business. After the failure in the Mexico market, Wal-Mart shifted towards a transnational
strategy to expand overseas.

Before 1991, Wal-Mart was confined to the United States; its high productivity resulted in
low operation costs and successfully dominated the retailing market. Initially, Wal-Mart
did not pay enough attention to the different infrastructure, various consumer tastes and
preferences and cost structure in Mexico. As a result, Wal-Mart considered that its
successful market strategy could be replicated in Mexico market. According to Dowling et
al. (2009) claimed that a international strategy is appropriate when cost pressures are low as
well as pressures for local responsiveness are low. This means that a firm can reduce costs
through scale economies in the local market without enough consideration of local
customization. Therefore, Wal-Mart chose international strategy at the beginning when it
accessed into Mexico retailing market.

There are some evidences that can support this idea. In 1991, Wal-Mart established its first
store as a joint venture in Mexico. Additionally, Wal-Mart had problems such as poor
infrastructure and lacking of leverage with local suppliers in the same period, which made
Wal-Mart’s commodity too expensive to gain the market share. Moreover, Mexico had
lower income levels than America and Wal-Mart’s offering of higher priced products and
unpopular items in Mexico contributed to the failure of gaining the market share. “Less
than one in three international retail expansions succeed when expanding overseas.”(Bain
& Co 2007) Consequently, Wal-Mart transformed from an international strategy to a
transnational strategy. Therefore, Wal-Mart addressed these barriers by taking learning
effects. For instance, by the mid-1990s, Wal-Mart improved the distribution system and
matched the local environment (Dowling et al. 2009). Moreover, their products which in
Mexican stores offered products to meet the local market demands, and many factories
were built near its Mexican distribution centres by its suppliers. By this location economy,

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fixed costs such as labour salaries can be usually lowered. Consequently, achieving low
costs of location economy makes Wal-Mart pursued a transnational strategy more
effectively.

Recommendations
Recommendation 1
The first thing for Wal-Mart to do before entering a new market is to ask itself the question,
whether it is an appropriate time to enter the market. The reason is that at the time policies
and regulations in this area can make it difficult for Wal-Mart to be successful. Such as
land-use regulations in some of the countries is a serious problem for its big-box model and
without sufficient scale Wal-Mart cannot reduce its fixed cost. Thorough research is the
second important thing for Wal-Mart to do. Understand the customers will make sure Wal-
Mart can have the right strategies, merchandise mixes and formats to satisfy different tastes
and preferences.

Recommendation 2
Wal-Mart in Mexico should seize the opportunities of free trade between USA and Mexico,
especially after the NAFTA taking effect, in terms of quantity exports have increased from
20 to 160 US billion dollars, and imports have increased over 10 times (). The trade treaty
has removed some of the transportation matters and government red-tape that had kept Wal-
Mart from fully achieving its competitive advantages here (Luhnow 2001). Besides due to
the economic polarization, Wal-Mart in Mexico should make sure their strategy EDLP can
really afforded by the people there (Tilly 2005). Low price and enjoyable shopping
environment will surely win both the mind and heart of consumers in Mexico.

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Reference List:

Bain & Co, ‘Wal-Mart Goes Abroad for Growth’, Business Week, viewed 21 February
2007.

Chris T, 2005, Wal-Mart in Mexico: the limited of growth, 1st ed, Nelson Lichtenstein, New
York.

Cnelson, 2008, East Asian Economy, viewed 6 April 2011,

<http://www.allfreeessays.com/essays/East-Asian-Economy/417.html>

Colla, E & Dupuis, M 2001,’ Research and managerial issues on global retail competition:
Carrefour and Wal-Mart’, International Journal of Retail & Distribution Management, vol.
30, no. 2, pp. 103-111

Dowling, PJ, Liesch, P, Gray, SJ, & Hill, CHL 2009, International business: Asia-Pacific
edition, 1st ed, McGraw-Hill Australia Pty Ltd, Sydney.

Kim, RB. 2008, 'Wal-Mart Korea: Challenges of Entering a Foreign Market', Journal of
Asia-Pacific Business, vol.9, no. 4, pp. 344 — 357

Luhnow, D 2001, Lower tariffs, retail muscle translate into big sales for wal-mart in
Mexico, Staff Reporter of the Wall Street Journal, viewed 31 August 31 2001,
<http://www.wright.edu/~tdung/Walmart_in_mexico.html>

Reference for Business (2011) ‘Wal-Mart Stores, Inc. - Company Profile, Information,
Business Description, History, Background Information on Wal-Mart Stores, Inc’, viewed
6 April 2011 <http://www.referenceforbusiness.com/history2/20/Wal-Mart-Stores-
Inc.html>

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Susan Christopherson 2007, ‘Barriers to ‘US style’ lean retailing: the case of Wal-Mart’s
failure in Germany’, Journal of Economic Geography7 (2007) pp. 451–469
doi:10.1093/jeg/lbm010.

Tilly, C 2005, Wal-Mart: template for 21st century Capitalism, New Press, New
York