Wal-Mart International Business Strategy - Essay Example

? International Business Strategy: Wal-Mart BY YOU YOUR SCHOOL INFO HERE HERE International Business Strategy: Wal-Mart Attractiveness of Discount Retail in the 1950s Started in approximately 1897, the era of the discount retailer began, with major discount retailers such as Woolworth’s maintaining market dominance on commercial Main Street. From the turn of the century until post-World War II, it was common practice for retailers to deny removal of merchandise from retailer shelves, instead providing in-house talent to assist customers directly at the store counter (Hesterly 2008). The expense of providing top quality, customised customer service was no longer worth the return on investment for human capital development and training as department stores began to emerge in the 1950s, representing an abundance of new competitive threats. A new model of retailing emerged, the discount retailer, allowing for self-service opportunities that negated the need for specialised, in-house staffing talent to manage customer relationships. The discount retailer changed the dynamics of interaction between sales support staff and the consumer, giving consumers a new type of flexibility and convenience in their shopping experience. During the Great Depression, fair trade laws were established in the United States to protect grocers and other assorted merchants (ranging from apparel to home goods) from undercutting one another using price fixing or penetration pricing (Hesterly 2008). After achieving economic growth post-World War II, these laws were repealed, allowing for a variety of emerging discounters to offer their own pricing models below the established manufacturer suggested retail prices of merchandise. The ability to establish a competitive entity without regulations on pricing structures fuelled the majority of growth in discount retailing by 1960. The discounting model was attractive in the late 1950s, additionally, due to changes occurring in the social environment of consumers. The distribution infrastructure in the United States, by 1960, was becoming well-developed, allowing businesses to expand their localised presence to multiple U.S. markets. Coupled with improvements in technology and mass production capacity, apparel became a very competitive retailing concept. During the 1940s and 1950s, many consumers openly shunned the private label apparel brands being offered by major department stores such as JC Penney and Sears Roebuck & Company. As discount retailers began to emerge on commercial Main Street, these new retailers were able to redefine value. Value was redefined from strictly service to that of quality, pricing and convenience (Hesterly 2008). It was during this period, also, where many consumers were moving from urban regions to suburban housing developments, thus changing the dynamics of lifestyle. Demographic shifts occurring in the late 1950s and early 1960s had mothers exiting the household to establish careers, laying the foundation of the modern dual-income family household. This changed the conception about convenience, providing ample opportunities for new market entrants in the discount retailing industry to emerge successful. Success for discount retailers is also reflected during the 1950s by the volume of competitors in the U.S. market. By 1960, major discount retailers such as Fisher’s Big Wheel, Bradlees, Caldor, TG&Y and Woolco (to name only a few competitors) were dominating the retail industry and seizing market share from well-established department store retailers. This 1950s represented a period before the era of competitive branding and positioning through psychographics, thus illustrating value through competitive pricing distinguished these retailers from major department store retailers. Consumers now had much more choice and variety available in the downtown region of urban commercial areas and in the suburban centres now sprouting quickly across the United States. It should be identified that the discount retail industry was very attractive during the 1950s. Kalyanaram and Gurumurthy (2008) agree that first movers in a new market maintain significant competitive advantage over late entrants. Consumers are largely risk averse and often compare late movers with the pioneering company with often unfavourable assessments (Kalyanaram and Gurumurthy 2008). By being a first mover around 1960, major discounters able to promote not only price advantages, but also convenience whilst also establishing the foundation of brand recall in major markets were able to quickly gain market attention and loyalty. This was especially true for the price-sensitive buyer market. Discount retailing, for Wal-Mart and other competition, represented tremendous opportunities to revolutionise the retail industry whilst outperforming department stores in areas of operations and pricing structures on assorted merchandise offerings. 2. Sources of Competitive Advantage for Wal-Mart in the U.S. The main source of competitive advantage for Wal-Mart is the company’s positioning strategy. Value is presented to consumers through the low-price model that continues to undercut competition which has served as the foundation for market success for Wal-Mart since the 1980s. In the United States, marketing slogans such as “Save money, live better” and “Always low prices...always” have continued to position this business as a pricing value leader. The positioning strategy of the business is vital to achieving market success and establishment of consumer group brand loyalty as it serves to differentiate the business from competition. One major competitor in this industry in the U.S., Target Inc., is positioned under quality conceptions, often referred to as “Tarzhay” in many consumer markets. Target recruits, as one example, major fashion experts such as Vera Wang to provide discounted apparel styled according to major fashion trends. Target distinguishes itself as a quality-value leader in this sense, but is still unable to outperform Wal-Mart’s proven low pricing model. How the business positions itself in important U.S. markets determines the prowess of its retailing presence and ability to gain market attention and loyalty. Wal-Mart also maintains considerable leveraging power along the supply chain, as described by Michael Porter (2011) as being a major consideration stemming from the external environment. Wal-Mart has established market presence in areas of procurement both domestically and internationally, fuelled by the company’s significant capital resources and establishment of international distribution hubs to facilitate more effective product transfers between borders. Wal-Mart is able to purchase retail products ranging from apparel to foods in mass volume quantities, thus achieving volume discounts not available to other retailers without the capital resources to consider quantity discounting in procurement. Therefore, the switching costs to select another supplier for many different retail vendors are significant, giving Wal-Mart an edge in establishing cooperative pricing structures along the supply network and demanding compliance to certain packaging and eco-friendly expectations for a variety of products. By being able to leverage pricing along the supply chain, it gives Wal-Mart the ability to pass on these savings on a variety of merchandise offerings, thus again outperforming competition because of these advantages in procurement. Another powerful source of competitive advantage for Wal-Mart is the company’s promotional strategy in an industry where competitive rivalry is intense and markets are saturated with many competitors boasting low pricing models. Wal-Mart devotes significant capital resources in advertising, with television being the primary medium under mass-market focused promotion; along with niche marketing occurring simultaneously to capture particular ethnic group interest. Wal-Mart spends approximately $2.1 billion on advertising in the United States, which is 0.8 percent of its total sales revenues (Ries 2011). Wal-Mart utilises ongoing television advertisements that illustrate actors with like consumer characteristics illustrating their experiences and value beliefs, thus creating psycho-social connections with a variety of target consumers. Significant and above-industry-average spending on promotions continue to give Wal-Mart much competitive advantage over competing retailers unable to devote this type of capital to the marketing function. In highly saturated markets such as the United States, it is very easy for companies to replicate existing product offerings of competitors. Thus, companies must consider how to differentiate one brand from another when products are largely homogenous in this retail industry. According to Bennet and Rundle-Thiele (2004) the only thing not easily replicated by competition is a strong brand image. Wal-Mart understands this conception, and has worked for decades to build consumer trust in key markets and the foundations of brand recognition through logo presentation and development and sending integrated marketing communications with a consistent and reliable message to avoid confusing markets about the values and tangible benefits of the Wal-Mart experience. Marketing, and the methodology by which Wal-Mart differentiates using promotional communications, continues to make this brand appear relevant and flexible to changing consumer needs, thus providing outstanding competitive advantages. By focusing on branding as a competitive strategy, it allows Wal-Mart to take the intangibles of service and product and translate these into perceptions of total value to consumer markets (Abimbola 2001). In recent years, Wal-Mart has also managed to improve its competitive edge by building a perception in consumer markets of service competence, an element largely missing in most discount retailing models. Today, in the U.S., Wal-Mart illustrates tangible connections between in-house service personnel and consumer markets, re-injecting elements of service capacity and competence for this brand. Lack of expert customer service development is usually what sets department store retailers apart from discount retailers such as Wal-Mart (Zarbo 1998). By establishing self-service systems and merchandising concepts, it allows for labour-related payments to be reduced and thus supports low pricing models by removing high costs in multiple areas of operations and staffing. Wal-Mart, however, has re-introduced quality by illustrating its focus on building culturally competent internal staffing to increase consumer perceptions of total value. Wal-Mart follows the transformational leadership model, one which opens lines of horizontal communication and decision-making, regularly imparting mission and vision as part of the team-focused model of culture (Fairholm 2009). The television promotions running simultaneously in multiple markets illustrates this competency and prowess related to service, illustrating that a retailer can be diverse and dynamic whilst also supporting the typical low cost merchandising and pricing models. Figure 1: In-store marketing strategy for service excellence differentiation Source: Lungu, I. (2012). 5 Tricks that will actually get you customer service at Wal-Mart. http://www.stuffabout.com/2011/02/5-tricks-that-will-actually-get-you.html (accessed 12 December 2012). As illustrated by Figure 1, Wal-Mart is successful in taking integrated marketing communications promoted by television advertising and then carrying this same consistency in the internal operational model of staffing and human resources to achieve competitive advantages. Wal-Mart does not waver from its marketing implications focusing on staff competency and service support capacity, thus avoiding confusion of key target markets about the values, principles, and benefits of the Wal-Mart shopping experience. 3. The Potential Sustainability of the Wal-Mart Model In order to fully understand the long-term sustainability of the existing business model at Wal-Mart, it is necessary to examine the threats to successful business practice provided by the external environment. Porter (2011) identified five forces that influence business direction, including competitive rivalry (previously identified), threat of substitutes, threat of new market entrants, consumer buying power and supplier suppler (previously addressed). Fortunately for Wal-Mart, there is little risk of new entrants in this industry as the costs of market entry to compete successfully against major multi-national retailers are significant. The initial capital required for new facilities construction, inventory volume ordering, compliance costs associated with the regulatory environment, and establishment of an effective distribution network are substantial. Wal-Mart and several of its large competitors, such as K-Mart and Target, are expanding their holdings across diverse markets, forcing smaller retailers into bankruptcy (Zarbo 1998). In this industry, apparel is one of the most profitable merchandise offerings, and the capital requirements necessary to establish private label brands are enormous. Wal-Mart maintains a very long-term sustainability advantage simply due to the sizable expenditures needed to enter this saturated market. There are significant threats of substitutes in this industry, with many competitors to Wal-Mart carrying inventories that are homogenous, being of similar quality and pricing. A common practice in discount retailing is the price matching conception, guaranteeing that customers will receive pricing discounts by providing evidence that competitors are promoting products at lower prices than Wal-Mart. In this industry, when products are largely standardised and homogenous, it is difficult to establish long-term brand loyalty in desired target markets. “Unless the consumer has a specific preference for one competing brand, consumers will select whichever business is most convenient for their immediate consumption needs (Zarbo 1998). Though some competitors have gained market loyalty by using celebrity endorsements and product co-branding, such as the Martha Stewart collection at rival K-Mart, there is always the risk that consumers will defect to the most convenient retailing option where substitutes are widely available. Though Wal-Mart attempts to break down these barriers by establishing private label apparel brands (as one merchandising example), without using marketing promotions to illustrate differentiation among this mix of substitute retail products it is questionable as to whether product-based sustainability is achievable in unpredictable markets. This industry also gives consumers a great deal of buying power, able to force backward integration in the value chain through threats of competitive brand defection. The homogenous nature of product offerings at Wal-Mart and many major competitors force transparency in many areas of operations, with consumers now looking at issues of acceptable corporate social responsibility, establishment of fair and competitive pricing, the human resources function, and even development of merchandising strategies. According to Porter (2011), when switching costs are low for brand defection, buyers are able to leverage pricing. Wal-Mart has many competitors offering like products such as JC Penney, K-Mart and Target, thus giving consumers ample opportunities to identify not only substitute products, but select those geographically convenient or at lower pricing opportunities. As identified previously, a critical success dynamic for Wal-Mart is the marketing and promotional functions, where most of issues associated with buyer power are reduced through differentiation and brand positioning. Wal-Mart maintains sustainability in relation to leveraging consumer buying power through the utilisation of creative and innovative promotions that extend value and quality over competition. Wal-Mart already maintains a critical competitive advantage in terms of satisfying the price-sensitive buyers, but is able to translate this into sustainability through the marketing function. Wal-Mart also is able to gain more market attention and expand the brand presence by utilising e-business tools to provide new perceptions of convenience to scattered and diverse markets that shop at the organisation. Wal-Mart has a well-developed product website offering direct delivery of in-store products to the consumer. This is certainly not a unique conception in this industry, as major competitors such as Target have similar websites available to promote convenience and spotlight its merchandising prowess and selection. Though Wal-Mart does not openly promote the specific contribution of sales from the company website (Wohl 2012), e-commerce represents a sustainable component of the business model so long as the content and offerings are relevant to buyer needs and preferences. 4. Comparing Wal-Mart in Germany versus the United Kingdom When Wal-Mart attempted to expand its presence internationally, the German market entry was expected to be a success by transferring the existing business model in use in the U.S. into Germany believing it would have similar positive market outcomes as those found in its home country. One major failure for this business in Germany was the company’s lack of knowledge and sensitivity about the German market and their lifestyle and social characteristics that were fundamentally different than U.S. markets. Wal-Mart entered the German market in 1997, through acquisition strategy of 21 different Wertkauf retailers with a supplementary acquisition occurring between Wal-Mart and In-Terspar, a hypermarket chain (mbaknol.com 2012). These acquired businesses had pre-existing brand recognition and the foundations of brand loyalty with key markets, built on social connections created between retailer and the psycho-social characteristics of German buyer markets. At the same time that Wal-Mart was establishing its brand presence in Germany, it was receiving considerable negative publicity for its business practices both perceived and tangible. Wal-Mart was accused by consumers and the regulatory environment for utilising predatory pricing to put established SMEs out of business (Clark 2006). Why is this relevant for assessing Wal-Mart’s failures in this new market? According to Dunning’s Eclectic Paradigm, a business must have internalisation advantages to achieve market success. These include advantages or synergies that are produced through alliance development or joint venture strategies to better serve the local market (Dunning 2000; Stefanovic 2008). According to Hofstede, a respected cultural researcher, the German market is characterised by high individualism. In Germany, consumers will not be loyal to a business unless it has established a perception of duty and responsibility, believing in an “honesty even if it hurts” methodology (Hofstede 2012, p.1). Wal-Mart believed that it would gain market interest and loyalty by taking pre-existing marketing and operational strategy and simply trying to transfer them into a very different and unique market from the United States. The acquisition strategy and the associated negative publicity did not take into consideration the potential gains that could have been experienced by using co-branding alliances with trusted German retailers to gain market prominence. Thus, the business was using promotions, merchandising strategies, and associated strategic imperatives that worked in the United States rather than creating customised business models to better fit the social and psychological needs of the German markets. If Wal-Mart had, early in strategy development for new market entry, considered the complex psycho-social needs of German consumers, many synergies could have been created by negating acquisitions and attempting a more incremental market entry after, first, establishing a positive brand perception as the foundation of brand recognition in this market environment. Wal-Mart was also unsuccessful in Germany as social characteristics have the majority of consumer resistant to change and with a strong ethnocentric belief in German superiority (mbaknol.com 2012). Dunning’s Eclectic Paradigm also proposes that the macro-economic policies of government, coupled with availability of skilled labour from the new market, will determine what type of strategy would be most beneficial to the firm involved in FDI. German consumers and employees hired from local labour pools did not appreciate Wal-Mart’s strategy for relationship development, a policy which requires workers to smile and greet customers (Landler and Barbaro 2006). Wal-Mart spent considerable capital attempting to transform the German culture from one of stoic belief in national superiority and with little propensity for American-style customer service dimensions by attempting to promote a human resources model unbefitting German culture. Male consumers found such demands for smiling and greeting to be akin to flirting, something unacceptable in a culture with strong family values and moral/ethical programming. Wal-Mart did not consider its locational advantages when developing a relevant, culturally-sensitive staffing and HR model using local labour talent. Coupled with demands from government that were well-publicised demanding price increases on many Wal-Mart products to protect smaller retailers, Wal-Mart was unprepared to successfully develop locational advantages that led to negative brand beliefs in key German target markets. The failures in Germany, however, were not replicated when entering the United Kingdom. Why is this? The UK culture is similar to that of the United States, with a balanced approach to individualism and one in which many Western models of business and promotion are effective when transferred from the United States. The distribution infrastructure in the UK is well-developed, providing ample opportunities for import/export and ensuring adequate delivery of relevant products that will fit lifestyle and needs of the UK consumer target market. Wal-Mart was able to create customised product offerings in the UK, diversifying from that of the supply strategy in the United States. Brand name and quality were important conceptions in the UK in a sales environment that had, for years, been inundated with positive press about Wal-Mart’s successes, focus on corporate social responsibility, and service competence. Coupled with the advantages of ease-of-access to innovative technologies, supply infrastructure, and a labour pool maintaining many characteristics found in Wal-Mart’s values and mission principles, the business achieved significant ownership advantages as well as the managerial competence to produce better, dedicated human capital to achieve corporate goals. The conceptions provided in the U.S. were fully transferrable to the UK in an environment with less ethnocentric beliefs in national superiority and where government promotes Wal-Mart for its ability to enhance market efficiency in the nation and also achieve positive brand-building reputational support by an encouraging legislative and regulatory structure. The majority of successes identified by Dunning’s Eclectic Paradigm were found in the UK, and not in Germany, largely due to the disparities between two radically different cultures. Consumers with pre-existing knowledge about Wal-Mart efficiency and quality were pre-existing in the UK whilst the foundation of negative consumer sentiment was laid early, immediately after entry into the German market. Wal-Mart was better equipped with investment strategies, culturally-sensitive marketing, and procurement models to fit the needs of UK consumers whilst in Germany, Wal-Mart was ill-equipped to create flexibility in a long-standing business model that was insufficient to meet local consumer needs and values. 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