Wal-Mart Entering the World Market - Case Study Example

Wal-Mart is one of the many public corporations that exist in USA. However, due to its sheer growth and expansion, it is known as the Beast Corporation. Wal-Mart was founded by Sam Walton in 1962. It was later converted into Public Corporation in 1969. Wal-Mart runs a chain of large, discounted supermarket throughout America (walmart.com) .Wal-mart currently has around 3811 stores in America. Wal-mart markets itself by a slogan "Save, Live Better" around which the policy of Wal-mart is based i-e offering lowest possible prices to its shoppers. Wal-Mart also operates in Mexico as Walmex, in the UK as Asda, and in Japan as Seiyu. It has wholly owned operations in Argentina, Brazil, Canada, and Puerto Rico (The Wal-Mart Effect, 2006). Wal-mart is also considered as one of the highest grossing Public Corporation all over the world. The model which Wal-mart uses are "low cost always" is been highly successful in USA's market where people value their hard-work and money. Although this model has been successful in most of the countries it operates in, this model didn't work-out in Japan. Japanese people were not ready to compromise presentation for low-cost and this corporation faced their first hurdle since its incorporation. This company is managed by Americans and they reflect typical American thinking of low-cost for everything. This resulted in their first failure in Japan, as already discussed (Fortune, August 2007). The huge disparity in cultures of various nations may tempt wal-mart to change its strategy from implement a global strategy to start using a multi-domestic strategy. Multi-domestic firms usually develop separate strategies for their different subsidiaries in different parts of the world. One such company is Uni-Lever, which uses a multi-domestic strategy (Daft, 1997). Their advertising policies and products are usually varied from one country to another. Similarly, McDonald in the recent years has also used multidomestic strategies. It developed a new product McKofta for Middle-Eastern market just to suit their taste buds. Pizza Hut has also introduced Chicken Tikka Pizza for Pakistani and Indian markets.(Cluster Flock, 2009) Thus it can be established from the above discussion that those businesses which have used multi-domestic strategies are more successful than those who follow a one rigid policy for their businesses in all countries. Even companies like Dell are also going more towards customization and this shows how important being flexible is in current business situation and recessionary times. So, it is imperative for Wal-mart to change their strategy immediately and should try to make strategies on the basis of different culture of different countries. This will improve the standing of Wal-mart not only in Japan, but also in other countries like Brazil, Mexico and United Kingdom.(Bruce Kogut , 1985) The domain of businesses now covers the entire planet due to recent advances in Globalization which was brought about by development of modern technology. Due to these advances it has become very easy for firms to control their operations in more than one country. As a result, more and more businesses now exist in more than one country. Wal-Mart is one of the largest chains of departmental stores in USA and fourteen other countries. It has been estimated that Wal-Mart's annual net income amounts to around $12 billion. Despite being a large company, Wal-Mart is just been in some South-American and European countries. It is either underestimating or not planning to exploit to the huge potentials of Asian Market. Asian Markets are known as the business hub for International businesses and all major businesses usually conduct their operations in Asia Countries, but Wal-Mart has been quite indifferent to the huge potential that Asian Economies offer. Wal-Mart exists in the tertiary sector (service sector) offering retail service to its clients. Since, Wal-Mart has large customer base, it usually purchases items in bulk and obtain large discounts and passes on these discounts to consumers in terms of low prices. One such economy is Pakistan which is a proven money-bag for international businesses. Many businesses like KFC, McDonalds and Pizza-Hut are earning large revenue by operating in this economy. These companies also exist in Tertiary Sector and are thriving well. As already established that Pakistan's Retail Industry has huge potential, I would like to give you some of the statistics about this industry. According to a report published by Pakistan's government, despite experiencing recession, Pakistan's retail industry is growing at a good rate. This market caters to almost 150 millions consumers, which indicates that Pakistan can be big market for Wal-Mart. Similarly, Wal-Mart will also benefit from the fact that Pakistan is a consumption-oriented economy and people spend most of their income on luxuries and necessities. Pakistan, statistically, is also ninth largest economy of the world, signifying the fact that it can be a great business investment for Wal-Mart. Similarly, competition wise, there will be very less competition for Wal-Mart as there are only two departmental store chains operating in Pakistan. Wal-Mart can exploit these chains by their huge financial backings. It can either offer lower prices to customers or absorb the market share of these chains or it could also buy these chains. This will give Wal-Mart monopoly power in the market and which will lead to big profits and market share. The report also indicates some challenges that Wal-Mart will face by entering Pakistani market like global recession might stunt the growth of business and this new investment might not reap sweet fruits. Similarly, due to reservations of Pakistani people against America, the business might not be well received. If these challenges are countered then only Wal-mart should undertake this investment in Pakistan. PEST ANALYSIS FOR PAKISTAN: Socio-Cultural and Politics Pakistan is one of the most diverse countries in the world, in regards to its population. At one end we have extremely rich people and on the other we have people living below poverty line. Unemployment is also high in Pakistan, so it will be easy for Wal-mart to find workers. Wages in Pakistan are lower than other parts of the world and operations in Pakistan might become most profitable for Wal-Mart. However, one drawback of investing in Pakistan is its volatile political environment. In order to counter political volatility, Wal-mart will have to change its inventory system. Currently Wal-Mart uses JIT inventory policy, but in Pakistan due to occasion political outbursts this policy might lead to losses. Wal-Mart in Pakistan, therefore, will have to make use of ware-houses to keep stock, so that political disruptions do not harm their business reputation. Wal-Mart will also face difference in culture upon entering Pakistan. In USA, Wal-mart uses JIT inventory system to cut down on their costs. According to JIT inventory control system, products or stock is bought only when needed. This not only saves the ware-housing cost for Wal-mart but also saves them from price fluctuations and from products getting staled. But, in Pakistan they won't be able to use this system of inventory control. Pakistan's culture is different than that of USA or any other Triad country of that nature. In Pakistan, there is a lot of political instability and if goods are not stored in ware-houses, then a strike or any other political disruption can harm the smooth operations of the business. Similarly, mindset of people in Pakistan is also different. Unlike people in USA, who revolves around work, work and work, people in Pakistan are found to be lazy and like spending time in leisure and worker. So, it will be very difficult for Wal-mart to find quality, hardworking labor in Pakistan. Economic: Literacy rate in Pakistan is also very low. Wal-mart may find it difficult to hire experienced and skilled workers. In order to get the quality workers, they may have to train them which is an additional expense for the company. Similarly, Pakistan is a developing economy, so the current technological status of the country might be very low. In order to bring its communication and technological system up-to-date there might be few investments need. Probably, they could start a joint-venture with the Government or any other company willing to invest in this field. This will reap rewards for the company in the future, when Wal-mart network expands in Pakistan. As Pakistan is governed under Islamic laws, Wal-mart will have to keep those away from their shelves which are prohibited in Islam like alcohol and pork. If we look at tax-laws of Pakistan, Wal-Mart will benefit by opening up large scale business in Pakistan. There are special tax-grants for companies operating on a large scale. Generally, companies are required to pay a 40% flat rate tax. Wal-Mart can also set up its operation in various tax-free zones which are located in through out Pakistan and can enjoy various government subsidies if they choose to operate on large scale. If we consider Pakistani economy from the lens of economic developments, we can clearly conclude that Pakistani economy is in the development phase and there is a lot of growth potential for companies who chose to enter into Pakistani markets. Wal-mart can also benefit from this and can enjoy a boom as Pakistan's economy grows. In recent years trend of buying from departmental stores has also increased and Wal-Mart could gain by starting their operation in Pakistan as quickly as possible. As already discussed, Pakistan is an import-oriented country, meaning that people perceive foreign brands of being high in quality and service. So, Wal-mart should enter the Pakistani market by either franchising their brand name or by using Greenfield venture. Greenfield venture is when a company starts its operations in another country right from scratch without any third-party being involved. However, it would be difficult to undertake Greenfield venture in the current scenario of global financial crisis. Similarly, in order to give people the feel of actual snob-appeal of Wal-mart environment, Franchising or Licensing will be the ideal option. The logic behind using this option is because it is cheaper than Greenfield venture, Franchisee pays for the advertising, and franchisee makes arrangement for ware-house, retail outlets and other business necessities. However, Wal-mart will need to keep a close eye on franchisee to make sure he is not harming the brand name by not providing the quality services which people expect from Wal-Mart. So, once they franchise their brand name they will have to keep regular checks on the working of franchisees, so that no harm is done to the brand name. However, they will have to adapt various things for Pakistani culture, like starting goods delivering system and other changes which might help them to boost sale. For example, when McDonalds started its operations in Pakistan, it used the same American taste, and as a result they faced plummeting demand. They made some changes in their meals in terms of Pakistan's taste and it has become one of the best fast-food companies in Pakistan. Similarly, it will be imperative for Wal-mart to adapt to Pakistan's culture and provide services accordingly. They will have to keep pork and pork-products out of their outlet as it is considered as a violation of religion in Pakistan. They will have to take a leaf out of Subway's book. Subway, on starting its operations in Pakistan, removed pork or pork -related items from their menu cards and became an instant success in Pakistan. So, in the end one can conclude that there is massive cultural disparity between Pakistan and the USA and changes will have to be made according if they want to thrive in Pakistan.(Pakistan Retail Management Report, 2000). Similarly, by franchising Wal-mart's brand name to a local group, will ensure that all the cultural and religious rules are followed and Franchisee will have more knowledge about the country than the Wal-Mart itself which is imperative for the success of Wal-mart in Pakistan. In Pakistan, the risks faced by the business are not economic related, because it is the only economy of the world which has remained unaffected by Global Financial crunch. Usually, businesses in Pakistan earn a profit margin of above 28%. This is after all expenses including taxes are deducted from the revenue. (Retail Sector Report, 2000). Only risk that these firms face is political and that could be overcome by having good security management system. If necessary precautions are taken in advance, Pakistan could become one of the best investments for Wal-mart, yielding very high returns. PEST ANALYSIS OF JAPAN: Japan is among the most advanced national of the world. It considered as the hub of technology and no wonder people in this country usually have very high standard of living. Political situation in Japan is also very stable. There are hardly any conflicts between Japanese Parliament and military. Japan also has one of the highest per capita incomes, among the top economies of the world. These people value quality more than cost-saving. Similarly, when Wal-mart tried to present these people with low-cost products at the cost of good presentation the idea failed. For example, Japanese like fish that are being sold to wrapped in Juniper leaves rather than lying on bare ice. This delicacy required additional costs which Wal-mart failed to incur as they did not want increase the price. This shows that Japanese people value presentation more than cost-saving. If we look at Japan culture, we will find out that Japanese people are very loyal to the firm they work for. In return they ask for good salaries and job securities. And as already discussed, Wal-mart people cannot work with "American" model of cost saving in Japan. This model would create fears among the consumers and employees. Consumer will fear that lower cost will be at the expense of good quality, whereas Wal-mart's employees will fear that cost-saving will be at the expense of them being made redundant. In any case, Wal-mart's American model will fail in Japan due to difference in PEST condition in JAPAN. The investment in Japan can be considered a good investment because economically this country is very strong and is booming to new heights every minute, and several market researches suggest that people in Japan give a lot of importance to cost-consciousness like Americans. It was considered as plan used by the USA giants to find profitability in Japanese market. However, what it failed to realize that Japanese also give a lot importance to presentation of items that are presented for sales in stores. This is one socio-cultural difference between Americans and Japanese people. Another reason behind the failure of this investment was that Wal-mart was failed to adapt to the culture of Japan. In Japan, workers are considered as really loyal to firms and firms on the other hand do not fire workers.. There was a wide disparity in the culture of both countries and they again failed to understand and create bridges between their mindset and Japanese culture. (Peter Drucker) Many people think that the heart of the problem lies in the model that Wal-mart's management is trying to follow. The model of "always low cost" may serve well in the under-developed economies of Mexico and Brazil, but it won't have any distinction in highly-organized and developed society like Japan. Similarly, many experts advised them that they cannot do here, what they can do in China, Brazil and Mexico. If they want to do it they should leave Japan and focus on economies like India, China and Bangladesh. Many people also think that Japanese market was over-crowded with retail stores that triggered the downfall of Wal-mart. Many stores are winding-up their operations in Japan and focusing on those economies which lack this type of stores. So, Japan was never an ideal market to start this business in. Instead, Wal-Mart should have looked toward India. Due to India's gigantic population, labor is cheap and profits are higher and this humongous population also makes it easy for any business that starts its operation in India to thrive. It was later revealed that many shareholders of Wal-mart wanted the company to expand, so that share prices increase. However, this early expansion has resulted in investment loss of more than $1 billion. However, many argue that if the management of Wal-Mart had altered their strategies in line with the Japanese culture, the outcome would have been much different and the business would have thrived. But on the other hand many predict that Wal-mart's fate in Japan was inevitable and they were to lose out in the highly competitive market. Japan is a stable economy and is considered as country which gives full-returns to any investment made. In the last year investments in Japan have yielded returns of above 20% for their investors (News Daily, 14 Aug 2008). Only threat to the company in Japan is exposure to large competition. There are already big chains of departmental store working in Japan and it would take some doing to take out the market share from this highly-competitive industry. Similarly, another risk that investment in Japan poses is creative destruction. In Japan, technology changes at the rate of knots. So, Wal-mart will need to have a lot of money in their reserves to make continuous improvement in the technology and to keep up-to-date with the competing firms. On the basis of above discussion, we can recommend "outsourcing" as the most favorable market entry strategy for Wal-Mart's operations in Japan. Wal-mart can enter into Japan with a strategy of outsourcing whereby they acquire one of the best superstore chains in Japan. This outsourcing can also be termed as lateral integration or horizontal integration. Acquisition of another business in the same sector will provide Wal-Mart with already established organization structure, and rules and regulation which are necessary to work in the country. Similarly, it will acquaint Wal-Mart with the Japanese model of a successful departmental store and experienced employees who are already working for the company that Wal-Mart will acquire. If we look at geographical limitations for Wal-mart from entering into Pakistani and Japanese market, we can say that with advancement of technology it is no more a problem. Wal-Mart head-office could easily control the franchise in Pakistan and outsourced firm in Japan with the use of new communication technology. One such method could be Close-circuit Cameras that could be used to control the company. Another method could be networking the sales with the computer in Wal-mart's head office. This would provide the head office a close eye on each every dollar sales. Similarly, they could also check the standard of their subsidiaries via ISO standard checks and this could be done on regular basis and eliminate the geographical limitation factor from the assessment. In the light of above discussion, we can safely conclude that although, Wal-mart is a big company, but in order to be successful in the international business environment, it will have to play its cards very wisely. If it did not choose the correct international strategies, it might fail in international operations like it failed to attract any market share in Japan. So, it will have to correctly analyze the market, situation of the company it is planning to start its operations and other dynamics of the country it wants to initiate its operations in. Since, cultural aspects and business environment in no two countries is same, it will be much more successful by adopting multi-domestic strategy, which calls for customized operations in each country based on the customer demands and needs in their respective country. Although, Wal-mart has chosen the correct strategy of outsourcing in Japan but it tried to mould the local business with the strategy which they follow in USA and this spelled trouble for the business. Instead, Wal-mart should have used the knowledge provided by the outsourced company and based on this strategy they should have based their strategy on. Similarly, In Pakistan, a good strategy for them is to enter the industry by Franchising and should let the Franchisee run the company on the bases of local demand and needs, if it wants to be successful. These were some of the ways that will help Wal-mart succeed when they enter a new country and alter their policies according to the local needs and demands. Another important point that can be reinforced here is that Wal-mart should not enter into any country by a Greenfield venture or wholly owned subsidiary, but it should always use franchising, licensing or cooperation by a local firm, which will not only save them from a lot of market research about culture and necessities of a particular country, but it will also be successful as local business might already have good customer base. In the end, I would like to end my essay by saying that Wal-mart has the potential to succeed in most countries of the world, but it will require them to shift their policy from being rigid to flexible and they should go for a multi-domestic policy rather than "one policy" for every country. References 1. Walmart's Official Website, Visited on 1 July 2009 a. www.walmart.com 2. Businessweek, February 28, 2005 Edition. a. http://www.businessweek.com/magazine/content/05_09/b3922073.htm 3. Richard L. Daft. Management 5th Edition, 1997, The Dryden Publishing 4. Peter Drucker, "An Introduction View of Management" Hamper's College Press (1977) 5. Robert Fulmer. "The New Management" 4th Edition. McGraw Hill (1989) 6. Harald Koontz. "Management" 9th Edition, McGraw Hill (1989) 7. Fortune Magazine. July 27 2007 a. http://money.cnn.com/magazines/fortune/fortune_archive/2007/08/06/100141311/index.htm 8. Collin Bamford. "Economics". Cambridge University Press (2007) 9. Pakistan Retail Sector Report. Written on August 2000 10. Anil Hira. Outsourcing: What's Behind America's National Crisis.(2005) 11. Andrew E. Serwer. McDonald's Conquer the World. Fortune Magazine 1994 12. Bruce Kogut. "Designing Global Strategies: Profiting from operation flexibility. Review (1985). 13. Peter Stimpson. Business Studies. Oxford University Press (2002) Read More