(Solution) MRKT19037 Case 2: Wal-mart’s entry into Africa – not business as usual but a leap into unknown territory

Description

Case 2: Wal-mart’s entry into Africa-not business as usual but a leap into unknown territory

 

Solution

 

Wal-Mart’s entry into Africa—not business as usual but a leap into unknown territory

Introduction

When firms expand offshore they need to consider the cultural environment of the country they wish to enter. Whereas Western developed countries are characterised by individualism, most developing country markets are characterised by collectivism (Hofstede 2001), which mandates a greater awareness of the context in which the business is to take place because developing countries are mostly high-context environments (Schutte and Ciarlante 1998). Firms in the West generally adopt a shareholder approach to doing business and are driven by what is in the best interests of their shareholders. In developing countries, however, a wider stakeholder approach is required in order to take collectivism into account and address the concerns of a wider range of stakeholders. This is necessary because both governments and consumers in developing country markets are sensitive to what they perceive as the economic imperialism of large Western corporations. This is especially the case with corporations that have a reputation in their country of establishment for getting their own way through political lobbying or making contributions to political parties—this power causes concern because some of these companies have a turnover that exceeds the GDP of many developing country markets. The internationalisation activities of Wal-Mart, the world’s largest retailer, illustrates the need for this cultural sensitivity in both selecting foreign markets to enter and choosing the most appropriate market-entry strategy.

Wal-Mart’s international expansion strategy

Wal-Mart was founded by Sam Walton in 1962 in Arkansas, USA. The Walton family tightly controls the retailer and still retains about a 40% stake in the business. The retail giant’s business model is centered on achieving efficiency in its global supply chain network and high customer service levels. The retailer employs more than 1500 employees in its procurement department. It sources products from more than 600 factories across the world, thereby accruing economies of scale that enable it to offer consumers competitive prices. Wal-Mart is popular with consumers looking for variety and value. However, the retailer has constantly been criticised for squeezing out margins from suppliers as part of its cost-cutting strategy, and it has a reputation for being anti-union and aggressive in wage negotiations. Wal-Mart has persistently denied these claims, highlighting its mutually beneficial relationships with suppliers across the world as evidence of its commitment to the wellbeing of suppliers and the communities in which the company does business. Having experienced significant growth in the 1980s and 1990s, Wal-Mart recognised the limitations for growth posed by its concentration on the US market. Hence, the company began to expand into international markets. To date, Wal-Mart operates under 55 brands in 26 countries via more than 5600 retail units whose net sales exceeded US$125 billion in 2012.

Initially the European market appeared to Wal- Mart to be the most logical international market region to penetrate, given the similarities in the business landscape that potentially existed between the European market and the USA. However, Wal-Mart chose not to target this market for its maiden foray into international markets. The main reason for initially avoiding the market was the presence of established competitors in countries such as the UK, France and Germany. Therefore, Wal-Mart switched its attention to growing but under-served market regions—the emerging markets in Asia and Latin America. Wal-Mart recognised the potential countries such as China, Brazil, Argentina and Mexico had for retail opportunities. However, the company had significant shortcomings in terms of skills and knowledge on how to do business in these markets. It therefore chose to initially focus on the Latin American markets for its international expansion. Asia was deemed to be geographically and culturally too distant to be used as a stepping stone, unlike Latin America. The retailer opened its first international store in Mexico in 1991 as a 50–50 joint venture. Drawing on lessons from the Mexican venture, it went on to open a store in Brazil in 1996 through a 60–40 joint venture. It then progressed to open a wholly owned subsidiary in Argentina. Thus its entry modes were largely shaped by both local conditions in target markets and lessons learned from previous ventures. The company has since focused on acquisitions in these markets. For example, in Mexico it now operates more than 1000 units, which give it a more than 50% market share. Wal-Mart set up operations in China in 1996 initially through a partnership with a Thai conglomerate that had a sound track record of doing business in China. The company then moved on to establish a joint venture with two politically well-connected partners—the Shenzen Economic Development Zone and the Shenzen International Trust and Investment Corporation. This joint venture was motivated by the challenges Wal-Mart faced in doing business in China, such as bureaucratic restrictions and long delays in approval from the central and local government agencies. The company learned that these were better addressed by engaging partners who had longstanding relationships with these agencies. Hence the challenge for serving the Chinese market was more than just understanding the customers’ different tastes and shopping habits; the influence of the political and legal environment was also an important consideration. This initial experience strategically positioned Wal-Mart to exploit any opportunities that might arise from the Chinese Government’s liberalisation of the retail sector. This opportunity was realised in 2006, when Wal-Mart outbid competitors such as Carrefour and Tesco to acquire a leading Chinese retail chain. This was Trust-Mart, which had more than 100 supercentres in 20 cities giving Wal-Mart the largest network of food and department stores in China…………..Kindly click the purchase icon below to buy the full tutorial at $15