Walmart Case Study

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GROUP MEMBERS:

Situation Analysis/Size-up:

Mike Duke, the CEO of Wal-Mart, understood that the company’s American market was becoming saturated and if the company were to continue to grow, it would have to expand into foreign markets. The Chinese market potential was very large, income was increasing, and the cities were becoming much more prosperous as well (particularly in eastern China). Consequently, in 1996 the first Wal-Mart opened in China and the slow but steady growth process began that would carry it through the next ten years. In 2006, Duke announced that Ed Chan would become President and CEO of Wal-Mart China. Chan had a strong background in business and would become an asset to the company, especially when it came to understanding the Chinese culture and customer. Now in 2007, Wal-Mart China is experiencing “double-digit growth” in many of their 195 stores that had been in operation for more than a year. During its entry into China, Wal-Mart acquired over one hundred Trust-Mart stores in 34 cities and was beginning to question whether or not it should continue to have joint ventures and Chinese partners (despite that both are viewed favourably by the government). Following these guidelines seems to have put them behind their competition in the past.

Symptoms

• One in every 220 Americans work at a Wal-Mart in the United States, and the average size of a family is shrinking.
• China’s middle-income class is rapidly growing and as a result, retail sales in China are increasing at a 15% annual growth rate.
• Wal-Mart China has a uniform national merchandising and marketing strategy, despite the fact that China is vast in land area, and very diverse in terms of geography and ethnicity.

Inferences

• Because of symptom #1, we can infer that Wal-Mart has reached its maximum potential in growth and profits in its domestic market and the only way for Wal-Mart to continue its growth would be to venture into foreign markets.
• Because of symptom #2, we can infer that competition is fierce in the Chinese market and Wal-Mart needs to have a thorough understanding local needs and Chinese culture if they are to be successful.

• Because of symptom #3, we can infer that Wal-Mart may be missing potential revenue as they are unable to operate the way a particular region may need.

Problem Statement:

Which international strategy model should Wal-Mart International pursue in order to succeed in China in the short-term as well as in the long-term?

SWOT Analysis:

Strengths

• Good reputation and recognition in China. Wal-Mart received the “2006 China Retail Industry’s Best Employer” award, and ranked number one in the 2007 Supplier Satisfaction Survey conducted by the Business Information Survey of Shanghai.
• Social responsibility. Wal-Mart participated in some programs in China such as Good Neighbour, Child Welfare, Education Support, Environmental Protection, and Disaster Relief. These help to create consumer’s loyalty and respect.
• Wal-Mart attempts to localize its merchandise, after learning from its past mistakes made in other countries (Germany, India, Korea). Wal-Mart meets local demand with exotic meat products.
• The acquisition of 35% of Trust-Mart, a Taiwanese-owned chain of more than 100 large stores in 20 Chinese provinces gave Wal-Mart an instant boost to its market presence.
• Cooperating with local investors, making joint ventures and acquiring local retailers gave Wal-Mart a competitive advantage in comparison with its multinational competitors.

Weaknesses

• Wal-Mart discourages unions. However, Wal-Mart had to allow establishing labour unions in China with certain restrictions in order to satisfy Chinese government regulations.
• Majority of Wal-Mart’s superstores are located in suburban areas and convenient only for customers who have cars. However, the primary modes of transportation in China are walking, bicycling, and public transportation.
• Standard U.S. supply chain model doesn’t work in China. An additional costly investment is required to build a better model.
• Wal-Mart China contributes only around 2% to the Wal-Mart Inc.’s overall revenues. China is one of the fastest growing retail markets in the world Wal-Mart is missing out.
• Wal-Mart’s typical big box format has a lower appeal and its efforts to be local have not been successful for Chinese consumers.

Opportunities

• China, the second largest economy in the world, is a lucrative market for western retailers, due to its huge population, booming middle class and rising disposable incomes.
• China’s retail sales were increasing at a 15 percent annual growth rate.
• Chinese consumers tend to be less quality-conscious. They easily switch to less expensive products and are responsive to promotions. Wal-Mart is able to satisfy Chinese customer’s expectations.
• Joint ventures open a larger market pool.
• Suburban areas, where Wal-Mart opens its stores, have potential for more future growth due to more housing built in these areas.

Threats

• Government regulations are very strict and usually favour the local retailers.
• Government owns the land in China and leases it out.
• Competition in the Chinese domestic and foreign retail sector. Customers are highly price-conscious and have unique tastes and preferences.  They are also very loyal to local brand names.
• Chinese customer’s shopping habits differ significantly from those of the West. Chinese consumers prefer daily shopping, focusing on the freshness of the product and small volume. This does not match Wal-Mart’s retail format.
• Chinese geographic and demographic patterns are challenges for a distribution system and information technology. The U.S. centralized efficient distribution model doesn’t work in Chine because the Chinese local suppliers have limited access to information technology and communications. This is a threat for the Wal-Mart’s EDLP strategy.
• Chinese supply chain fragmentation, non-tariff barriers, and local protectionism make it difficult to acquire and stock some imported products.
• Lack of cooperation between regional and local governments with central government mandates or law creates a costly business environment.
• Rural customers don’t have sufficient disposable income to afford some Wal-Mart products.
• Chinese ethnic diversification makes it difficult to satisfy unique food preferences.

Value Chain Analysis:  (See Exhibit 1)

Support Services:

Firm Infrastructure:

Wal-Mart gained entry into the Chinese market in 1996 with the opening of a Superstore and Sam’s Club in Shenzhen. By 2007 (most recent data available), through acquisition of 102 Trust-Mart stores and by opening additional Wal-Mart branded locations, Neighborhood Markets and Sam’s Clubs operations, the company has grown to 195 locations and 70,000 employees. However, Wal-Mart’s traditional “cookie-cutter” store lay out needs some revising in regions of China. In the cities, the residential areas are crowded and space is limited. To combat this, Wal-Mart built smaller outlets similar to the existing “wet markets” and corner stores that the populations in those areas had grown accustomed to under their “Neighbourhood Market” banner.  On the strength of their rapid growth and efficient management, by 2006, Wal-Mart had become the second largest multinational and third largest retailer in China with sales topping 29 billion Yuan. That figure includes the locations under the Wal-Mart, Sam’s Club and Neighbourhood banners.