International Business

Week Four – Case Study:

Wal-Mart’s Global Expansion

1- How does global expansion benefit Wal-Mart?

The text mentions three benefits that Wal-Mart sees from their global expansion; an increased market of consumers that can add to the profitability of the firm, greater economies of scale and tapping many different cultures for improvement ideas (Hill p443). All three of these benefits add to the value creation of the firm.

Wal-Mart has additionally been able to work directly with suppliers in the nations where they are developing their new markets. According to their website (walmartstores.com) they have been able to develop local suppliers; some for regional supply as in Argentina and some for export and international supply where, in Brazil 1400 families are involved in Producers Club. This Wal-Mart sponsored program works with “small and medium [size] farmers to help commercialize and open new markets for their products. The initiative helps support our communities, provide our customers with more high-quality, local goods at competitive prices, and promote sustainable practices.”

This effort has reduced cost within the Wal-Mart supply chain. At the local level they are able to get fresh goods faster and increase jobs while supporting the communities that they are marketing to. They also reduced the costs associated with shipping. They may still need to truck goods from the farm to the store, but the distance is reduced to one hundred miles from potentially several thousand miles. Secondly, Wal-Mart has reduced the supply chain costs because of the suppliers they are developing in low cost countries. Developing suppliers for their international markets has reduced the cost of goods all over the world that they are able to sell in their retail outlets.

2- What risks do they face when entering international markets? How can these risks be reduced?

Wal-Mart has used joint venture partnerships when entering new global markets. Once they become comfortable in that market they turn to a fully owned subsidiary or acquisition based program and then start to build green field ventures. This seems to be a relatively conservative strategy, however the speed at which they proceed through the process is “pressing-hard” even according to Wal-Mart executives (Home Textiles). Based on this strategy there are many risks.

Although partnerships are relatively low in capital cost, Wal-Mart may not be able to have the control needed to ensure that their partner does not steal core technology used in supply chain management (Hill p.444). The second problem that may arise from joint ventures is that conflict may prevent critical information being related to corporate decision makers (Hill p.500). Because Wal-Mart is depending on gaining this information to move to the next step, there is significant risk of making bad future decisions based on faulty information.

Some ways to mitigate the risk of joint ventures is to ensure the information collected is accurate with external sources. This would increase the time needed before Wal-Mart was ready to extend to the next part of the plan, gaining larger share of partners and acquisitions. If decisions were based on correct information that has been verified, Wal-Mart could improve the success of its future ventures.

Acquisitions are very capital intensive, but Wal-Mart has used acquisitions to gain fast market share in foreign countries. Once they become comfortable with the joint ventures they rapidly start to acquire national chains which give them an immediate market presents. The risks associated with this strategy are many. There is a difference of culture that must be overcome, as well as imperfect information prior to the acquisition. The largest problems are what face all acquisitions, which are typically only 17% successful (Hill p.504). Some of the reasons for the low success rate are tensions between the acquired firm and the acquiring organization. This tension may be caused by cultural differences or pay discrepancies between companies. Poor planning is among the top reasons for the failures. Managers typically overestimate the ability of the combination to reduce cost from efficiency gains. They may also find out only too late that the company acquired has large financial problems.

Some of these acquisition pitfalls may be avoided if top managers do their homework to avoid overpayment. Careful analysis of profitability, market and hidden problems is the first step. Some of this may be accomplished if Wal-Mart is able to get good information from the partners. Next it is important to understand the culture of the firm to be acquired, finding a close fit will prevent high management turnover as well as cultural clash which can be very costly to replace. This cultural clash may be hard to avoid when the target for acquisitions are very specific. Wal-Mart typically acquires companies that already have a large market presence. This criteria really narrows the possibilities and there are surely other criteria that shrinks the candidates further.

3- Why did they enter Mexico as a joint venture? Why did they later purchase their partner?

As discussed previously, joint ventures gave Wal-Mart some distinct advantages including market knowledge, shared capital costs and having some basic infrastructure in place (Hill p.499). With Cifra, Wal-Mart was able to gain a better understanding of the Mexican market and develop a strategy to open its own brand of stores (Bnet). The costs and risks of the expansion into Mexico were shared between the partners, which increased the attractiveness of the joint venture.

In 1997 Wal-Mart purchased stock that brought their stake in Cifra to 51%, which gave them a controlling interest. This takeover followed shortly after the 1995 peso devaluation which was “’a valuable learning experience for Wal-Mart as we learn how to manage our business in such an environment,’ according to the company's 1998 annual report” (Bnet). The poor economy may have been one of the reasons they decided to take control of their partner. This would give them more control in the decisions and removed some of the conflict in strategic planning.

This decision was correct and along with other strategic decisions they have become Mexico’s’ largest retailer (CorpWatch). Actually, Wal-Mart is the world’s largest retailer. In fact when the sales of the next three largest retailers in the world are added together, Wal-Mart is still on top (BusinessWeek).

4- What type of strategy is Wal-Mart pursuing? Does that make sense? Why?

Initially Wal-Mart was pursuing a “global standardization” strategy especially in its first several placements into the Mexican market. With many problems forcing the American Wal-Mart to work in Mexico, they realized that a better strategy was the “transnational” (Hill p.443). The transnational strategy allows companies to gain from the economies of scale from international growth, but also gives the firm the flexibility to change operations to work in the global locations. This flexibility also allows profitable ideas from different parts of the world to be focused back to all other locations and provide profit growth throughout the firm.

Even though Wal-Mart still uses the main idea of a large discount retail organization, they are able to meet the market expectations. They have also been able to use the same supply chain efficiencies developed in the US to drive prices down in every retail outlet throughout the world (walmartstores.com).

Bnet. A partnership for the long-haul: Wal-Mart’s involvement in Mexico. Retrieved June 7, 2008 from: http://findarticles.com/p/articles/mi_m3092/is_1999_Oct/ai_57578926

BusinessWeek. Some uncomfortable findings for Wal-Mart. Retrieved June 6, 2008 from: http://www.businessweek.com/bwdaily/dnflash/oct2005/nf20051026_8916_db016.htm

Corp Watch. Mexico: Wal-Mart Invades. Retrieved June 7, 2008 form: http://www.corpwatch.org/article.php?id=9369

Hill, Charles (2008). International Business: competing in the global marketplace, e7. New York: McGraw-Hill Irwin.

Home Textiles. Think long, think global, Wal-Mart tells investors. Retrieved June 7, 2008 from: http://www.hometextilestoday.com/article/CA6493701.html

Walmartstores.com, Fact Sheets. Retrieved June 6, 2008 from: http://walmartstores.com/FactsNews/FactSheets/ (Argentina & Brazil).