Strategic alliances in business and organizational contexts

Wal-Mart

At the time that Wal-Mart embarked on a program of international expansion, the United States was undergoing negotiations with Mexico and Canada over the North American Free Trade Agreement or NAFTA and this brought Mexico to the attention of Wal-Mart as a fit global venue (Hill 2002). Although the Mexican economy, at the time, was beset with huge barriers to cross-border trade and investment, substantial state involvement in business activity and high inflation, the government of Carlos Salinas introduced free market reforms that rendered the country's conditions attractive to Wal-Mart. Since Salinas assumed office in 1988, Mexico's economy was growing at 4-5% yearly and with an increase in disposable income at 70%. Although it was considered a very poor country by American standards, 30 of its 80 million people could be classified as middle class, the affluent segment concentrating in Mexico City and two others. Wal-Mart's Sam Walton and a founder of Cifra in Mexico believed that the NAFTA agreement and conditions augured well. A decade earlier, Mexicans cried out against colonial and economic imperialism. But that cry died out later.

2) Wal-Mart's competitive advantage consisted of a combination of culture and supporting information and logistics systems, which it found difficult to transfer to franchisees. These difficulties were high prices, an unsuitable distribution system, poor infrastructure, crowded roads, lack of leverage with local suppliers, improper selection of merchandise and government bureaucracy impositions on labels and instructions in Spanish (Hill).

3) Wal-Mart had intended to license its brand name to franchisees, expand via wholly owned subsidiaries, or enter into joint ventures with a Mexican company, Cifra. Because of the difficulties in transferring its culture and systems to franchisees and realizing its negligible knowledge about Mexico, Wal-Mart entered into a 50-50% joint venture with Cifra as part of its globalization expansion program.

4) Unlike other foreign ventures that moved out of Mexico City during the 1994 peso crisis, Wal-Mart took advantage of the crisis to build its market share, with 63 stores in operation at that time. It only put off expansion plans for 25 additional stores in 1995. In the meantime, it strongly improved its operational efficiency by opening a distribution center in Mexico City. This center later became the most efficient in Wal-Mart's entire system, mainly because of low labor costs. These greatly reduced costs, in turn, decreased logistics and inventory costs. A three-way partnership with EASO, a Mexican trucking company, and MS Carriers Corporation provided for the sharing of modern trucks between EASO and MS Carriers. This resulted in a 25% cost reduction for EASO, passed on to Wal-Mark, which has been using 200 EASO trucks in operating its Mexican logistics system (Hill). Wal-Mart likewise could then source far more goods in Mexico to realize lower production costs and take greater advantage of the NAFTA advantages, such as the establishment of a Vega TV factory in Mexico. It also learned quickly from its early mistakes by improving the mix of its offerings. Furthermore, it improved leverage with suppliers, bringing prices down to the advantage of the buyers. This stance enabled Wal-Mart to retain its market and stay profitable even as the spending level in Mexico went down from 1995 to 1996. In comparison, competitors like Sears Roebuck and Kmart left the country.