Wal-Mart's competitive strategies and international expansion barriers

Wal-Mart

International Expansion

International Expansion (Wal-Mart)

Company Background

Wal-Mart Stores, Inc. is the prime retailer in the world, the world's second-largest company after Exxonmobil and the nation's leading nongovernmental company. Wal-Mart Stores, Inc. operates retail stores in a variety of retailing layouts in all 50 states in the United States. The Company's selling operations and functions serve its customers mainly through the operation of three segments. The Wal-Mart Stores segments comprise its discount stores, Supercenters, and locality Markets in the United States. The Sam's club segment comprises the warehouse membership clubs in the United States. The Company's subsidiary, McLane Company, Inc. gives products and allocation services to retail industry and institutional foodservice customers.

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Industry Analysis

The Threat of New Entrants: The discount retailing market was dominated by large players, which by themselves served as substantial barriers to entry for new players. At the micro-level this was accomplished by:

A. Capital Requirements and Economies of scale: A typical Wal-mart store spanned almost 80,000 square feet compared to the average supermarket, which was typically 40,000 square feet. The sheer size of the stores and the variety of products that they carried thwarted any competition from small and mid-size retailers. Warehouse club stores were even larger, allowing for more economies of scale and lower costs.

B. Strategies: Firms focused on long-term strategies to compete against their rivals in the future. For example, Wal-Mart began opening stores only if it had the capacity to expand at a later date. Over the years, this excess capacity became a substantial deterrent for new market competitors.

C. Cost Advantages: Retailers gained absolute cost advantages by utilizing:

Reducing operating costs

Identifying markets with the least competition

Strengthening and exerting influence over vendor relationships

Promoting continuous improvement from the grass-roots level

Buying goods from countries where labor-costs were cheaper

D. Product differentiation: In an industry where product differentiation was minimal, retailers tried to position themselves as superior service providers. Wal-Mart on the other hand, built its brand name around superior service combined with low cost products. The company also used a motto of "Everyday Low Prices," which led consumers to think they were getting the lowest price, even if there was only a few cents difference between the pricing at a competitor's store.

E. Distribution: Firms built efficient distribution networks to reduce costs. Innovative techniques led to lower inventory costs, increased product availability and shorter lead-times.

2. Competition from Substitutes: Discount retail firms faced stiff competition from substitutes as the majority of their sales were generated from nationally advertised, branded products carried by a variety of retailers. However, discounters slowly introduced their own private labels that provided higher margins and exploited store loyalty they had built over the years. Major substitute retailers for Wal-Mart were Target, K-mart, Service Merchandise, Price Club, etc.

3. Bargaining power of Buyers: Intense competition among retailers led to a market where buyers had the option to purchase the same product from a number of retailers. As a result, buyers' decisions were made primarily on price, convenience and perceived image of the store. Accordingly, buyers had the strongest bargaining power in the model.

4. Bargaining power of suppliers: Firms benefited from strategic long-term relationships with their suppliers that allowed them to leverage significant discounts. Suppliers initially benefited from these relationships by receiving feedback on customer preferences, having stable demand for their products and lower inventory costs. Nevertheless, as the purchasing power of the discount retailers increased, the suppliers steadily lost their bargaining power.

Wal-Mart.com -- E-Business Strategy

Wal-mart's decision to go online was primarily market driven; one of its main competitors, Target, had already launched a web site. Wal-Mart recognized that in order to remain competitive, they would also need to move into the e-retailing marketplace. In 1996, they developed an online strategy "Wal-Mart Online." Realizing the benefits of technology partnering, the company formed a partnership with Accel Partners, a respected Internet venture capital firm in 2000. The partnership prompted a name change to "Wal-Mart.com" and the online operations were re-located from Arkansas to Silicon Valley.

According to an e-business forum article written by KPMG Consulting, "the biggest advantages that clicks-and-mortar retailers possess are the brand name and the customer base." Wal-Mart plans to capitalize on this advantage by taking Wal-Mart.com public, while giving Wal-Mart Stores Inc. majority ownership of the venture. The company also wants to ensure that the "online" store builds on the Wal-Mart brand and takes full advantage of the traditional bricks-and-mortar stores. In preparation for the 2000 Christmas season, Wal-Mart.com had five basic strategies for its online site. These strategies involved creating a user-friendly site, offering products that were not yet sold the company- but would supplement brick-and-mortar store inventory, and integrating its brick and mortar stores with the online stores.

Every new venture has its advantages and disadvantages and Wal-Mart.com made a costly mistake in replicating its bricks-and-mortar store on the web without conducting adequate consumer market research. Jeanne Jackson, CEO of Wal-Mart.com, noticed that several categories of traditional bestsellers at the stores, such as underwear, socks, and votive candles, failed to sell online. Moreover, the company also realized that Internet advertising was not a cost-effective way to attract customers and thus decided to rely on its brick-and-mortar stores to direct shoppers to its site.

Simplifying its web site was a good idea because online shoppers prefer simplicity over complexity when looking for low-value items. Offering supplementary products that are not in its stores is key because Wal-Mart stores are usually accessible to most shoppers. Moreover, selling large items like patio furniture that occupy too much in store space online will generate higher profit margins than offering traditional items like the aforementioned socks and candles. Therefore, products that complement limited store offerings should be used to target online shoppers.

The Future of Wal-Mart

The primary issue facing Wal-Mart is how to sustain its historic growth rates in a mature market. At least one thing is clear -- Wal-Mart has a significant competitive advantage relative to its rivals, all of whom are scrambling to find new sources of profits.

With its significant financial resources, Wal-Mart will be able to pursue various paths of diversification in either old economy or new economy segments, conceivably exploiting its established distribution networks. Despite comparative store sales inevitably dropping below the historic growth rate (32%), and return on assets and return on equity trending slightly downward, Wal-Mart should be able to maintain a competitive advantage relative to its rivals due to the cost advantages achieved from economies of scale and its cost savings focused infrastructure.

Therefore, I recommend that Wal-Mart use the Judo and Sumo Strategies together in order to maintain its competitive advantage, while continuing to cut costs and move rapidly to new markets at the same time. The uncontested ground can be another continent (International Strategy), another business (Diversification) or cyber market (E-business Strategy).

International Strategy

As Sam Walton said, "We would go to the extent that we could from a warehouse and put in a store. Then we would seal in the map of that region, state by state, county seat by country seat, until we had saturated that marketplace," in the physical world, Wal-Mart should continue to expand its markets. However, as aforementioned, the dynamic international market environment is significantly different from the U.S. market -- Australian consumers have more brand loyalty than Americans. Moreover, many international companies are against Wal-Mart's entry into their markets and they may seek government intervention to prevent or limit Wal-mart's expansion. Thus, Wal-Mart should adjust its strategy into consumers' needs in the each country even though its low-cost strategy has caused to local retailers in foreign countries to rethink their business strategies.

For example, in the Mexico City, Wal-Mart created bus shuttles to drop customers off at the door not to trudge across those large parking lots with bags full of merchandise. For customer service for especially some Asian countries, Wal-Mart can run shuttle bus service to Wal-Mart from main apartment complexes as most shopping centers do in Korea. Moreover, Wal-Mart can have travel agency, barbershops, banks, photo shops, and kids' playground in their stores for customers' convenience. By doing so, customers can do almost everything that they need.

Diversification

Another approach that Wal-Mart could pursue would be to diversify its business by entering new but similar business such as restaurants and convenience stores. It would be easier for the company to enter those businesses because Wal-Mart already has a wide and efficient distribution network. It also could utilize its competitive advantages -- low price, advanced technology and strong relationships with suppliers. By sharing core competency, Wal-Mart can create synergy with new businesses and reduce transaction cost. To reduce the new-player disadvantage, Wal-Mart could consider acquiring an existing chain. For international market, acquiring or having partnerships with local food chains, Wal-Mart can easily localize and get familiar with customers. For an instance, I recommend that Wal-Mart have a partnership with Rotteria, the biggest Korean fast food chain rather than MacDonald in Korea.

E-business Strategy

In the cyber world, Wal-Mart started e-commerce through Walmart.com. It can expand its business on the Internet to enter e-retailing and the online grocery market. Wal-Mart already has strong brand recognition in power in the bricks-and-mortar world, so it might be easy to convert its customers' stickiness to the Internet.

However, it was a late e-commerce entrant and already has had difficulties in managing its site. We recommend that Wal-Mart form partnerships with major players on the Internet such as Amazon.com and successful online grocer, Tesco.com. Wal-Mart could eliminate its disadvantage as a new entrant with limited e-retailing experience because Amazon.com, the biggest online brand has expertise and exposure in the online business. Wal-Mart could expect to increase its online market share and its stock price as well. Moreover, Wal-Mart could also avoid head-to-head conflict that is happening in the international market against Wal-Mart. For example, grocery retailer Tesco recently announced price cuts worth ?28m in the UK, following a ?30m cut earlier in the year.

Summary

In summary, Wal-Mart can maintain or improve its performance by moving rapidly into new territories in the physical and cyber business worlds -- Globalization, Diversification, and Online business. Through partnerships and acquisitions, it can lower entry barriers to new markets as well as avoid head-to-head conflict.