Wal-Mart the Implementation of NAFTA

Wal-Mart The implementation of NAFTA has had a significant influence on Wal-Mart's success in Mexico. Prior to NAFTA, Walmex was importing most of its goods for sale into the country. As a result, it was paying import duties on those goods, and this increased the retail price for those goods. The company relies on a cost leadership strategy in order to succeed and the fact that it was unable to be the cost leader was holding it back. With NAFTA, those duties disappeared.

Wal-Mart was able to import from the United States without duties, and as a result was able to pass those savings along to its customers. With its supply chain on equal footing with that of its competitors, Wal-Mart was able to gain competitive advantage from its buying power. Prior to NAFTA, that buying power was only able to keep the company on par with its competitors. NAFTA also had a couple of other positive impacts for Walmex.

The deal allowed companies to manufacture in Mexico and then ship to the rest of North America. Given Mexico's competitive advantage in the price of labor, this led to a boom in manufacturing in the country. As a result, the transportation infrastructure in Mexico improved significantly. The federal and state governments were suddenly motivated to improve old highways. Private trucking firms, now flush with cash, were able to upgrade their fleets. The improved transportation infrastructure was critical to Wal-Mart being able to replicate its distribution superiority from the U.S.

In the Mexican market. Lastly, NAFTA encouraged more consumer goods manufacturers to set up production facilities in North America. Foreign firms seeking to sell to the U.S. And Canada prior to NAFTA often produced at home, knowing that the cost of labor in North America is just as high if not higher. With NAFTA, it became possible to serve this market from Mexico, where labor costs are much lower. This encouraged companies -- Sony being just one example -- to set up production facilities in Mexico.

This benefited Walmex more than its competitors, because these were many of its suppliers, whereas competitors had become accustomed to relying on Mexican suppliers. Thus, while Walmex saw the cost of many of its goods fall as production shifted to Mexico, its competitors did not see any drop because nothing had changed in their supply chains. 2. NAFTA made a contribution to Wal-Mart's success in Mexico because it removed a competitive disadvantage.

Prior to NAFTA, Wal-Mart was still doing well in Mexico, but it faced a disadvantage bringing its goods across the border. Wal-Mart held competitive advantages over its Mexican competitors in distribution and purchasing, but it had a disadvantage in the trade barriers. With the disadvantage removed, Wal-Mart's competitive advantages were able to win the company success in the Mexican market. The success that Wal-Mart had in Mexico could be replicated by other U.S. companies. Many major U.S. retailers have similar competitive advantages to those of Wal-Mart.

From warehouse stores like Costco to direct competitor Target to category killers like Home Depot, American firms have substantial buying power advantages over Mexican firms and many have emulated key aspects of Wal-Mart's distribution and supply chain strategies. Thus, while these companies may not succeed in Mexico to the degree that Wal-Mart has, they are still likely to succeed. That role that NAFTA plays is to put American retailers on equal footing with Mexican ones. At that point, the competitive advantages of the American retailers would shine through. U.S.

companies that lack these competitive advantages would see no benefit from entering the Mexican market, regardless of NAFTA. 3. Comerci's main move to remain competitive was to try and match Wal-Mart's buying power. It tied with another competitor to form a buying group, in the hopes that it can lower its cost of goods sold to a level that would allow it to compete with Wal-Mart. This appears to have been the main strategic response the company has made to compete. Ultimately, Wal-Mart derives its buying power from its global scale.

In addition to its massive U.S. market, it buys for Mexico and Canada at the same time, and often its goods from China are sold by its stores there as well. This means that Comerci cannot match the buying power of Wal-Mart no matter with whom it enters a buying group. The advantage of this strategy is that it does improve the company's buying power. The first disadvantage of this strategy is that it does not do enough to match Wal-Mart's buying power.

The second disadvantage is that it fails to address the many other ways that Wal-Mart outcompetes Comerci, including the other ways that impact on the company's overall cost structure. Comerci's actions are insufficient, and unlikely to succeed. The company is going to need a much broader customer base -- beyond Mexico -- in order to even approach the buying power of Wal-Mart now that Wal-Mart has half the Mexican retail market. 4. Comerci is in a difficult position. Mass market retailers usually struggle when Wal-Mart enters their market.

The key to Comerci is that it needs to stop viewing itself as a cost leader in the market. It will probably never be able to match Wal-Mart's prices. Comerci instead needs to focus on finding ways to differentiate itself from Wal-Mart. It can do this in another ways.