Analyse The Wal Marts Case Study Management Essay
Wal-Mart Stores, Inc. opened in 1962 by Sam Walton and his brother. Nowadays, it is ranks as the largest corporation in the World. In early 1990s, the company announced that it would initiate the international operations, which commenced in 1991 in some countries like Canada, Puerto Rico, Argentina, China, etc. (Reference for Business, 2012).
In order to analyse the Wal-Mart’s case study we are going to apply the PEST analysis which is ‘A type of situation analysis in which political-legal, economic, socio-cultural and technological factors are examined to chart an organization’s long-term plans’ (Business Dictionary, 2012).
II.1. Political Factors
When a firm desires to undertake businesses in a foreign country there are some factors to investigate before taking a final decision, for example, the system of the government, law and local trade unions, language, religious and ethical values.
Wal-Mart faced numerous complications on the legal and political front in many countries. For example, in Mexico the company participated in an aggressive lobbying campaign to amend the long-standing U.S. anti-bribery law that the company might have violated. The 1977 law, well-known as the Foreign Corrupt Practices Act, prohibits U.S. firms from offering fees or gifts to foreign officials to advance corporate interests (Hamburger, Dennis & Yang, 2012).
Moreover, when entered the German Market, it seems that Wal-Mart did not do the homework appropriately, taking into account that the firm was accused of breaching several local laws. Restraints of competition, was the first one, which prohibits companies with more market power in relation to the small and medium sized competitors from lowering its prices and engaging in price wars with small companies. Furthermore, Wal-Mart was also hauled up because of not publishing financial data such as balance sheet and profit and loss account statements on its operations in Germany. This situation took the trade unions against Wal-Mart in the State court (Subhadra & Dutta, 2004).
Wal-Mart’s new market strategy through acquisitions faced several cultural issues. For example, the German experience mentioned before described how the company did not understand the local language. When Wal-Mart installed the operations in Germany, English became the official language of the company. This situation produced severe communication difficulties for the German employees, and they started to feel like outsiders in their own country. In addition the German customers found difficult to pronounce Wal-Mart’s name correctly (Ibid, 2004). This experience taught Wal-Mart to use local management who can understand what German consumers actually wanted.
Similar errors occurred in other countries such as Brazil, where Wal-Mart started selling golf clubs, where the game is unfamiliar, or ice skates in Mexico (Lander & Barbaro, 2006).
II.2. Economic Factors
The economic factors of PEST analysis consist of interest rates, disposable income, unemployment rates and gross domestic product (GDP).
To finance its global expansion, Wal-Mart use source of fund from its operational cash flows and debt financings (short-term and long-term debt). Those debts generate Interest rates. In general, Wal-Mart is profitable due to its income is higher than the cost of funds derived from interest rate. This profit used by Wal-Mart to paid or refinance its existing debt and for other purposes. Also, to minimise risks, Wal-Mart hedge a portion of its interest rate risk by managing the mix of fixed and variable rate debt and entering into interest rate swaps (Wal-Mart Annual Report, 2012).
Disposable income measures the income available for households to spend after deducting income tax and adding benefits (Sloman, 2006). These determine how much money consumer willing to spend in a specific period. Most of Wal-Mart consumers are located in USA & Europe and due to crisis occur within those regions, it affect the household spending. One of Wal-Mart biggest market in Europe, ASDA (United Kingdom), affected with this economic downturn. According to Centre for Economics and Business Research Ltd. (CEBR, 2012), the average UK household had £146 a week of discretionary income in April 2012, £4 less than 12 months ago. And it affects ASDA family spending power down 2.4% year on year in April (£4 a week less).
Unemployment rate is the percentage of those who would like to work who do not have jobs (Mankiw, 2011). In economic recession, unemployment rate tend to increase, as it happens in Europe and USA recently. According to Bureau of Labor Statistics (BLS), USA unemployment rate in 2011 is 8.9% of labour force. In UK, unemployment rate in October 2011 is 8.4% of labour force (Office of National Statistic). All of this figure will affect to Wal-Mart operation within those regions. In UK, the high unemployment rate still holding back income for household which impact their monthly expenses (CEBR, 2012). However, the Wal-Mart low retail prices (Every Day Low Pricing) may allow consumers to increase purchase, hence leading to higher employment and income in the retail sector (Hicks, 2006).
GDP is the market value of all final goods and services made within a country in a given period of time (Mankiw, 2011). The GDP of a country represent how big is a country in terms of market size. In its home country (USA), Wal-Mart facing formidable competition from K-Mart and Target, which adopted aggressive expansion and started binging into Wal-Mart’s market share (Subhadra & Dutta, 2004). Despite of USA big market size, Wal-Mart still expand in international market in order to maintain and increase its market share. Wal-Mart strategy running well in international market especially in UK where ASDA and Tesco account for a market share of over 80% of retail food sales in UK (Farfan, 2012). However, Wal-Mart experienced loses in German market and decided to close its operation in there despite of the fact that German economy is the world’s third largest, both in GDP and population (Subhadra & Dutta, 2004).
II.3. Social Factors
Wal-Mart faces several difficulties regarding its operation presence. First, Wal-Mart eliminates local retail business due to its monopoly effect which can lead to job lost. Wal-Mart’s job creation in one area may not be sufficient to encounter the job lost. Second, to enable low price, Wal-Mart outsource its business to a cheap labour countries with few labour regulations. Its offshore supplier may not as concern as Wal-Mart in term of social responsibilities towards its labour which can affect indirectly to its global CSR programs. Third, the need of large space for its store limits Wal-Mart expansion in urban area due to limited and expensive set up. This means Wal-Mart will operate in rural area where large spaces are available. As part of the local monopoly effect, this will also change the demographic of area and the social mobility.
Apart from its constraint and effect to social aspect, Wal-Mart tried to develop its various social programmes. In 2005, Wal-Mart contributes $18 million and 2,450 truckloads of supplies to hurricanes Katrina and Rita victims. In 2006, Wal-Mart U.S. introduces its $4 generic drug prescription program. In 2010, Wal-Mart commits $2 billion to help end hunger in the United States and launches a global commitment to sustainable agriculture.
II.4. Technological Factors
Technological factor that is essentials in retail industries especially Wal-Mart is its ability to enhance the effectiveness of its total value chains distribution. Value chains effectiveness is more important than the product development due to its common nature of retailer to sell product, not produce it.
Wal-Mart main driven factor to support its core business – everyday low cost (EDLC) – is technology. Wal-Mart’s technological advantage is in its distribution, logistic and inventory control (Basker, 2007). This advantage played important roles concerning large number of Wal-Mart stores which consist of 4,479 stores in USA and 5,651 stores in outside USA (Wal-Mart Annual Report 2012).
Wal-Mart had implementing technology innovation since the very beginning, for example in 1983, Wal-Mart implements computerized point-of-sale systems to replace cash registers, enabling fast and accurate checkout. In 1987, Wal-Mart connects its US operations store with satellite communication system, enable each stores to communicate through voice, data and video.
To achieve effectiveness, Wal-Mart use its self-develop technology called radio frequency identification (RFID) technology to keep track its logistic and also implement RFID to each of its suppliers to enable the total value chain integration. With this technology, Wal-Mart has accurate information of its product availability or information to re-stock in each store. Making a quick and efficient product movement from warehouse/supplier to store, thus avoiding excess stock, reducing inventory storage and handling cost which leads to cut down time and cost effectively.
Internet also used by Wal-Mart to support its core business, as online channel have low infrastructure cost. Through its dedicated e-commerce R&D – @walmartLabs – Wal-Mart develop several multi-channel gateway which enable customers to shop “anytime, anywhere”. Customers can discover items and check prices use smartphones and social media. Wal-Mart has successfully run its online e-commerce in USA, UK and Brazil. The next implementations are Canada and China, where Wal-Mart acquired Yihaodian, Chinese leading online retailer.
To sum up, Wal-Mart international operation experienced successful result, as can be seen in its annual report. Moreover, Wal-Mart has successfully implement technology in its backbone value chain system and its front-end delivery channel to customers in efficient and effective ways which enable Wal-Mart to achieve its core value, everyday low cost (EDLC). Also, to prevent cross-cultural mistakes Wal-Mart learnt to develop a better and well thinking strategic planning to adapt each country’s culture. However, Wal-Mart still needs to improve its strategy prior entering new market especially in government regulation and consumers demand preference in each country. Altogether, with a better expansion strategy the company will become more efficient and profitable in the long run performance.Order Now