Entry Strategy Used By Wal Mart Commerce Essay

This report examines Wal-Mart as a case study. An introduction of the history, objectives and strategy was first examined. It later went on to determine what motive the company into international strategy using secondary data obtained through Websites and journal articles. Taking into consideration Wal-Mart operates in about 15 different countries its entry into Brazil was investigated.

The entry strategy used by Wal-Mart was examined using the four categories of timing of entry, market choice, and investment scale and entry mode. The company’s corporate strategy was examined and it was discussed in terms of whether Wal-Mart strategy was Global, Multi-domestic and Transnational. Wal-Mart strategy was concluded to be more on the transnational strategy as it took into account its global strategy and local strategy as well.

Wal-Mart is known for being a company that has competitive advantage in logistics and customer service which are among its functional analysis. The logistics was examined in full as the main functional analysis affecting Wal-Mart in its entry into Brazil.

Finally, recommendations were given on what Wal-Mart could do better when entering another international Market and a conclusion was made.

Introduction

This report discusses the Wal-Mart was first established in America in 1962 by Sam Walton .Wal-Mart is known as one of the World’s Largest retailers serving more than 200million customers and members per week (Walmartstores.com).

As at 2010, its fiscal year sales was $405 billion and is one of the Worlds’s most admired Companies Survey. Wal-Mart has over 8400 stores in 15 different countries (Wal-Mart.com) due to its need for globalisation.

In this report, Wal-Mart entry into Brazil would be looked upon enabling the discussion on what motivated the firm into globalisation, its entry strategy into Brazil, its corporate strategy that enables it success and its functional analysis. Secondary data’s would be used for this analysis.

Firm Motivation

In order to be able to analyse Wal-Mart’s entry strategy, it would be worthwhile to understand what motivated the firm into globalisation. Management realised, that by the 2000 the market in the United States would become saturated and reduce their market share and decided to expand global.

Also in 1990’s, Wal-Mart was facing stiff competition from key players such as K-Mart and target (Angela da Rocha 2002). These two companies were taking up Wal-Mart market share and expanding their global strategy.

The competition strategy used by Target and K-Mart left Wal-Mart with no choice than to enter the international market with the aim of increasing market share and sales of the company. Wal-Mart believed in its strength and technology development to help in markets abroad.

Wal-Mart was also motivated in terms of thinking about the benefits of economies of scale and scope obtained through globalisation. Wal-Mart deals with major international firms like Unilever (food products) which has its own international operations thereby using its large size to demand deeper discount on items (Hills 2008). Also, another reason Wal-Mart might have decided to entry Brazil could be because of the knowledge and expertise to be gained by other firms competing in such a country and be able to integrate the knowledge obtained into other operations in the future.

Diagram derived from: http://www.themanagementor.com/kuniverse/kmailers_universe/mktg_kmailers/wal-mart.htm

The diagram above details the competitive advantage that Wal-Mart has in order for it to internationally encourage to enter different markets.

Entry Strategy

According to Hill 2008, there are four categories of entry strategies used by firms they are as following using Wal-Mart as analysis.

Market Choice

In 1994, Brazil experienced a new thrust in the economy where there was implementation of lower inflation. This improved the purchasing power of Brazilians and also enhanced economic growth, Wal-Mart saw this as an opportunity to invest in the country. In 1995, Wal-Mart began operations in Brazil; Wal-Mart entered Brazil in order to be able to obtain the benefits to be derived from the potential demand of the population and potential the economic growth Wal-Mart did not use one single strategy to enter different countries.

The selection of market choice was based on the detailed information of the business, competitive and economic environments of the country of operations. Govindarajan and Gupta stated “After choosing the country, and understanding the environment, the management at Wal-Mart would decide on the best entry strategy. The selection varied from starting new stores from scratch (to acquisitions), joint ventures, and alliances. Wal-Mart establishes its presence in local markets by first understanding the uniqueness of each market, and then by adapting its business model to suit that market.

Entry Mode

Wal-Mart, through partnership with Lojas Americanas which one of Brazil’s leading discount store chain entered Brazil. Wal-Mart chooses to own 60% whereas Lojas Americanas would retain 40% which is a joint venture. Wal-Mart holds 60% makes decision making easier has they control a larger percentage of the company and can make quick and managerial decision compared to if it was 50:50.

According to the data founded by Hill 2008, UN estimated that some 40-80% of Foreign Direct investment were in form of mergers and acquisition. It is easy to execute joint venture than to start a company from scratch .Within the time taken to start a company from the beginning a competitor might have acquired another company within the country and limit the market share to be obtained. Joint Venture makes it easier for Wal-Mart to meet its objective of becoming a globalised company in international market.

The logic behind this partnership and its success is that Lojas Americanas brings in the cultural integration whilst Wal-Mart brings in the managerial skills and resources needed for the partnership to work. Wal-mart decided to open Supercenters (50,000 different items) and Sam’s Club stores (buyers club which required a fee for membership) because it believed its discount operations would work. The idea of the Supercenters was to provide a new product mix and varieties for the Brazilian market at lowest price.

Timing of Entry

Wal-Mart entered Brazil as a first mover advantage as technology was not readily available in Brazil at the time of entry given them a competitive advantage against Carrefour. This helped the economy to imitate the technological advancement and incorporate them into other businesses. Although, the sharing of technology was an advantage it could have also been a disadvantage as Wal-Mart was sharing its knowledge with its competitors and this could have been used against them.

Investment Scale

Wal-mart entered with Lojas Americanas which was known for its aggressive strategy in dealing with businesses thereby helping Wal-Mart gain an advantage. It entered with US$120 million to construct its stores with one in the largest city (Kotabe 2003).It entered at a large scale in order to gain competitive advantage this could have also been a problem if Wal-Mart failed in Brazil thereby losing the revenue used in entry.

According to Kotabe 2003, it was stated that “Wal-Marts objective was to achieve number one retailer position in Brazil and in order to do that they setup a logistics and communication system competent of supporting no less than 80 units in the Brazilian Market”

Wal-Mart also employed Brazilian executives who understood the market, cultures, and customers and would be able to manage the company effectively. Wal-Mart continued investing into Brazil has the demand was becoming more than the supply for their manufactured goods and services.

Corporate Strategy

According to Sam Walton, Wal-Mart strategy is ‘low prices always’. Wal-mart is known as Wal-Mart greeters where customers enter the store and they are greeted ‘with a sweet face’ a, huge smile and a shopping cart (Burbano 2004). Wal-Mart also offered attraction of employees at disposals of consumers helping them as they enter into the stores.

Wal-Mart company strategy is based on four pillars cost leadership, customer orientation, logistics and information technology (Angela da Rocha 2002). Fig 1 explains the reasons such as pressure from local responsiveness and pressure from global integration helps in determining the corporate strategy of the firms. When a company such as Wal-Mart chooses a corporate strategy it needs to decide how strong would the pressure of global integration or the pressure of local responsiveness affect its overall objective?

Global Strategy

In terms of Wal-Mart being a global strategy based in the beginning they prided themselves on being global. It brought the cultures, product, ways and products of the United States into Brazil and thought it could work since Brazil could not be different from America. It was later realised that it would not work and it revised it strategy by incorporating the culture of the Brazilians and the product to satisfy customer needs.

Multi-Domestic Strategy

In terms of localization strategy, Wal-Mart could not be seen as being localised because it never forgot its strategy of lowest prices and it incorporated some of its American product as well as Brazilian products in the market.

Wal-Mart had to change its product from being USA focus and included variety of product that was an attraction to the Brazilian people. Wal-Mart prides itself on being a customer oriented in terms of good service, product at lowest prices. Wal-Mart boasts that it has a global strategy but it is also locally focused we people the people first (Walmartstores.com)

Transnational Strategy

Wal-Mart could also be seen as a transnational company in terms of the striking the balance between global standardization of operating strategy and local customization of store layout and stocking practices. Wal-Mart took into account what the Brazilians want by buying product from the local manufactures thereby integrating the cultures and customer needs. Also Wal-Mart adjusted to the situation of Brazilian market by increasing the deadlines of delivery by manufactures, it did not use the United State to bring in the products.

Functional Analysis

In order for Wal-mart to be successful in its chosen country it needs to work as a team with different departments. The departments such as Marketing, Purchasing, HRM, Logistics and Distribution etc come together to analyse the details and decide what is best for the company’s operation in the chosen country. Wal-Mart prides itself on its logistic systems being that it enables the company have competitive advantage over its competitors.

As Wal-Mart began operation the demand of their merchandise was increasing compared to the supply that they had in store. The checkout lines were longer than expected; there was storage of parking space, traffic congestions and aggressive reaction from Carrefour its competitor.

In accordance with Kotabe 2003, Wal-Mart experienced an alarming 40% stock out rate in Brazil, as compared to 5% in the United States. Although the stock out rate has decreased since, the problem is far from being completely eliminated.

Brazilian suppliers are lagging behind the U.S. counterparts in logistics technology as that level of technological advancement has not been reached, thus making computerized inventory management systems useless. Additionally, the presences of traffic congestion present another major challenge to consistency and predictability in supply of both Wal-Mart stores and distribution center.

At the time of entry, Brazil was in no comparison to the United States in terms of technological advancement. Wal-Mart believed that its logistics was good enough to help them in Brazil; what they failed to consider was the population of the Brazilian people and the demand for their merchandise. Consumers were eagerly interested in the lower prices of merchandise sold by Wal-Mart, and there was no indication of stress of traveling long distance to obtain merchandise.

Wal-Mart had a flexible logistics, which enabled it realize the problem the problem of distribution and transport costs from the United State into Brazil. It decided to set-up alliances with local suppliers to deliver some goods that the store needed. This enabled reduced costs due to reduce transportation and fuel by drivers of their trucks and due to the technology it had it was able to determine the quality of the products.

Recommendation

When Wal-Mart decides to enter into an international market it needs to fully understand the market and the potential demands, political and supplier’s issues in order to be fully prepared for adverse reactions. Wal-Mart believes in its logistics as one of its competitive advantage and believes it could help them in any market. It is recommended, that they put into account the tastes and cultures of consumers and how they would be able to adapt to the countries ways of doing things. It is recommended that Wal-Mart could go a long way in benefiting internationally if the above recommendations are considered.

Conclusions

In this report, the motivation of Wal-Mart into internationalisation was analysed. Also, the entry strategy which included the market choice, the timing of entry, the type of entry mode and the investment scale was analysed. The corporate strategy of Wal-Mart whether it being multi-domestic, global or transnational was analysed. Its functional analysis was examined as well taking into account its logistics system. It was finished with a recommendation on what the company could do better in fir the next entry into another market.