Background
From its humble beginning in 1962, Wal-Mart has achieved phenomenal growth to become the largest company in the world and the largest private employer in the United States (Tully 283). Although its initial operations were concentrated in the United States, the global retailer was driven by market saturation concerns and the need for more revenue streams to expand internationally using a multiplicity of strategies.
In 2013, Wal-Mart had over 10,700 retail stores operating in 27 countries, meaning that its international business operations had been largely successful with the exception of a few international markets (e.g., Germany and South Korea) that proved difficult to penetrate (“Wal-Mart” 1). The present paper uses a case study to answer several salient questions about Wal-Mart’s internalization journey.
Benefits of International Expansion
Wal-Mart has benefited immensely from its international expansion efforts, particularly in terms of achieving greater growth and reaching more customers. Additionally, the company has benefited from significant economies of scale arising from its global purchasing power as most of its key suppliers (e.g., GE, Unilever, and Procter & Gamble) have an international presence. This means that Wal-Mart can use its enhanced size achieved through international expansion to demand more discounts from the local networks of its global suppliers and, in turn, pass the benefits to consumers in terms of low prices. The effective use of its purchasing power achieved through increased international expansionist strategies has also enabled the company to increase its market share and earn greater profits (Leelapanyalert and Ghauri 195).
Moreover, Wal-Mart’s efforts to expand globally have paid dividends in terms of enabling the company to leverage the flow of innovative business ideas across the 27 countries in which it now has a presence. For example, although multi-level stores were initially conceptualized in South Korea, the idea has been successfully applied in other Wal-Mart stores across the world. Lastly, international expansion has enabled Wal-Mart to diversify its product lines with the view of serving more customers and growing its profit margins. Here, the case study is clear that the main triggering mechanism for Wal-Mart expansion into electronic services was its experience in China’s business environment.
Risks to Entry and Mitigation
Wal-Mart experiences several difficulties in its attempt to enter international markets, key among them being the inefficient distribution systems it usually encounters in the host country. Unlike in the United States where Wal-Mart had established an efficient distribution system, the company experienced distribution difficulties in Mexico due to poor infrastructure, crowded roads, and inability to work efficiently with local suppliers. This led to stocking challenges and high costs of doing business, implying that Wal-Mart was unable to offer its products at low prices.
Another risk concerns the lack of prior information on consumer tastes and preferences, leading to difficulties in merchandise selection. In Mexico, for example, the retail giant found itself stocking products that were unpopular in the local market and hence could not sell well in the host country. This risk was compounded by the automated information systems (technology) used by the company by virtue of the fact that the systems were unable to match the demands of the local environment. Other risks to the international expansion that are specific to Wal-Mart include human resource issues, understanding and complying with foreign laws and regulations, export/import issues, repatriation of profits, and maneuvering cultural and language differences (“Tackling the Risks” 1-2).
These risks can be mitigated by developing a comprehensive understanding of business operations in the host country, partnering with stakeholders in the host country (e.g., Wal-Mart partnered with a Mexican trucking company to improve its distribution system), and developing inventory and stocking practices that meet the tastes and preferences of local consumers. Other mitigation measures include undertaking acquisitions to benefit from the management expertise of local companies, preparing employees through intercultural learning and management experiences, and developing a deep understanding of the legal and regulatory environment in the host country (“Tackling the Risks” 3-5).
Entry Strategy in Mexico
Wal-Mart expanded into Mexico via a joint venture with the view to benefiting from the management expertise of the largest Mexican local retailer. A joint venture, in my view, also allowed Wal-Mart to mitigate potential operational risks, benefit from the operational and marketing expertise of an established player, and achieve less costly access to the Mexican market. Lastly, the local retailer provided Wal-Mart with the distribution know-how, which in turn enabled the company to establish a marketing presence in the country.
Wal-Mart purchased its Mexican joint venture partner in 1998 to, among other things, benefit from ownership advantages, have full control of decision-making processes, take full advantage of the synergies that had been developed in the joint venture partnership, expand its market reach, and benefit from the economies of scale associated with the company’s size (Pride, Hughes, & Kapoor 87-88).
Entry Strategy
It can be argued that Wal-Mart pursues a global standardization policy, which “focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies” (Leelapanyalert and Ghauri 194). As demonstrated by Wal-Mart’s low-price strategy which is popular among consumers in the United States, the company’s strategic objective is to pursue a low-cost strategy on a global scale by leveraging on its economies of scale. Additionally, the global standardization strategy is evident in the company’s centralized nature of decision making, inability to adapt to local tastes and preferences in some markets (e.g., stocking irrelevant merchandise in Mexico), the similarity of its store layouts and formats across different cultures, and stocking the same type of assortments and pricing without distinctions (Brennan and Lundsten 127-128; Moon 221).
Challenges in China
The challenges that Wal-Mart will confront in its efforts to enter and dominate the Chinese market include
- disconnect in buying and consumption patterns,
- language and cultural barriers,
- distribution challenges due to the expansive Chinese landscape,
- bureaucratic red tape,
- product sourcing challenges with local suppliers,
- lack of prime locations for expansion,
- product quality issues (Trunick 17-18).
Wal-Mart’s challenges in Mexico mostly affected its operational side of the business in terms of poor distribution systems and stocking challenges. Although the distribution challenge is still a problem in China due to the country’s regional setup, the company will have to do more to appeal to consumers with totally different tastes and a government regime that is known for its bureaucratic red tape and stringent laws targeting foreign-based companies (Moreau 43-44).
Conclusion
This paper has used Wal-Mart’s case study to answer several important questions about the company’s internalization journey. The paper can serve as an important resource for readers interested in understanding the internalization process through the prism of Wal-Mart, including the company’s risks and challenges to global expansion, global entry strategy, and how risks can be mitigated to ensure successful entry.
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