Discussion Questions: 1. Why did Mexico make such a good proving ground for Wal-Mart’s foreign expansion strategy? There were various strategic reasons why Mexico made such a good proving ground for Wal-Mart’s foreign expansion strategy. Since the early 1990s, when Wal-Mart had realized that its U. S. growth prospects were ultimately limited by market saturation, they decided to enter Mexico retail market considering the North American Free Trade Agreement (NAFTA) that would lower barriers to cross-border trade and investment.
As Mexico is very well connected by land, the planning and control of the flow of goods and materials through an organization or manufacturing process was easier with the company’s hub-and-spoke-based distribution system, where central distribution warehouses were strategically located to serve clusters of stores. Under the government of Carlos Salinas, a Harvard-trained economist, a tight monetary policy had lowered Mexico’s inflation rate into the single digits resulting the country’s economy to grow at 4 to 5 percent a year by the early 1990s.
With about 30 million of its 80 million people classified as middle class, Wal-Mart with its “always low prices” could target the middle class people for their products. When Wal-Mart entered most towns in Mexico, its primary competitors were small “mom-and-pop” stores that had a much higher cost structure. Wal-Mart quickly gained significant share in these towns and did not have to face competition from such stores. Also, to mitigate any initial investment risk, the company decided to enter into a joint venture with a large Mexican retail chain called Cifra, which operated about 120 discount and grocery stores in 1991 and generated sales f about $2. 2 billion. 2. What is the source of Wal-Mart’s competitive advantage? What barriers did Wal-Mart have to overcome in transferring its competencies to Mexico? Competitive advantage: 1. A first class management team. Wal-Mart has a first-class management team that helps the company to pursue a number of innovative operating strategies. This excellent team also leads the company to deliver a large selection of high value merchandise at a low cost to consumers. 2. Small primary competitors. When Wal-mart entered to markets, most of primary competitors were small like “mom-and-pop” stores.
These stores had much higher cost structure than Wal-mart. With this opportunity, Wal-mart could gain share in these towns dramatically with no competitors. 3. The development of a hub-and-spoke-based distribution system. Wal-Mart developed the concept of central distribution warehouse (hub-and-spoke) to serve clusters of stores. With this system, it allowed Wal-mart various advantages: • Rapidly replenish stock in its stores • Keep stores’ inventory to minimum • Higher sales per square foot and more rapid inventory turnover • Increase store sales Drive down inventory cost and logistics cost 4. One of the first to utilize computer based information system. Wal-mart used the information system to track in-store sales and transmit this information to suppliers. The benefit of information is the company can determine pricing and stocking strategy and better manage inventories. Moreover, with the combination of state-of-the-art information systems and the hub-and-spoke distribution system, Wal-mart could build the leanest supply chain in the industry.
Wal-mart is considered as a leader in information systems. 5. Advance communication systems. With the use of information systems, all Wal-mart stores, distribution centers, and suppliers are linked via information systems and satellite-based communication systems. This allows for daily adjustments to orders, inventory, and prices. 6. A dynamic and egalitarian culture. The culture had delegated the major decision-making authority done by the store managers, department managers, and individual employees (associates). 7. Well treating its employees.
Profit sharing plan and stock ownership plan for all employees made every employee “think and behave like an owner of the company. ” As a result, it generated high productivity, thus translating into lower cost. Barriers: Although Mexico had embraced free market reforms, there are some barriers for Wal-mart to cross-border trade and investment in this country. 1. The US and Mexico had different culture in supporting information and logistics systems. This would be difficult when transferring franchise and doing license with a local company. . Mexican retail market was still very fragmented and dispersed. 3. Mexican population mostly was poor although they were classified as middle class. 4. Higher prices reflected the transportation costs between Wal-mart distribution center in Laredo and its Monterrey store. NAFTA had not yet been implemented tariffs, so high tariffs contributed to the higher prices. 5. Wal-mart had problems replicating its US distribution system in Mexico including poor infrastructure, crowded roads, and a lack of leverage with local suppliers.
Many or local suppliers could not deliver directly to Wal-mart stores or distribution centers. This led to higher prices and lower margin for Wal-mart. 6. Wal-mart did not offer the right selection of merchandise for Mexican market. Some products were popular in the US but not in Mexico. 7. Government bureaucrats was one of crossing broader investment’s barriers for Wal-mart. 3. How did Wal-Mart intend to create value in the Mexican market? By the early 1990s, Wal-Mart management saw that the company’s business growth in the U. S. market was slowing down.
In order to prevent its stock price from decreasing, Wal-Mart began to make strategic moves to boot up the company’s stock value. The first strategy was to reconfigure the traditional Wal-Mart stores into Wal-Mart Supercenters selling consumer merchandises plus food products. Then, Wal-Mart began to expand globally with Mexico as the test marketplace. Wal-Mart embarked its Mexico adventures at times when a few favorable business events happened in the 1990s. The most affective event was the U. S. ’s negotiating the North American Free Trade Agreement (NAFTA) with Canada and Mexico.
With the passing of NAFTA, Wal-Mart realized that the Mexican market would provide profitable opportunities to foreign investors. At the same time, Mexico was under the government of Carlos Salinas, a Harvard graduate, worked very hard to improve Mexico economy, stabilize the value of Peso, introduced free market reforms, and removed trade barriers as much as possible. When Sam Walton, founder and CEO of Wal-Mart, met with the founding brothers of Mexico’s largest retailer, CIFRA; Sam concluded that a 50/50 joint-venture with CIFRA would be the best strategy to embark global expansion; especially in Mexico.
Wal-Mart opened the first Sam’s Club in Mexico City in 1991 followed by six more Sam’s Clubs in 1992. Initially, the retail business was so good that the company began to open stores under the Wal-Mart name in 1993. However, Wal-Mart’s business growth in Mexico was hindered by the 1994 Peso Crisis and bureaucratic Mexico government. The economic slump and depreciating Peso discouraged many foreign investors from further investment; some retail giants such as Sears and K-Mart even left the Mexico market. Wal-Mart was taking a much different approach as its competitors.
Wal-Mart thrived to apply its management skills into operating the Mexico stores. Wal-Mart tried many ways to lower prices for its merchandise; and to pass cost savings to the consumers’ benefits. Wal-Mart built a distribution center in Mexico City to improve store operation, inventory, and logistic systems in Mexico. With growing market share and customer base, Wal-Mart was able to use these leverages to negotiate low prices with suppliers. Wal-Mart also started to source Mexican-made products drive down the prices to an affordable level in the local market.
With all these dedicated efforts, Wal-Mart had established over 373 stores and retained 60 percent market share in Mexico by April 2000. Wal-Mart was able to build up its new brand name in Mexico; known as the Wal-Mart de Mexico, or WalMex. These successes had proved to be the commitments of Wal-Mart to create value in Mexico. 4. Despite some early setbacks, Wal-Mart has apparently been successful in Mexico. In contrast, some other U. S. retailers pulled out of the country in the aftermath of the December 1994 peso crisis.
What do you think distinguishes Wal-Mart from these companies? Wal-Mart first stuck its presence into Mexico in 1991 through a joint venture with Cifra, Mexico’s leading retail company, initially limited to developing Sam’s Club warehouse stores in Mexico. The tremendous success of the first Sam’s Club stores and the impending passage of the North American Free Trade Agreement encouraged further collaboration, and Wal-Mart and Cifra expanded their joint venture through the 1990s. Wal-Mart purchased a majority stake in Cifra in 1997.
Prior to the joint venture, Cifra’s lineup included superstores selling food, clothing, and a variety of other items, Superama supermarkets, Suburbia department stores, and restaurants. To this roster, Wal-Mart added Wal-Mart superstores and Sam’s Club warehouse stores. Wal-Mart Cifra had fewer grocery stores than either of competitors Gigante and Comercial Mexicana as of 1993, but had overtaken them by 2000 and today has 326 Wal-Mart, Aurrera, Sam’s, and Superama stores. Wal-Mart controlled 49 percent of Mexican supermarket sales in 2001.
Wal-Mart’s success is particularly striking in comparison with the performance of other International players. As Table 3 shows, Wal-Mart’s presence dwarfs that of every other major foreign retailer. Wal-Mart and other recent international retail entrants in Mexico |Chain |Country |Format |Year entered |Mexican stores in July 2004| |Wal-Mart |U. S. |Self-service |1991 |646 (326 grocery stores) | |7-Eleven |U. S. Convenience |1971 |“More than 500” (compare | | | | | |OXXO/Femsa with “over | | | | | |3000”) | |Auchan |France |Self-service |1997 |Exited in 2003 with 5 | | | | | |stores | |Carrefour |France |Self-service |1994 |27; announced its intention| | | | | |to sell Mexican stores in | | | | | |February 2005 | |HEB |U. S. Self-service |1997 |19 | |Inditex (Zara) |Spain |Department |1992 |100 | |JCPenney |U. S. |Department |1995 |Sold its 6 stores to Grupo | Sources: Number of stores and related information from company web sites. The conventional explanation is that it has brought a set of superior management techniques and technologies. Various media have emphasized Wal-Mart’s low-price strategy, high-technology distribution network, and intense pressure on suppliers for discounts—“the same formula” as in the United States, according to New York Times reporter Tim Weiner.
Wal-Mart rolled out its “every day low prices” (EDLP) policy in Mexico in 1999-2000, once inflation had diminished to the point where meaningful price comparisons were possible. The chain marked tens of thousands of items down as much as 14 percent, and has also passed on further savings, for example when currency shifts decrease an item’s cost to the company. Wal-Mart also began to post price comparisons with other chains, a practice that in 2002 got it expelled from ANTAD, Mexico’s National Association of Supermarket and Department Stores. “EDLP has been extremely successful for us in Mexico,” commented Wal-Mart International CFO Charles Holley. Wal-Mart de Mexico also has connected with and replicated the U. S. Company’s huge, automated distribution network.
With NAFTA eliminating most trade barriers, Wal-Mex has direct links to U. S. -based distribution centers, but also has built twelve distribution centers within Mexico. In addition to heightened efficiency, this multiplies Wal-Mex’s power as a purchaser, since Wal-Mart consolidates orders for all goods from outside the United States. As in the United States, Wal-Mex uses that buying power to drive down prices. Wal-Mart maintains its profit margin and never reduces its margin. They do pass on savings in price, but at the expense of the manufacturer. Executives of competing Mexican companies also referred to Wal-Mart’s use of minutely prescribed systems and procedures. There’s a sign on the Wal-Mart headquarters saying ‘Ordinary people coming into a company to do extraordinary things. ” commented an executive of another chain. “…With the right systems, training, and tools, ordinary people can do extraordinary things. ” Wal-Mart’s conjunctural advantages were several. First of all, “they bought the business Cifra that was already the leader and shortly after Wal-Mart launched its joint venture with Cifra, the dramatic peso devaluation of 1994-95 offered the U. S. Company a unique opportunity to buy a controlling share of Cifra at an extremely low price. Wal-Mart deserves credit for having the foresight to invest in Mexico rather than pulling out as K-Mart and Sears did, this was major breakthrough.
More broadly, Wal-Mart gained first-mover advantages by arriving in a Mexico that was “under-stored,” where other retailers were still using traditional high/low pricing, still depending on suppliers for most deliveries, and little accustomed to demanding discounts from suppliers. There is also growing evidence that the Wal-Mex advantage does not translate well to other contexts. Wal-Mart has failed to reproduce its Mexican success elsewhere in Latin America. In Argentina, Wal-Mart entered without a joint venture partner, maintained a strategy predicated on high incomes despite Argentina’s prolonged descent into recession, and encountered difficulty in securing local suppliers. A closer look at Wal-Mart’s performance in Mexico indicates that it is neither invincible nor exceptionally exploitative.
Though Wal-Mex has indeed scored impressive growth since 1991, this spurt rested on a specific set of circumstances. Imitation by competitors, income polarization, and economic hardship that steers consumers toward the informal sector could limit Wal-Mart de Mexico’s growth in the future. 5. If Wal-Mart can succeed in Mexico, it can probably succeed in most countries. Discuss this statement. Is it correct? While Mexico was a good starting point for testing its ability to expand into foreign markets, Mexico offered many advantages to Wal-Mart that would not exist in other markets. This is evident by looking at the external advantages that lead to Wal-Mart’s success in Mexico.
NAFTA – NAFTA was a huge reason Wal-Mart even considered expanding into Mexico. NAFTA would cut trade barriers, allowing for Wal-Mart to transfer its low cost structure to another market. It drastically reduced or eliminated trade tariffs, which had the other effect of attracting more manufacturers to Mexico to take advantage of the reduced costs in selling to America. MS Carriers/EASO partnership – Wal-Mart entered a three-way partnership with MS Carriers, one of their major US trucking companies and EASO, a Mexican trucking company. “Under the agreement, MS Carriers shared its fleet of modern trucks with EASO, as well as its satellite systems designed to help plan delivery times.
This helped EASO cut its costs by 25 percent, which it passed on to Wal-Mart, which now uses 200 of EASO’s trucks to run its Mexican logistics system. ” Without this partnership, it’s questionable if Wal-Mart would have been able to successfully implement its logistics network in Mexico. Cifra Partnership/Owning interest – Wal-Mart’s initial move into Mexico was done as a joint venture with Cifra—the largest of three major retail chains that “accounted for 30 percent of the retail market” in Mexico. This joint venture allowed Wal-Mart to open stores in Mexico with the aid of a major retailer in the target market. Taking these factors into account, it’s not readily apparent if Wal-Mart would be successful in most countries it tried to expand to.
While it still had superior purchasing power, most of that hinged on its ability to move a high volume of products. It could definitely reproduce the joint venture partnership it had with Cifra in another country but the advantages offered by NAFTA and the MS Carriers/EASO partnership would definitely not be reproducible in all foreign markets. Could Wal-Mart succeed in most countries? I think it could do very well in developing countries where the standard of living is increasing and infrastructure is improving to the point of being on par with developed countries. There are certain conditions that need to be in place for Wal-Mart to succeed.
Its cost structure being based on its hub and spoke supply chain means the road/transportation systems of a new country would need to be sufficient to allow the tight controls that Wal-Mart relied on. Disposable income of the new countries would need to be able to support Wal-Mart’s build-up phase, otherwise sales would never reach an acceptable level to support further expansion. Only after significant expansions (resulting in larger sales volumes) can Wal-Mart truly realize its cost savings and pass these savings onto the customers. There must exist a level of production in the country or products readily available for import into the country. Part of the cost savings at Wal-Mart is due to the low cost of production and shipment of its products for sale.
If it needs to import a large majority of its products for sale into a target country, depending on shipping costs and any trade barriers, the cost may be too high for Wal-Mart to sell products at competitive prices while still turning a target profit margin. It’s these factors that make much of Asia attractive markets. However, then we get into cultural issues. Being so close to the US, the Mexican population shares many of the same qualities as Americans. This makes appealing to the population as a workforce easier. This may not be so in other countries. There are many factors that determined the success of Wal-Mart in Mexico. Given all the factors, I can not say that their performance in Mexico is a positive indicator of their probable success in other countries. 6. Update the case and find articles on Wal-Mart’s success (failure) in the following countries: Germany and China.
Comment on the reasons for successes/failures and link them to Module 5: Strategies for MNEs. Germany Wal-Mart’s performance in Germany is in stark contrast to their performance in Mexico. Wal-Mart entered the German market in 1997. Since beginning, it took Wal-Mart 7 years to recognize a positive cash flow, finally seeing it in 2004. However, in 2005 a major issue arose when Wal-Mart distributed an ethics manual to employees in their German Supercenters. The ethics manual was a straight translation of the US ethics manual. In a Business Week article from April 11, 2005, cautions against supervisor-employee relations were taken as a ”puritanical ban on interoffice romance. Along with other policies communicated to German workers, “the ethics-code fiasco shows that Wal-Mart is still prone to do things the Wal-Mart way without enough consideration to local customs. ” “The ethics-code flap, which has prompted a flurry of negative headlines in the local press, is another sign that Wal-Mart doesn’t quite get the $370 billion German retail market. Since entering the country in late 1997, Wal-Mart has captured just 2% of German food sales, or $3. 2 billion annually. ” “Wal-Mart a secondary player? To Americans accustomed to the chain’s relentlessly successful expansion, that’s hard to believe. But in Germany the store count has slipped from 95 Supercenters in 2002 to 91, a fifth the number of rival Kaufland. ”
Then on July 28, 2006 Wal-Mart announced it was ceasing operations and sell its remaining 85 stores to rival retailer Metro. Leaving the German market caused Wal-Mart to take a $1 billion hit (It’s uncertain if that’s their cumulative loss or a one time loss for just the closure and sale of its German operations). In 2005, Wal-Mart’s global revenue was $312 billion, meaning the German stores only account for about 1% of total sales. The market was already saturated with other major retailers and a favored low cost retailer Aldi, who Wal-Mart was inconsistently able to offer lower prices than. The key difference between Wal-Mart’s German operations and their Mexican operations is the lack of a domestic partner.
Wal-Mart entered German solely on its own, and because of this they paid dearly for their missteps in expanding into the $370 billion German retail market. Pulling out of German came after a year filled with personnel issued caused by the introduction of a new ethics manuals, inconsistent performance, inability to be the low cost leader, inattentiveness too local culture both in their product offering and their treatment of workers. For more information see this paper on Why Wal-Mart failed in Germany: http://www. iwim. uni-bremen. de/publikationen/pdf/w024. pdf http://www. businessweek. com/magazine/content/05_15/b3928086_mz054. htm http://www. businessweek. om/globalbiz/content/jul2006/gb20060728_594752. htm? chan=top+news_top+news China Wal-Mart came to China in 1996. In retail market that has a 15 per cent a year annual sales growth, after a decade of fighting the Chinese Way, Wal-Mart had only 3. 1 per cent of the market, compared with 60 per cent of the Mexican market. It has finally seen the light and is adapting to Chinese consumers customs and culture. Recent changes include: • Acquiring a Taiwanese-owned chain of more than 100 box-stores in 20 provinces in China, for $1 billon, which will still give it only 8. 9 per cent of the retail market. • Selling fresh fish, crabs, clams, eels and tortoises.
Consumers plunge fishing nets into the serve-yourself, in-store tanks. No dead fish for the Chinese. • Displaying meat uncovered. • After eight years of fighting it, Wal-Mart has accepted organized labor and unions in their stores. • Replacing their American chief China executive, a 32-year Wal-Mart veteran from Bentonville, Arkansas, with a Chinese Hong-Kong retailing executive who ran 1,400 stores in Asia and has opened 800 stores since 2001. Wal-Mart had deep pockets and other global revenue streams to be able to afford ten to twelve-year learning curves in China and finally able to get things turnaround by following local customs which are key for success abroad.
Understanding changing business values and the characteristics of the Chinese business culture was a challenging project for Wal-Mart. It was a process of accepting differences, adapting to change and adopting new ways of managing across cultures. To conclude, the Wal-Mart success in Mexico is not an absolute guarantee for successes in other countries. We have seen how a strong global player could prove to be completely wrong with adopting its MNE’s strategy (Germany case where it was a big failure) and at the same time it could take years for a company to be profitable (Wal-Mart China case) and came only after a huge learning curve with changes to the local customs and values.