Questions on Wal-Mart’s International Expansion
Other than profit, what other reasons would Wal-Mart have for opening stores globally?
The pursuance of the international markets by WalMart has been the strategy adopted to enable the firm to continue growing profits. With less than 100 stores opening each year in the U.S. The market appears to be moving towards a saturation point, and new stores may result in a diminishing return. Opening stores in new markets will allow for the firm to continue growing and pursue profit, but there are also a number of additional motivations that could drive the international expansion.
The first reason may be linked to the diversification of risk. The firm is well developed in the U.S. market with a dominant position. However, when a firm has a significant amount of revenue coming from a single market, there is a risk of a downturn if that market suffers; for example economic shock (Mintzberg et al., 2011). If a firm is operating only in one country, and that country suffers a significant economic downturn, then the firm may suffer reduced revenues and lower profits, and may have to undertake new strategies to satisfy new market needs. If the firm operates in a number of different markets, the exposure to the risk in a single market is reduced, as a lower percentage of the revenue is generated by each market. This places the firm in a stronger position to deal with regional issues that may impact on operations or sales (Mintzberg et al., 2011).
The second motivation may be to undertake expansion as a defensive strategy. WalMart may be the dominant retailer in the U.S., but they are not the dominant player in all markets, for example in the UK Tesco is the dominant firm and in France it is Carrefour. This international position indicates that there are large firms with a significant level of resources that could potentially enter the U.S. market. Having a presence internationally places the firm in a good position to develop further, especially if there is increased competition in the home market. The firm could also compete aggressively in the international markets if firms seek to compete in their home market (Mintzberg et al., 2011).
International expansion may also increase the knowledge and contacts in a firm and give them a better understanding of the markets. The firm can learn and adapt strategies in foreign markets if they have advantages, and may also develop local relationship with suppliers which may enhance the overall performance of the firm.
Part 2 – Why would Wal-Mart want strong centralized, or localized, control of its stores?
There are advantages and disadvantages associated with both central control of stores and localized control of stores. Strong centralized control gives the firm a clear advantage in terms of ensuring that the shopping experience will be the same in all stores, and that the desired image and standards are maintained. In the U.S. A customer knows what to expect when they enter a WalMart, there will be a similar lay out, and with centralized control the different stores will have the same promotions at the same time, selling many of the same goods. The standardized approach also facilitates increased potential benefit in terms of the economies of scope and scale (Nellis and Parker, 2006).
The danger with the central control approach, as seen with WalMart in South America is that differences exist between the different markets. When WalMart started out in Brazil they sold American jeans and footballs, to attract customers they realized they needed to satisfy the local demand, which were for the cheaper knock off jeans and soccer balls along with displays for ingredients for local dishes (Simchi-Levi et al., 2007). With the centralized approach, the management making the decision were not familiar with the needs of the local markets, and the generalized approach not only failed to serve the needs of that market, it alienated the potential customers (Simchi-Levi et al., 2007). Firms that do not adapt to local needs are unlikely to capture any significant level of the local market, as customers will not choose to purchase their goods. There may be increased costs associated with local control, and the additional hierarchy that may be needed to make the decisions, there may be a loss of some potential economies of scale, and the risks may include the failure of the firm to have a unified approach, so shopping experiences may differ across the company. However, the benefits are a greater ability to recognize and satisfy local demand, and adapt and change more rapidly as the decisions are made closer to the operating environment. WalMart moved away from the centralized approach, towards a higher level of local control, which has proven to be beneficial.
Mintzberg Henry, Ahlstrand Bruce, Lampel Joseph B. (2008), Strategy Safari: The Complete Guide Through the Wilds of Strategic Management, Financial Times / Prentice Hall
Nellis JG, Parker D, (2006), Principles of the Business Economics, London, Prentice Hall
Simchi-Levi, David, Kaminsky, P; Simchi-Levi, E, (2007), Designing and Managing the Supply Chain, (3rd Edition), McGraw-Hill/Irwin
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