Analysis of Wal-Mart in China


Introduction

Globalization and multinational operations are one of the ways that businesses are increasing their territories. In responding to globalization, one of the organizations that have embarked on this journey is Wal-Mart which has expanded its business territories to other countries. There are two key reasons why an organization may have the desire to globalize. Ampansoh (2010) insists that there are only two sides why an organization would be eager to globalize. Firstly, they would globalize in order to change the economy of a specific country and secondly, in order to engage different participants in their global economic operations. This would speed up the process of fighting poverty in the developing economies.

There are various challenges that an organization faces when it decides to internationalize. This is specifically true for organizations whose markets are over populated in their home countries (Yip, 2003). This paper aims to analysis Wal-Mart as an MNE and its operations with the aid of concepts such as Hofstede cultural framework and CSA/FSA model. This paper will also discuss factors considered in developing international business in China including the political environment, culture and economics.

Moreover, it will also discuss production and marketing strategies in China. In addition to that, it will discuss on issues/challenges the company currently faces in China and elsewhere and how they relate to the learning above. What went right and what went wrong and why. Lastly the paper will give conclusions and recommendations for medium and long term development and implementation.

Company’s profile

Wal-Mart has over 8,400 retail units which exist in fifteen different countries. According to the Wal-Mart Annual report, Wal-Mart had a total sale of $401 billion with over 200 million customers weekly (Wal-Mart Annual Report, 2009). Wal-Mart has its headquarters in Arkansas US. The founder of the organization is Sam Walton with over 2 million associates globally.

Company analysis

In the present world, business organizations seem to be in a competition with everything and everyone. This is due to the availability of cheaper technology which makes almost everything possible. However, the big question as to what is the best strategy in globalization still stands. Authors like Ghauri & Cateora (2005) have argued that there is no set of rules that organization should follow but organizations should be able to adapt to the environment they are going to outsource in.

Moreover, the organization should also be aware of cultural differences and the place. One such model which can be efficient is the Hofstede model (2010) which has been used to scrutinize individualism, feminism vs. masculinity, presence of power and uncertainty avoidance in China. Moreover, other models and frameworks that are considered include mode of entry and strategy change in to new markets.

Analysis Wal-Mart its operations

Global retailers are seeking to expand internationally by tapping potential market. In the retailing industry, the continent of Asia has proved to be a good potential market (Dawson et al, 2003). One of the most attractive markets is China as it has witnessed an annual growth of over 9 % with a total sale of 628 billion US dollars. According to Hingley et al, 2009), China has emerged as the 3rd largest market worldwide with an increase in 15% per annum in a span of twenty years.  China, which is a developing country has made big names in the retailer industry like Wal-Mart  to enter in to their economy due to the explosion growth in the U.S which is gradually disappearing (Frazier, 2009).

Mode of entry

There are various factors that influence a business Entry and exit strategies. For an organization, its original method of entry greatly determines its entry and exit mode.  According to Lessassy, (2007), for an organization like Wal-Mart it uses the same strategy regardless of the market they are venturing in to and do not bother to adapt to the new market.

Free trade

Hill (1998) describes free trade as a mutual agreement between two states whereby each country will determine its trade policies and discriminatory charges are non existent. China, which is also engaged in free trade with other countries, makes a suitable and potential market. For firms which are planning to outsource in China, they can chose the mode of entry which suites them best. There are four main strategies of venturing in to a new market according to Lessassy & Jolibert (2007). The strategies are by joining venture, by franchising, by direct acquisition and lastly by self established subsidiary.

Franchising & Foreign direct investment

Hill describes franchising an agreement between two firms to sell the same services or products (Hill, 2007). This is the most promising and quick way of venturing in to a new market since it removes any trade barriers (Ghauri & Cateora, 2005). Moreover franchising is also convenient since it mainly focuses on utilizing local expertise. Foreign direct investment can be described as investing in to foreign marketing in order to produce and sell their services and goods in to a new market. For Wal-Mart, it focuses on being the key distributor by being the informative revolution (Tibi & du Brusle, 1998).

Globalization Drivers

For Wal-Mart, its main strength is the use of sophisticated data gathering which is real time from its main network. This, not only acts as a technological drive but it also assists in developing data for the data warehouse tools which will be used in the exchange of data with suppliers. It is speculated that the IT of Wal-Mart is even higher then NASA (Colla, 2002).

In addition to that, some of the other factors that influenced Wal-Mart to venture in to the Chinese markets in order to gain competitive advantage is the target population, the high infrastructure and the cheap labor. There are three strategies that Wal-Mart uses in achieving the goal of gaining a competitive advantage. Firstly Wal-Mart expands in to new market in many forms, secondly Wal-Mart opens new stores with variety of goods and services in to existing market and lastly, Wal-Mart increases its sales at their present global stores

Nation’s competitive advantage

It is vital to identify a nation’s most favorable factor for success in a country in order to remain relevant in an international competition. Some of the factors that give an organization a competitive advantage is availability of cheap labor, increase in sales opportunities and lastly availability of both the needed facilities and suppliers. Liu & Song (1997), insist that it is the responsibility of a government to push and motivate organizations in increasing their profitability by raising their aspirations.

 By adapting to porter’s nation competitive advantage, organizations are able to stay relevant in the market. Wal-Mart, before outsourcing to China used the porter’s nation competitive advantage to identify some of its competitive advantage the target population, the high infrastructure and the cheap labor and government policies. Hill insists that it is important to identify these factors in order to decide whether one will venture in to the target market or not (Hill, 2007).

China has provided Wal-Mart with large economies of scale since it operates in three main formats that is the convenience stores, the supermarket and the hypermarket. By focusing on the Sam’s club, also known as cash and carry, Wal-Mart is able to create its economies of scale (Hingley et al, 2009).

Culture analysis by Hofstede framework

In internationalizing, the main problem no longer lies in deciding whether on should outsource to other countries or not but mainly lies on the different strategies to use in order to stay relevant in a different continent and culture (Dupuis & Prime, 1996). By critically analyzing the entry barriers through the failure of success of other companies, firms can easily identify the cultural barriers that stand in a foreign entry process (Barkema, 1996). However, developing countries seem more favorable to when expanding due to its free trade, a large population and the availability of a favorable economy. According to Cremer & Ramasamy, 2009), these factors have proved vital to organization since they highly determine whether an organization will be classified as an international organization or not.

Some of the problems that organizations face while venturing in to China include misunderstanding of culture, negotiations, price competition, corruptions, betrayals and lastly past incidences of messy outsourcing. Targat (1996) insists that an organization venturing in to such cultures must be fully aware of such issues and have already identified strategies on how to tackle them.

This is especially true in understanding the foreign culture (Mellahi et al, 2002). In the culture of the Chinese, they highly value sustainable relationship both with the organization and the people. For organizations outsourcing to China, whether it is a small corporation or a multinational Corporation, some of the most critical factors in becoming successful is the reputation of an organization, its referrals and references. In china, the most vital and popular network is the “guanxi” network which mainly advocates for high quality products.

Hofstede’s cultural framework analyses the reaction of a society towards avoidance, masculinity, individualism, power and feminism. The theory states that for countries which are located in the far east and south for instance China are ranked in the category of power distance and individualism which is low. Moreover, they are masculine and have weak uncertainty towards avoidance.  Even though Hosfede’s theory assist in recognizing the cultural differences that exist between geographic areas, it is important that an organization realizes that there are other factors that are always involved (Hill, 2007).

Hofstede’s cultural framework assists in identifying and categorizing the various differences between different cultures and nations. An instance is the US which is categorized as a male dominated society. Moreover, the US is also classified high individualism. China, due to low individualism and power distance, makes a lot of organizations which are internationalizing to focus in such countries. For Wal-Mart, outsourcing in countries like Mexico and Canada is quite easier if compared to Asian countries like China and Japan.

According to Hosfede (2001), China has a low level of individualism which means that before organizations venture in to their market have to take this tight relationship between the Chinese in to account. For Hill, guanxi has been seen as the savior of the obstacles that organizations face when venturing in to China. In this case, individuals are considered more powerful than the system (Hill, 2007).

Compared to other Asian countries, China can be ranked as having the highest Long Term Orientation. Chinese are known to have an attitude of perseverance where they go for the cheapest deals in order to save money for the future. According to Hingley et al., (2009), this fact has proved to be true especially for shoppers in Beijing who have been observed to have a high long term orientation. Therefore, this means that when an investor decides to venture in to China, they have to put in to consideration the high long term orientation.

Moreover, the Chinese people have a lower rate of individualism if compared to other countries. This fact can be attributed to their loyal nature and a collectivism society. According to Hill (2007), Confucianism tends to dictate the Chinese people how to live meaning that they are good at maintaining their relationship with other people. The Chinese people also have a higher rate of distance power meaning that they highly believe in the inequality of power. This means that the “guanxi” network is of very great importance to them and they respect its guides.

For Wal-Mart, in order to succeed in China, Wal-Mart has to truly understand the importance of “guanxi” in China. Moreover, they also have to adapt strategies that confine with the Chinese culture. This is to include both their operations and merchandising strategies. One of the mistakes that Wal-Mart did when investing in to China was to sell dead fish to the Chinese people. Moreover, Wal-Mart also sold meat which was packed in cellophane and Styrofoam. What Wal-Mart did not understand about the Chinese is that they prefer fresh meat compared to frozen meat.

Wal-Mart was quick to adjust to their mistake and this by creating fish tanks which any consumer would pull out a fish if they were interested. Moreover, Wal-Mart also started to sell meat which was not covered and selling live turtles which would be used to make turtle soup. This worked well for Wal-Mart as there was an increase in the number of consumers who responded to their new strategy. Although Wal-Mart rarely involved itself in unions, it did so in China because Wal-Mart noticed that majority of the workers in China were huge supporters of unions.  According to Hill (2009), after Wal-Mart enrolled their Chinese employees, it was reported that Wal-Mart fetched a 35 percent.

Challenges that Wal-Mart faces

            According to Maddox (1993), globalization requires an organization to change not only its strategies but its managerial skills. Moreover, their leader must possess global leadership skills.  Some of the leadership skills that a global leader should possess is global explorer. Becoming a global integrated enterprise means that they have a cross national workforce. The CEO of a global integrated enterprise therefore becomes a global leader. A global leader should possess the characteristic of having the interest of both the organization and the workers at heart. By being a global explorer, one has the interest of various cultures and is eager to learn about other cultures. Therefore, by understanding different cultures, one will be able to integrate nicely with other cultures and live in harmony with other cultures since he understands their culture.

Political Environment in China

Before outsourcing in to China, there are different political factors that an organization should consider. Some of the political strategies to look for include the price control, the Chinese government, the property rights and the Chinese laws. Hill (1998) describes free trade as a mutual agreement between two states whereby each country will determine its trade policies and discriminatory charges are non existent. China, which is also engaged in free trade with other countries, makes a suitable and potential market. For firms which are planning to outsource in China, they can chose the mode of entry which suites them best.

Moreover, the Chinese government has the power to control prices and strict wage payment for organization although the law is not strictly followed. In addition to that, there are many rules that are imposed on foreign organizations in China which includes the financing, the personnel and the technology. China has also worked hard to bring the rule of law in to effect so that they may protect the interest of organizations which have outsourced in China.

Production & marketing strategies

For Wal-Mart, in order to succeed in China, Wal-Mart has to truly understand the importance of “guanxi” in China. Moreover, they also have to adapt strategies that confine with the Chinese culture. This is to include both their operations and merchandising strategies. One of the mistakes that Wal-Mart did when investing in to China was to sell dead fish to the Chinese people. Moreover, Wal-Mart also sold meat which was packed in cellophane and Styrofoam. What Wal-Mart did not understand about the Chinese is that they prefer fresh meat compared to frozen meat.

Wal-Mart was quick to adjust to their mistake and this by creating fish tanks which any consumer would pull out a fish if they were interested. Moreover, Wal-Mart also started to sell meat which was not covered and selling live turtles which would be used to make turtle soup. This worked well for Wal-Mart as there was an increase in the number of consumers who responded to their new strategy

Opportunities for Wal-Mart               

China provides Wal-Mart with new opportunities to grow. According to Hill (2009), some of the opportunities that Wal-Mart uses in China include global expansion. Some of the strategies that Wal-Mart uses in global expansion in China include improving quality of both products and services, accelerating the speed of the market, lowering the cost of products and services and lastly one of the main and vital reasons that Wal-Mart outsourced to China is their cheap labor.   Berggoetz & Laue (2002) suggest that majority of the MNCs which outsource do so due to the availability of cheap labor in the developing countries. This means that for Wal-Mart, the only way that they could reduce their expense costs is through outsourcing to developing countries.

Recommendations

Wal-Mart has to truly understand the importance of “guanxi” in China in order to succeed in China. Moreover, they also have to adapt strategies that confine with the Chinese culture. This is to include both their operations and merchandising strategies. One of the mistakes that Wal-Mart did when investing in to China was to sell dead fish to the Chinese people. Moreover, Wal-Mart also sold meat which was packed in cellophane and Styrofoam. What Wal-Mart did not understand about the Chinese is that they prefer fresh meat compared to frozen meat.

Wal-Mart was quick to adjust to their mistake and this by creating fish tanks which any consumer would pull out a fish if they were interested. Moreover, Wal-Mart also started to sell meat which was not covered and selling live turtles which would be used to make turtle soup. This worked well for Wal-Mart as there was an increase in the number of consumers who responded to their new strategy. Although Wal-Mart rarely involved itself in unions, it did so in China because Wal-Mart noticed that majority of the workers in China were huge supporters of unions.  According to Hill (2009), after Wal-Mart enrolled their Chinese employees, it was reported that Wal-Mart fetched a 35 percent.

Moreover, when outsourcing Wal-Mart needs to train its workers especially his leaders in order to possess global leadership skills. Some of the leadership skills that would be essential for a global leader would include being a global explorer. Becoming a global integrated enterprise means that they have a cross national workforce. The CEO of a global integrated enterprise therefore becomes a global leader. A global leader should possess the characteristic of having the interest of both the organization and the workers at heart. By being a global explorer, one has the interest of various cultures and is eager to learn about other cultures. Therefore, by understanding different cultures, one will be able to integrate nicely with other cultures and live in harmony with other cultures since he understands their culture.

According to Hosfede (2001), China has a low level of individualism which means that before organizations venture in to their market have to take this tight relationship between the Chinese in to account. For Hill, “guanxi” has been seen as the savior of the obstacles that organizations face when venturing in to China. In this case, individuals are considered more powerful than the system (Hill, 2007).

Compared to other Asian countries, China can be ranked as having the highest Long Term Orientation. Chinese are known to have an attitude of perseverance where they go for the cheapest deals in order to save money for the future. According to Hingley et al., (2009), this fact has proved to be true especially for shoppers in Beijing who have been observed to have a high long term orientation. Therefore, this means that when an investor decides to venture in to China, they have to put in to consideration the high long term orientation.

Moreover, the Chinese people have a lower rate of individualism if compared to other countries. This fact can be attributed to their loyal nature and a collectivism society. According to Hill (2007), Confucianism tends to dictate the Chinese people how to live meaning that they are good at maintaining their relationship with other people. The Chinese people also have a higher rate of distance power meaning that they highly believe in the inequality of power. This means that the “guanxi” network is of very great importance to them and they respect its guides

Conclusion

In conclusion, business organizations seem to be in a competition with everything and everyone. This is due to the availability of cheaper technology which makes almost everything possible. However, the big question as to what is the best strategy in globalization still stands. Authors like Ghauri & Cateora (2005) have argued that there is no set of rules that organization should follow but organizations should be able to adapt to the environment they are going to outsource in.

Moreover, the organization should also be aware of cultural differences and the place. One such model which can be efficient is the Hofstede model (2010) which has been used to scrutinize individualism, feminism vs. masculinity, presence of power and uncertainty avoidance in China. Moreover, other models and frameworks that are considered include mode of entry and strategy change in to new markets.

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