Wal Marts Entry Strategy Into China Management Essay

Wal Marts Entry Strategy Into China Management Essay With reference to Porters PEST theory, the paper aims to examine Wal-Mart entry strategy into China, and show whether or not pursuing a joint venture strategy was key to Wal-Marts external growth within the Far East. The paper is situated relative to previous academic research articles and sets out to contribute to the literature, aiming to expand on previous work while giving an insight into business decisions and intent that need to be considered when entering new markets. The paper will aim to answer two questions in relation to Wal-Mart business strategy as seen in the analytical theory section, offering an in depth understanding and critique in regards to Wal-Marts Far Eastern ventures: Did the Political, Economic, Social and Technological incentives favour Wal-Marts strategy into China, and; Based on the findings from the PEST analysis, was Wal-Marts decision to adopt a joint venture entry strategy feasible? Chapter 1 1.1 Introduction Wal-Mart Inc. is ranked on a global scale as one of the largest retail companies worldwide, with a market capitalisation of 192.38billion (www.uk.finance.yahoo.com) and sales in excess of $108 billion and earnings per share of 96 cents (Smith, 2009). This combined with its position within the Top 5 of the Fortune 500 Index and the impacts of the ongoing credit crunch make it a very engaging topic to investigate. In this paper I aim to build on the concepts within the topic of international business strategy, addressing Wal-Marts own strategy in their decision to enter the Chinese Market. Business strategy within many global organisations plays an essential role in attaining a desired level of strategic leadership (intent) and Wal-Mart is no exception. Wal-Mart like many firms is very specific in its business agenda, which Pereira (2002) summarily acknowledged, as establishing dominance in the home retail markets (US), global expansion/leadership and a constructive brand creation (Pereira et al, 2002). Based on Pereiras perception of Wal-Marts strategy, by undertaking Porters PEST analysis looking at Political, Economical, Social and Technological, the findings will be aligned with regards to Wal-Marts policy on joint ventures. It will build on previous academic research articles and theories, listed in the literature review with the aim of understanding the strategic decisions Wal-Mart has undertaken in regards to its global expansion. These decisions underpin the entry strategy Wal-Mart has adopted to enter into the Chinese market, Wal-Mart is exporting its retail savvy east to Asia with stores opening in China (Halverson, 1994, p1). The paper having outlined the general concept of PEST when considering market entry, will then conclude with an overview of the entry strategy taken by Wal-Mart in China based on this PEST analysis. 1.2 PEST Analysis PEST is a business tool that was developed by Michael Porter (1980s). It is used by firms to understand changes within the macro environment focusing on 4 main factors, Political, Economic, Social and Technological. Gathering information based on these four components PEST is used by firms to address their strategic positioning, planning and marketing decisions. The importance of a PEST analysis according to articles written by Glaister and Falshaw, is that PEST considers the integral components of the external appraisal of the company, leading to considered view of the opportunities and threats facing the firm (Glaister and Falshaw, 1999, p112). By contrast other types of analysis, for instance the TECOP model, bring into the commercial and organisational risk aspects into the analysis. (www. siteresources.worldbank.org, p25) However for the purpose of this report a PEST analysis is the most appropriate. The views on PEST, combined with Porters own theories on firm behaviour in relation to the environment, the pressure to change is more often environmental than internal (Porter, 1998, p52) exemplifies why aligning an entry strategy to a PEST analysis is, for many firms, crucial. Wal-Mart is a typical example of this, highlighting the importance of considering all four aspects before making a decision. Wal-Marts development and decisions based on its entry strategy are strongly aligned to the fundamentals of PEST. The template below illustrates this: Chapter 2 2.1 Literature Review There are many previous studies and literature, which use Porters PEST analysis as a tool to understanding entry decisions. This review will aim to expand on these and use the concepts to offer a diverse understanding of Wal-Marts global expansion strategy within China. From a global perspective, the retail sector is one of the biggest and most competitive markets, the amount and variety of forms of international retail operations have increased in recent decades (Dawson, 1994, p39). Having established in 1962, Wal-Mart has been no exception to this pattern, Wal-Mart is both the worlds largest retailer and corporation measured by its revenue (Dobson, 2004, P89). As Wal-Mart has strategically developed, the necessity to adapt and evolve a global strategy and align it to the external environment has been vital. Wal-Marts global expansion and positioning within new markets with the strategic intent of acquiring a competitive advantage against other retail giants such as Tesco and Carrefour in terms of market share, epitomizes this, since 1994, Wal-Mart, the biggest retailer in the world, has been one of a range of American `new format retailers causing havoc in foreign retail markets (Hallsworth and Evers, 2004, p1). The literature gives an insight into why firms exist where they do. PEST is a tool used to gain an understanding of market growth and decline (external to the firm) and as a result helps to determine the ideal strategic positioning for an organisation. As Langlois and Robertson stated, a company when dealing with any business strategy must establish the boundaries of control in relation to their organisations scale and scope (Langlois et al, 1995, p7). If this is not established upfront, any plan around firm positioning becomes problematic and as Lamont has stated in his work, and in particular with reference to Wal-Marts global-regional strategy, this has been the case in some areas. Wal-Mart, Lamont argues has made some mistakes in judging the importance of economic, cultural, and business risks within local countries (Lamont, 2002), which as a result has prevented them from positioning themselves in some countries as a successful retail firm. Many European cities like Germany for instance have stuck with the smaller retailers like Spar and Lidl as their needs and choice are not as diverse as the Chinese demands. Further literature expands on the problems of a lack of understanding of the external environment. For instance, Lamont, Kottoli and Schaefer critique Wal-Marts European entry strategy in relation to the fundamentals of PEST. Lamont picks up on the economic analysis and argues that higher prices and increased competition was a source of Wal-Marts failure in countries like Germany (Lamont, 2002). Kottoli also joins the debate and argues cultural insensitivities became the barrier to Wal-Marts success, which in turn backs up Schaefers theories relating to why Wal-Mart had the problems it did. Wal-Marts inability to adapt its home ideologies to its global goals due to management problems, language barriers (social), market knowledge and political regulation all added to its decision to re-structure and sell off its losses (Schaefer, 2006). This said carrying out a PEST analysis on Wal-Marts Chinese venture becomes an interesting exercise, because, while Kottoli, Schaefer and Lamonts arguments are all credible for Europe, others believe China offers a unique angle. A PEST analysis will give a more in depth understanding of why Wal-Mart chose a certain entry strategy for China. Goldstein in his writing showed how Wal Marts approach to China differed from previous entry strategies and that it has actually experienced an element of success (Goldstein, 2003). It is at least still present expanding and respected in China and Asia, which cannot be said for its development in some European countries like Germany. Kierney compounds this further when stating with regards to China, Wal-Mart is firmly entrenched (Kearney, 2006, p6) within China. Other literature agrees with such a viewpoint and Naughton for instance states that for Wal-Mart, China represents the biggest frontier since it conquered America (Naughton 2006). Having utilised PEST to understand the external environment Wal-Mart had to develop a suitable entry strategy for China. Previously Wal-Mart in Canada, as stated by Govindarajan and Gupta, used an acquisition strategy. The reasons behind such a development were that Wal-Mart faced relatively little need for new learning, and thus, entering through a strategic alliance was unnecessary (Govindarajan and Gupta, 1999). China on the other hand presents a very different emerging market, which at the time of the Wal-Mart venture had remained much untapped. Taking this into account, an alliance or joint venture is the best entry strategy to utilise, as a joint venture allows firms to assess the competitive landscape with more accuracy (Hamel and Prahalad, 1989). Realising this, Wal-Mart entered China on the basis of a joint venture, which capitalised on their previous acquisition experience. Chapter 3 3.1 Analytical Theory From a detailed PEST perspective this section will look at the individual P-E-S-T aspects. It questions whether the underlying concepts of a PEST analysis, the political, economic, social and technological concepts favour Wal-Mart in pursuing an entry strategy based on joint ventures. It will do this by considering two aspects of the entry strategy: 1) Did the Political, Economic, Social and Technological incentives favour Wal-Marts strategy into China, and; 2) Based on the findings from the PEST analysis, was Wal-Marts decision to adopt a joint venture entry strategy feasible? 3.2 Political When considering any business strategy it is important for an organisation to analyse the political environment in which decisions must be made. It should consider regulation, government positioning, trade agreements and policy. Politically, Hallsworth and Evers have examined the barriers that internationalisation of firms like Wal-Mart have frequently encountered, responses from indigenous rivals, the regulatory mechanisms of the governments of host or target nations have often hindered strategies for global development (Hallsworth and Evers, 2004, p1). In China, the political agenda exposed Wal-Mart to such potential barriers in the shape of highly regulated systems favouring domestic firms and preventing a so-called foreign takeover. However, timely changes in government policies meant that Wal-Mart was able to gain a foothold, as China was opened up to investment, and the government eased restrictions on foreign businesses, and encouraged Chinese entrepreneurs to enter joint vent ures with Westerners (Hornblower, 2004). Wal-marts entry strategy at the time clearly benefited from this. Wal-Mart undertook a joint venture with Citic Pacific Ltd (www.articles.latimes.com) with the sole purpose of gaining an established brand in the highly competitive Chinese domestic retail sector. As China continued to develop a more open commercial philosophy, economic growth opportunities started to emerge particularly as the economic climate (growth and investment) was right (the commercial side of the TECOP model not addressed by PEST). Wal-Mart was faced with greater prospects in terms of positioning itself in the market and enhancing its market share. Wal-Mart as a result adapted its strategy around such political incentives. Having established its brand, Wal-Marts strategy evolved to embrace acquisitions and pull out of its original joint venture. Political restructuring and incentives, which included greater leniency of jurisdiction in relation to competition enhanced t he Wal-Mart entry strategy. Wal-Mart expanded as a single entity, increasing its capacity to 89 stores in different cities, beginning to slowly erode the domestic retail sectors market share (www.wal-martchina.com). Chinas goal to achieve political stability and its opening up of policies also acted as an incentive for investment to take place (www.euromonitor.com). The political environment contributing to a new emerging Chinese market, allowed opportunistic businesses such as Wal-Mart to develop joint venture strategies, which gave them easier access and control over distribution channels and supply chains. 3.3 Economic In relation to any retailer considering global expansion, the strategy it bases its actions upon has to be aligned to market conditions. Based on market conditions certain strategy decisions will be developed and in Wal-Marts case, its development of a joint venture strategy in economic terms is understandable. Wal-Marts entry strategies were very much in line with Chinas 5-year plan of economic growth. (www.bw.china-embassy.org). The International Monetary fund (IMF) Statistics are proof of this. Wal-Mart by utilising the economic concept within PEST has strategically positioned itself in correlation to data seen in Table 1. China with a population greater than1,334,296 million and an increasing annual Gross Domestic Product (GDP), which highlights its economic performance, presented Wal-Mart with a massive opportunity for growth, customer base and profit maximisation (www.imf.org). By aligning its entry strategy to work with those already in the market, Wal-Mart was then able to bu ild foundations to expand its network. Table 1 Country Subject Descriptor Scale 2009 2010 2011 China GDP Billions 12,076,672 12,983,630 14,314,365 China Population Millions 1,334,296 1,354,310 1,374,625 (www.imf.org, Accessed 11th June2009) Economically the US-China Business Council also shows a pattern of growth, which explains why Wal-Mart wanted to expand into China, with political support back in the USA. In relation to retail sales (Table 2) these have increased dramatically over the last 10 years. For instance from 2003 to 2008 the percentage of growth in retail has been 12.5% (www.uschina.org). Such statistics would appeal to any foreign firm looking to strategically position itself within Asian Markets. At the same time the joining of China into the World Trade Organisation in 2001 (www.wto.org: 2001 Press Releases) also presents companies like Wal-Mart with an opportunity to enter a market that is categorically a Free Trade Zone, increasing export led growth (USCBC, 2009). Such economic incentives, established through the Political and Economic (part of PEST) analysis are the reason why the Wal-Mart scale and scope now extends into the Far East. Table 2 Main indicators 2003 2004 2005 2006 2007 2008 Retail sales 5,251.6 5,950.1 6,717.7 7,641.0 8,921.0 10,848.8 % growth 9.1 13.3 12.9 13.7 16.8 21.6 (General Economic and Financial Indicators, 1999-2008, http://www.uschina.org/statistics/economy.html) By carrying out a joint venture entry strategy, Wal-Mart was able to utilise labour pools already present in the retail field without incurring start up costs. Similarly, the size of Chinas workforce meant that Wal-Mart was able to significantly reduce the cost of capital investment, Chinas abundant labour supply means that companies can choose to use manual processes instead of automated processes and still save money (Huffman 2009). Hornblower also expressed a fundamental aspect of the importance of understanding the economic environment. He stated that Wal-Mart entry strategy was timed to allow others to enter the market first. This allowed Wal-Mart to have a second mover advantage or fastest follower and in so doing minimise its fixed costs. This clearly worked as Wal-Mart was able to cash in on low-wage Chinese labour already present due to previous investors (Hornblower, 2004). 3.4 Social When using PEST to develop a strategy, the social dimension of a country is also very important. Cultural attitudes, country specific product development and language barriers are a few of the issues that have to be considered external to the firm. Wal-Mart, when entering China, has had to develop a strategy around understanding such issues and how to address them. It is therefore not surprising that joint-ventures seemed to be a logical entry strategy for Wal-Mart into China. Through adapting such a strategy Wal-Mart has prevented some of the problems it faced in Europe, namely that of language barriers (Schaefer argument). Through gaining an alliance with domestic firms, Wal-Mart has gained an understanding of the cultural demands of the Chinese people. Using the cultural experience gained from its initial entry, Wal-Mart has started to diversify its strategy to reach out into areas not supplied by the typical hypermarkets, Wal-Mart is now operating 3 convenient stores (Wei and Kwok, 2009). This along with Wal-Marts adaptation of their strategy based around going green and addressing environmental problems (Hennock, 2008), has enabled Wal-Mart to develop a strategy based around longevity and socio-cultural awareness. Such a strategy is considered for a USA firm exceeding rare, but in this particular case was built upon US-China trade agreemen ts. At the same time, Wal-Mart has tried to learn from the problems it experienced when entering Europe. Wal-Marts entry strategy into China takes into consideration the needs of the community. Kottolis argument of cultural insensitivities found in previous ventures, as mentioned within the literature review, have been addressed and Wal-Mart actively participates in community service and charity events and has donated funds and in kind support worth more than RMB 58millon (US$8million) (www.walmartstores.com/factsheets).Wal-Mart has capitalised on the positive effects of being seen within the community as a sympathetic and generous enterprise. In addition, Wal-Mart has developed a strategy, which focuses on upstream measures with the aim of meeting customer demands. Using a strategy of working in partnership with suppliers, Wal-Mart has managed to reduce prices of goods by an average of 20 percent, generating increased customer traffic and turnover (www.walmartstores.com/factsheets). 3.5 Technological Technological innovation is also a factor, which needs to be taken into consideration when developing an entry strategy into an unknown external environment. Wal-Mart on entering the Chinese market sought to gain a competitive advantage over other retailers by introducing innovative measures around marketing and implementing cost reduction methods. For instance taking control of the supply chain and outsourcing. Such a strategy is key to explaining Wal-Mart global expansion, as Technological innovations account for approximately 60% of Wal-Marts growth (Basker and Pham, 2008). At the same time Wal-Mart has also introduced advanced retail technology and experience to China and advanced Chinas retail industry standards and development (www.tradeinservices.com), which has helped it to produce cheaper products, offering innovation, controlling supply chains and meeting the requirements of consumers. An example of this is the Wal-Mart introduction of electronic stock taking and till to back office re-ordering which consequently led to other firms imitating such technological advances supplying the needs of the Chinese customer both efficiently and at the lowest cost possible. Through adapting both internal and external strategies Wal-Mart has been able to gain control over and add value to certain areas that focus on customer communications/awareness as its core competence within China. Chapter 4 4.1 Policy implications Having established the reasons why Wal-Mart chose to enter China through Porters PEST analysis it is important to look at the policy implications Wal-Mart has needed to address and understand. A joint venture strategy, for instance requires Wal-Mart to take into account the risk of exploitation, and bootlegging from other competing firms. At the same time Wal-Mart has to consider its internal policy implication for entering China and whether Chinas policy for foreign direct investment (FDI) supports Wal-Marts entry strategy choice. Policies based around exports and imports (Tax), foreign policy and anti dumping legislation encouraging fair competition must be considered. The Chinese government itself must impose anti dumping legislation making sure price competition is even-handed. Such policy implications are important as without understanding these, retail firms strategies incorporate unnecessary risk and the decisions to enter into certain markets becomes problematic. The theoretical findings within the paper highlight the importance of making sure the correct entry strategy is chosen. The paper shows that Wal-Mart has had to evolve its core competencies to incorporate Chinas demands. The labour force, varying tastes and changing demands exemplify why Wal-Mart entry included a joint venture strategy aligning itself to market requirement. Using a PEST analysis has illustrated how Wal-Mart has evolved its US strategy to meet the needs of Far Eastern Markets. If Wal-Mart had undertaken other entry strategy decisions such as franchising, or even an acquisition strategy, they may have been unable to adapt their home market policy to foreign market policy. As seen in some of Wal-Marts European ventures (i.e. Germany) this would have resulted in a lack understanding and consequently market failure. If one wanted to pursue this paper further, incorporating other tools to assess the theoretical reasoning of Wal-Mart entry into the Far East and in particular China, a SWOT analysis as a business tool could be used. This tool allows firms to understand the strengths, weaknesses, opportunities and threats, both internally and externally, allowing decisions to be based on whether or not certain entry strategies are supported by the policies that exist and whether there is a need for the development of new policies. Combining the use of a PEST analysis with other businesses tools like the SWOT into entry strategies will give a much more informed decision and remains fundamental to business development. Similarly other more in depth models could be used to analyse Wal-Mart entry strategy. For instance as mentioned the TECOP model would add another dimension from both a commercial and organisation aspect, perhaps addressing the marketing perception in greater detail. 4.2 Conclusion It is clear that from analysing and using the data from the World Trade Organisation and US Chinese councils that Porters PEST analysis is a useful tool in understanding Wal-Mart strategic motives for developments within China. Europe, on the other hand, in regards to PEST has pressures that were not suited to Wal-Mart entry strategies. Its ideology around discount low prices for instance did not appeal, and politically and economically the competition meant Wal-Mart was unable to gain any market control. Through making mistakes in Europe, Wal-Mart has gathered experience in entering markets significantly different from the American market and as a firm it has been able to establish clear boundaries of control within China. This, combined with a learning strategy based around joint ventures has also been beneficial to Wal-Mart entry strategy within China, particularly when dealing with an emerging market and the domestic competition that existed. At the same time with Wal-Mart acting as a second mover within the Chinese retail market, following a strategy of joint ventures has allowed it to establish itself within the market. Taking into account the policy implications for entry into China as part of its entry decision has allowed Wal-Mart to establish a brand that incorporates the Economic, Political, Social and Cultural factors that is was unable to do in Europe. Having said this however it is imprudent to focus on the external environment as the only factor facing Wal-Mart in decisions to enter new markets. Managerial decisions and core competencies along with other internal aspects also need to be aligned to suit Wal-Marts strategic intent. Keeping success going requires constant attention to the competitive environment. Continuous work on the supply chain, responsiveness to political decisions and influence over these decisions and, last but not least, continued customer and employee focus are all aspects Wal-Mart needs to continue to address.