Wal-Mart Expansion to China Case Study

Wal-Mart Expansion to China

Introduction

Global expansion is triggered by the desire to achieve growth and gain a larger share of the market. Before a company invests in a foreign nation, it must consider various aspects such as the country’s economy, demographics, political stability, culture, and technological innovations among others. These factors determine whether the business will achieve success in a foreign destination or not. Notably, multinational corporations will refrain from expanding to nations that have high instances of riots. In addition, the company should select the right entry strategy in its global expansion program. Wal-Mart looks forward to expanding its retail outlets to other regions. China provides the ideal destination for Wal-Mart market due to its location, a high number of consumers and growing market. This assignment aims at evaluating the business profile for Wal-Mart expansion in China. The research also determines the ideal strategy that Wal-Mart could use in order to minimize foreign exchange risks. In addition, the assignment will suggest ways in which Wal-Mart could leverage laws and politics in order to attain success. Lastly, the research will determine the key operations, financial, human resources and marketing aspects that Wal-Mart must use in its expansion to China.

Wal-Mart Stores, Inc.

Wal-Mart is a US based company that has for so long dominated the retail business. Since its inception in 1962, Wal-Mart has successfully served the public over the years. The company is based on the vision of its founder, Sam-Walton. Wal-Mart always seeks to help communities live productive lives by saving on food items, laundry detergent, and other necessities. Wal-Mart has over time opened various stores in more than twenty-eight nations in which it operates.

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Entry Strategies

Investors wishing to penetrate foreign markets can use various strategies, including exporting, licensing, Foreign Direct Investment and joint ventures. However, each entry strategy has got its advantages and disadvantages (Palmer, 2012). Thus, Wal-Mart should carefully evaluate each approach in order to minimize foreign exchange risks.

Direct Exports from the US

In direct exporting, Wal-Mart will be directly involved in marketing its products in China. As a result, Wal-Mart shall set up a centralized position in major cities, including Shanghai and Beijing. It shall be responsible for coordinating marketing, contracting, distribution, facilitating exporting and pricing of Wal-Mart’s products.

In direct exporting of food items, laundry detergents, and other necessities, Wal-Mart shall realize various advantages. These include better information feedback on the quality of services offered by the company and areas of improvement. Secondly, direct export shall translate to more sales, especially when conducted by local agents, with whom consumers can easily associate. Direct exports also enhance greater control of the quality of Wal-Mart’s products. In addition, it protects Wal-Mart’s intangible assets, including trademarks and goodwill in China.

On the other hand, the short-run costs of implementing direct exporting are quite high and risky. For instance, Wal-Mart has to conduct thorough research on how to implement the strategy, who to appoint to distribute the pricing methodology as well as establish a reputable team that will oversee and coordinate the whole process. The process of direct exporting may also be more expensive in terms of logistics, transport costs, insurance and licensing involved. In addition, the process is time-consuming in terms of time spent in exporting the products, as opposed to producing and distributing the food items, laundry detergents, and other necessities locally.

Licensing

In licensing, Wal-Mart will give local firms (licensees) the rights and technological know-how on the production process and implementation of its products. The licensees will produce Wal-Mart’s products either exclusively or non-exclusively for a stipulated period and marketing of products in China. The licensee will pay a commission and loyalty to Wal-Mart for the services produced. Therefore, Wal-Mart’s products can penetrate into China without the company setting new operations there.

Wal-Mart can reach a wider market in China by using the already existing infrastructures. In addition, Wal-Mart can easily expand its market territory without incurring high costs of expansion.

However, the income and profits realized from licensing other companies are much lower when compared to other strategies of global expansion. In addition, once you license local firms, you may lose control of production and distribution of your product, and quality of Wal-Mart products may be jeopardized. For instance, an incompetent company can also largely ruin the reputation of Wal-Mart in the global market. Another problem associated with licensing is the conflict of interest; whereby the licensee may take advantage of the license in promoting his product at the expense of Wal-Mart products.

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Foreign Direct Investment (FDI)

The Foreign Direct Investment is the third strategy that Wal-Mart can use in its expansion to China. According to Gilroy, Gries & Naudé (2006), FDI is a process where investors from the home country purchase assets for the purpose of controlling the activities of a company located in another country. In recent years, FDIs have gained popularity, particularly in the emerging markets due to their contribution in capital inflows. It is a long-term investment that increases aggregate demand and eventual economic growth in the host economy. In recent years, the number of FDI firms in China has increased significantly. It has, in turn, enhanced the country’s dramatic growth in exports. China provides international investors with opportunities to achieve growth due to low costs of manufacturing and a high population that provides cheap labor. Thus, Wal-Mart can exploit its core competencies to achieve growth in China. By undertaking FDI, Wal-Mart can gain cost advantages.

Wal-Mart will, however, attract higher prices, ranging from field surveys, registration, distribution, and operations.

Joint Ventures

The last option that Wal-Mart can use in its expansion to China is joint ventures. A joint venture occurs when two organizations combine their operations to form a new entity. By pooling resources with other firms, Wal-Mart can achieve short-term growth in China. Also, Wal-Mart can spread foreign risks because the partners in a strategic partnership share both profits and losses.

However, the joint venture may take much time and efforts to establish. Also, the partners may fail to agree on goals and objectives. Furthermore, cultural differences may lead to collapse of the alliance.

Recommendation on the Best Entry Strategy

Several strategies of market entry, including direct export from the US, licensing, FDI and joint ventures have been proposed. After weighing the pros and cons of each strategy, the report highly recommends licensing as the ideal strategy for minimizing the foreign exchange risks. Licensing is more beneficial, as opposed to the other three strategies. It includes lower costs of execution, operation and licensing, ease of expansion to other markets within the region through taking advantage of the existing infrastructure and policies in China, lower costs of logistics and operations as well as favourable social-economic, political, legal and technological environment, since the licensee will be easy to associate with in the market.

Ways in Which Wal-Mart Could Leverage Politics and Laws

An organization that operates in a foreign country is affected by politics and laws governing that host country. Political unrest is the most detrimental risk for multinational corporations. Thus, leveraging political risks prevailing in the country in which a business operates is the key to continued growth and profitability. Wal-Mart can leverage politics and laws by keeping China dependent upon it. In addition, Wal-Mart can carry out research and development (R&D) in order to determine the prevalent political risks. Furthermore, Wal-Mart needs to familiarize with the Chinese trade laws. In this regard, Wal-Mart should obtain all licenses and permits through laid down procedures.

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Key Commitments That Wal-Mart Must Make

In order to achieve success in China, Wal-Mart must make key commitments, including financial, operations, marketing, and human resources. With regards to financial decisions, the company must successfully deal with risks and uncertainties that face international businesses. In addition, Wal-Mart must come up with the right proportion of debt and equity.

Operations are those activities associated with transformation of inputs into the final product ready for sale. In an industry setting, these include the management and their decision-making skills. The management at Wal-Mart should mobilize all the inputs, and organize them into a fully functional company that provides the required services to its customers.

Marketing and sales are those promotional activities that the company uses to encourage buyers to buy its product, or inform potential clients of the existence of its brand. They include pricing, advertising, sales force, channel selection, relations, and promotion. On this end, Wal-Mart could make use of various promotional activities to attract more customers to their brand. They may use TV commercials, print advertisements, and promotional offers.

Wal-Mart should embark on such concepts as researching on consumer preferences and behavior, dividing customers into distinct segments and improvement of products in search of a competitive advantage. In China, the rivalry among retail operators is intense. Wal-Mart should, therefore, provide attractive services to their clients in order to have a greater share of the market. In addition, Wal-Mart should employ various competition weapons, including lowering prices and technological innovations in order to achieve a greater market share and profitability.

An organization has different departments that combine their efforts to meet the goals and obligations of the firm. The human resource department is a key distribution center of manpower in an establishment (Holland et al., 2012). This department is headed by a human resource manager, who executes the full spectrum of the human resource functions. The human resource manager has many roles in the organization, including human resource planning, recruiting, training and development and overseeing employee relations. All the successful institutions have upgraded and concentrated on the human resource department, a factor that has led to their success (De Cieri et al., 2008). Therefore, it is important for Wal-Mart to bring the right people into the organization. The Human Resource Manager at Wal-Mart should predict the future needs of staff members in order to enhance their loyalty to the firm. The human resource manager must be equipped with many skills to be able to perform his duties effectively. These abilities include interpersonal, conflict handling, management, and negotiation skills, just to mention a few.

Conclusion

The assignment has analyzed various factors that must be put into consideration in Wal-Mart’s business expansion. China provides the best market for Wal-Mart’s products due to such aspects as technological development, high population, and attractive social-economic and political frameworks. Thus, an ideal entry strategy must be developed to ensure that the operations are successful and profitable. After establishing various pros and cons involved in each strategy, the report recommends licensing as the ideal market entry strategy for Wal-Mart because the cost implications in licensing are much lower. Wal-Mart must make key commitments, including financial, operations, marketing, and human resources in order to achieve growth in China. However, the report recommends the company to research on consumer needs. Researching on consumer needs will enable Wal-Mart to create market responsive products.

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