Expansion strategies of companies
Introduction
This research document is going to focus on some of the expansion strategies of companies when entering new markets. The case study in the research is going to be Wal-Mart. Companies always have the aims of widening their operations, and entering new regions is one of the major decisions most companies have to make so that this can happen. Wal-Mart became international in the year 1991 after the grand opening of the Sam’s club in Mexico. Wal-Mart has ever since been growing overtime drastically. Despite the successes in many markets, Wal-Mart has been faced with various challenges in its operations of trying to enter different markets.
Walmart’s Global Strategy Expansion
Wal-Mart started its international expansion strategies by first focusing on Mexico and Canada as the major areas of expansion. It first opened Sam’s club in Mexico, and this was the stepping stone for Wal-Mart. In Mexico, China and the UK, Wal-Mart resorted to offering subsidized prices to its customers. This strategy did not work out for them due to resistance from other established retailers in the regions. Wal-Mart did not use a lot of expansion options in its strategy to diversify its operations. It mainly used the chain acquisition procedure to venture into different markets. Wal-Mart used this strategy during the purchase of Woolco in Canada, but in the Canada case, it was faced with low sales because of the small sizes of Woolco stores. It also purchased Wertkauf and Spark Handels AG in Europe, The strategy of buying already existing stores was an ideal method because it enabled fast growth and access to the brand suppliers, distributors and customers (Baines 2012).
According to Baines (2012), in Mexico, Wal-Mart also resorted to a joint ventures strategy. It took a joint venture deal with Mexico’s largest retailer Cifra SA. Wal-Mart also ended up using a joint venture with Lojas Americanas SA, to open five stores in Brazil. A joint venture strategy is whereby the two companies tend to share ownership between them in the newly formulated entity. This strategy proved to favour Wal-Mart because it helped it to join regions that were bound with cultural barriers and regions that were difficult to enter. A joint venture was also attractive to Wal-Mart since financial risks were shared among the companies that were involved. The strategy was also not quite ideal since Wal-Mart did not get full control of the outlets formed from joint ventures.
Another strategy that Wal-Mart uses is the strategy of organic growth. Wal-Mart used its own invested resources to bring up new stores or to acquire one more existing retail facilities from others. The success of this strategy was based on the availability and accessibility of the assets to support the high costs of initial investments. This was not a problem for Wal-Mart since it had a lot of capital to sustain its initial investment. But in my own views, I think this strategy was not the best one for them because it would lack the intelligence of the original players in the region of expansion.
Wal-Mart’s cultural problems
Wal-Mart success journey has also been faced with various cultural challenges in the various regions it expanded to. In Germany, for example, two cultural factors tended to make the growth of Wal-Mart difficult in the country. There was the issue of mismanagement. Some of the American management practices were not ideal for the Germans. The company installed American managers who made well informed cultural bloopers. One of the cultural mistakes they made in accordance to the cultural differences they had between the Americans and the Germans was the offering to pack groceries to the German customers. In contrast, the Germans prefer to pack the groceries by themselves. The American company management also directed the clerks to smile at customers while the Germans were used to the unfriendly services and were put off by the act of smiling.
Wal-Mart management also made all the employees take part in a morning exercise before the shift. The employees were made to chant ‘WAL-MART! WAL-MART!’ during their morning exercises. In America, this exercise could have been taken as a sign of morale boost, but in Germany, it was taken as an annoying act. Wal-Mart management was not considering the employees’ feedbacks in Germany, this led to frustrations among the employees and their morale diminished. In Mexico, it was also faced with the problem of corruption among the executive management in the company. It was stated that the management offered bribes to get construction permits for Wal-Mart de Mexico. This led to a 5% drop in Wal-Mart’s shareholdings, which totalled to approximately 10billion US dollars (Lillis & Tian 2010).
Opportunities and challenges in Russia
In recent past years, the decrease in oil prices and international sanctions has affected the Russian economy, leading to Russia facing a financial crisis. From the year 2014 to 2016, Russia’s GDP has dropped by 1.5 per cent every year on average, and private consumption also dropped by 7.1 per cent. The financial crisis proved to be a burden to the consumer-goods companies’ margins. The conflicts in Ukraine, the meddling of Russia in US and European elections, and the management of the Syrian war have led to poor relations between the West and Russia. This poses a challenge to the multinational companies which still vie Russia as a major portfolio to invest in. The geopolitical tension can negatively impact their businesses if they enter the Russian market (Kusznir 2016).
The Russian currency tended to grow weaker, and the high inflation rates witnessed in Russia caused the prices of commodities in supermarkets to rise and squeezed the consumers spending power. Russia mainly depends on fresh food imports and costly logistics. Due to this, the prices in Russia are high. Mainly in the eastern regions because of the long distance from the import hubs. The Russian consumers have been ever since being paying for the expansion costs by retail companies, their costs of growth, inefficiencies witnessed and the import duties. This can act as an opportunity to Wal-Mart’s global expansion management. It could expand its operations in Russia and offer commodities that are less expensive than the ones in the prevailing market (Kusznir 2016).
Most companies in Russia also charge the same prices on commodities across the country. The general public of Russia have sentiments on the pricing policies in place. So this can be one of the niches that Wal-Mart can focus on. It could focus on the level of income in different regions in Russia, and it could take advantage of the regions’ heterogeneity. So Wal-Mart can decide to differentiate prices and consider promotion offers across areas.
Wal-Mart’s entry strategy for Russia
For Wal-Mart to traverse the Russian market successfully, it has to keep in mind the major players in the Russian retail market. It will have to sort for a developed retail company so that it cannot undergo the cost of construction and advertisement after the construction process. So either a total buy-out of the other company or a joint venture might be the most suitable strategy of entry, depending on the deal that will be accepted first from the different market players in Russia. A total buy out would be most appealing if the time factor is brought into consideration. Wal-Mart is mostly driven by the idea of consumer satisfaction and at affordable prices (Bei, Gielens & Dekimpe 2018).
Due to the issue of high prices in Russia across all regions, Wal-Mart’s entry into the market might come up with less expensive commodity offer to the customers. The price reduction can only be possible if Wal-Mart is in full control of the already existing retail company, it’s opting to purchase. If it gets into a joint venture, it would be hard for them to make decisions because of the input from the other shareholders. But a joint venture can always be the entry mode and then it could end up purchasing the other company’s shares to be the greatest shareholder and attain the major decision making capability.
Conclusion
In conclusion, it is vivid that Wal-Mart is a major player in the retail business with a huge capital base, power and assets. Wal-Mart has been able to encroach most of the world’s retail markets. It has a number of stores in different countries in the world and is still ambitious to enter other markets it has not explored. Wal-Mart has employed the best entry strategy in the right places and the correct time. They have a detailed knowledge about their market, what the market needs, and how to improve on the services they are already offering in the retail market industry.
Wal-Mart has faced stiff competition over time, and it has been able to defeat them time and again. They have a high purchasing power making it possible for them to undercut its competitors easily. Wal-Mart’s competitive nature comes in with their ability to purchase commodities in bulk and at lower costs, then passing on the savings to their customers. The fact that Wal-Mart understands its market and moves with what its consumers want, it will continue always to have the upper hand in the retail industry.
References
Baines, J. (2012). Walmart’s Contested Expansion in the Retail Business: Differential Accumulation, Institutional Restructuring and Social Resistance.
Lillis, M., & Tian, R. (2010). Cultural issues in the business world: An anthropological perspective. Journal of Social Sciences, 6(1), 99-112.
In-depth integrative case 2.2
Kusznir, J. (2016). Doing business in Russia: The main political risks and challenges for international companies. In-State Capture, Political Risks and International Business (pp. 115-133). Routledge.
Bei, Z., Gielens, K., & Dekimpe, M. G. (2018). Retail entry and exit. In Handbook of Research on Retailing. Edward Elgar Publishing.