Strategic Business Analysis, August 2011
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Strategic Business Analysis, August 2011

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Kaplan University MBA, Strategic Management

Kaplan University MBA, Strategic Management

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  • Good afternoon ladies and gentlemen. Today we are going to discuss the operations of Walmart, China. Our consultants are: Yvonne Blankenship, Cindy Sterrett, Catherine Tedrick, Lisa Whaley and John Wheeler.This is a strategic analysis on the complete operations of Walmart China. Areas that we will cover include: local protectionism, infrastructure, technology, Chinese culture, strategic analysis, competitive rivalry, power of Walmart’s customers and suppliers, obstacles to global strategy, as well as Walmart’s potential capabilities. We will also include our recommendations for Walmart, China.
  • Walmart developed a highly successful model for growing their business in small rural towns across America. They were able to successfully transfer this model to international endeavors in Mexico, Canada and Britain. However, when they attempted to branch out into China, they found that their highly successful business model did not work. In fact, it was the opposite of what would be needed in order for the company to succeed. Stores placed in small, rural towns could not be sustained due to low income in those areas and each region had different consumer needs. They dealt with underdeveloped roads, strict and often unregulated government laws, as well as how the different incomes of Chinese customers dictated how they shopped which made it impossible to develop a uniform national merchandising plan.
  • China currently has 223 Wal-Mart Super stores and 5 Sam’s Clubs throughout the country. These have been heavily weighted towards the coastal areas. This is not really surprising since this is where the vast amount of China’s disposal income is found.
  • Local protectionism was a serious problem. Chinese government restricted expansion of foreign retailers to only limited cities that could have retail stores as well as how many of these type of stores there could be in a city. Local protectionism allowed local governments to retain a percentage of the tax revenue and was unfair and costly. They could make up their own rules when charging tolls on the city’s roads that could reach as high as 10% of the shipment. And, though the Chinese government prohibited this local protectionism in 2002, policy implementation and enforcement continued to be a struggle.Many multinational firms faced issues with protectionism while trying to expand their operations throughout China. Walmart’s biggest challenge with trying to expand was a result of trying to enter into Shanghai which is China’s wealthiest and most commercially developed city. And, regional fragmentation of the supply chain due to local protectionism causes decreases in efficiency and increases in costs which results in fewer choices or higher prices for consumers (Farhoomand).
  • The infrastructure that was built was not good for incoming and was to protect local interests. This posed difficulties for private and commercial trucking, road transportation, clearance through customs for imports, and purchasing within other areas. The regional consumption also affected domestic regulatory control of retail consumer and agricultural products. These restrictions on geographical expansion forced Walmart to stay in the southern part of China until they entered the World Trade Organization. Market forces played minimal role in the national market of China. Production and distribution was governed by central planning and allocation was governed by a hierarchical vertical structure (Farhoomand, 2006).
  • Mainland China caused another obstacle for Walmart due to the lack of an information technology network. In the U.S., Walmart developed high tech ways to track merchandise and had highly efficient distribution centers within a one day drive of the stores. In China, the infrastructure could not support that, nor would the government allow more than three hypermarket type stores like Walmart in a city. This caused Walmarts to be more sprawled throughout the country.This made purchasing difficult for Walmart China. Walmart was unable to communicate with their 15,000 local suppliers due to a lack of a network. These suppliers provided Walmart with 95% of their goods. Orders were placed via fax.
  • As a primary focus for making more money, Sam Walton had developed cost control measures that worked well in the U.S. However, cost control proved difficult in China because of additional costs of: - Goods delivery including live animals; Every day low prices for US customers was the primary reason for shopping there. In China low cost is important, but more so was quality and freshness. - Customers make more trips with smaller purchases; the “Every Day Low Prices” (EDLP) model in the U.S. encouraged bulk buying – typically having large purchases once or twice a week from each customer. -The very poor Chinese would not purchase at all, but would use the stores as a destination to escape their dismal lives by walking around and enjoying the clean, calm, bright atmosphere.Law required labor unions be formed in any organization; Shoplifting was another major problem that both chain stores and department stores faced in China. Billions of dollars in retail sales were lost in China as result. ). Shoplifting was not given much attention by law enforcement and was prevalent among the employees – this often cost as much as 5% of sales. Shoplifting was not only done by consumers but employees as well (Farhoomand).
  • Walmart has a very strong Business Model, which has been duplicated successfully in many different environments (e.g. US, Canada, Mexico) (Wang & Farhoomand, 2006). They have strong supply chain experience stemming from their extensive operations in the United States. Walmart’s strategic activities include having an aggressive logistics systems and technology for inventory management that helps reduce supplier shrinkage and internal costs.Encourage their suppliers to eliminate waste in their production of goods, as well as using Walmart’s technological capabilities to provide their own lean inventory management, has made them the low price leader in the United States. Walmarts relationships with suppliers and the enormous savings it achieves through hard negotiations and purchasing in large quantities is more effective by localizing its supply source.Their financial position is one of great strength. Walmart’s sales per square foot of store space, in the United States, have been estimated at US$413, while the closest competitor realized only US $222 per square foot (Wang & Farhoomand, 2006, p. 8).
  • Need notes for this
  • Entrance into any foreign market will produce challenges of a political and legal nature. Walmart has had success in the markets of Canada and Mexico. Their entrance into Europe and Asia, however, has been fraught with substantially more challenges than had been anticipated. Distribution has been challenged in China. Due to the size of the country and the distances between populations, the current Distribution Centers for Walmart are not being used to their capacity. The distribution centers, along with rail, freight and expedited shipping are insufficient to meet the needs of the vast market. Market patterns in China are very different than market patterns in the United States. Concerns of consumers are very different. Bulk buying is not the norm, as in the U.S. (Wang & Farhoomand, 2006).Another significant challenge has been Walmart’s aversion to any type of unionization within their organization. In China, this has met with disapproval. This, along with shrinkage due to shop-lifting and employee pilferage, has minimized the profits of the stores.
  • China has the world’s largest population at 1.3 billion and growing. Currently, China is already manufacturing US$20 billion in products and could really bring about the phrase, “Every Day Low Prices.” The business atmosphere has changed dramatically since Walmart first tried to enter their market. Due to these changes, 72.6% of consumer goods sold in China are from non-state enterprises.
  • Although China’s large population is an opportunity for Walmart, it is also a threat. Walmart’s success within the U.S. is through the use of distribution centers that will serve stores within the region. Due to China’s size, this philosophy will be significantly harder when stores will have to further away from each other. As China has relaxed its regulations and made it easier to enter the market, this has led to very intense competition and Walmart is falling behind. Part of the issue hampering Walmart is the income disparity they are finding in China, and it is becoming even more apparent today as incomes in rural areas have continued to be small which hampers their ability buy things beyond life’s necessities. Whereas, those along the coast have thrived, but local officials have made it tougher on big retailers by forcing them to pay extra fees that local retailers do not have to.
  • Walmart made several attempts in the early 1990’s to enter into the competition in China only to be turned down due to the Chinese government’s contention that there was already too much competition and more would make the market unruly. In 2001, the World Trade Organization (WTO) opened up the Chinese market. By 2005, China embraced the intensifying competition. Carrefour was, by far, Walmart’s biggest competition. By 2004 they had 62 stores spread throughout the country, representing approximately 16,241 RMB in sales. They also had regional locations in Eastern, Western, Northern and Southern China. Foreign stores met with fierce competition from local stores. The foreign market represented only about 3% of the market share. After a decade of development the local retailers had a large network and many of their locations were in prime areas. The domestic retailers were picking up ideas for revenue growth models and management techniques from the major competitors as they entered the market. China’s largest chain store, Bailian Group invested in state-of –the art distribution centers. This allowed the centers to be automated, utilizing conveyor belts and barcode scanners. They also had the advantage of localized suppliers and distribution, along with strong regional dominance and allegiance. Foreign competition gained ground slowly.
  • When Walmart first opened their doors in the U.S. they understood how and why American shoppers shopped. They knew Americans were looking for bargains, but that they also were impulse shoppers. Because they arrived in vehicles this opens them up to buying things in bulk. However, Chinese shoppers arrive at their shopping destinations on foot or on bikes. Because of this, they cannot buy things in bulk, or even large packages. They also spend their leisure time walking through the different stores comparing prices and looking for quality products.Income disparity is very noticeable in China where those in the top 10% of wealth have 11.8 times greater disposable income over the poorest 10%. Chinese with an annual income less than US$500 would limit their purchases to daily necessities. Once the income rises to between US$500 and US$1000, they are able to buy goods beyond necessities.
  • Walmart has a reputation in the U.S. as a shrewd negotiator, when it comes to suppliers, but suppliers with heavy regional allegiances in China retain their ability to bargain with Walmart. Their position is far more favorable than their American counterparts. In the United States, Walmart effectively forced suppliers to lower prices. They were able to do this because of their formidable buying power. Due to many regional differences in buying patterns, multiple suppliers are needed. What is a common supply in one region may not be common to another. Products, like live animals and fish, are sourced locally. Each region has shoppers who have different wants and needs. Creating new alliances with Chinese suppliers will not happen overnight. Local suppliers will maintain some of their power, which will continue to affect pricing for Walmart.The lack of an IT network has slowed the process of their supply chain. In the U.S., they centralized their purchasing efforts and their suppliers shipped orders to strategically place Distribution Centers. “The distribution network was based on the hub-and-spoke concept, with warehouses at the centre of a trade area where no store was more than a day’s drive from its distribution centre” (Wang & Farhoomand, 2006). This has not worked in China, due to the government. With China’s lack of infrastructure, the concept of distribution centers is going to remain a high priority for Walmart.
  • The primary barriers to entry that Walmart faced were strict Chinese government regulations on competition imposed to protect domestic companies. Unpredictable costs were imposed by local government, such as random transportation tolls and taxes. These barriers were not as difficult to overcome as China’s under-developed infrastructure. Transportation and communication systems were rudimentary, at best.Walmart's American model was challenged by China's limitations on where and how many stores they could open. In the U.S., Walmart would open several stores within 100 miles of each other and they would all be serviced by one central distribution center. "When a distribution centre served a large enough number of stores, economies of scale would be achieved, thus pushing costs down” (Wang & Farhoomand, 2006). In China, however, regulations allowing only three stores to be opened in one city hampered Walmart’s ability to recreate its business model successfully. There were also limitations on which cities were allowed to have foreign retailers. Local protectionism allowed city governments to retain a percentage of the tax revenue which was costly and unfair. They fabricated rules that allowed them to charge tolls on the city’s roads that could reach as high as 10% of the shipment. The Chinese government prohibited this local protectionism in 2002, but policy implementation and enforcement continued to be a struggle. "The major cause of all ad hoc barriers imposed by local governments against interregional trades was the lack of promulgation, and later an ineffective implementation of, a fiscal policy that prohibited such behaviours" (Wang & Farhoomand, 2006). China's underdeveloped infrastructure, both in terms of physical routes for transporting goods and limits to technology, caused inefficiencies, delays and waste. "In addition to China's under-developed highway network, on which Walmart's distribution system depended, different forms of transportation were not well connected and were seriously fragmented" (Wang & Farhoomand, 2006).
  • John Mentzer, the Chief of International Operations, stated that Walmart’s biggest obstacle faced in mainland China was the lack of technology and an IT Network. Mentzer saw how significant a factor this was to minimizing costs and knew in order to be successful in China, developing a communication network would be key. However, Walmart launched a large-scale project to link their suppliers electronically to its own system. Only 30% were not being reached electronically and these suppliers received their orders via fax. The regulatory ban on the use of satellite seriously impacted Walmart’s ability to communicate with their suppliers. Walmart has 15,000 suppliers that provide at least 95% of their merchandise sold to their local stores who were not able to be contacted via a web based system, which spelled disaster for the stores in China. However, they did have a plan to overcome this obstacle which was to launch a large-scale project link to their suppliers electronically to its system. EDLP (Everyday Low Prices) was Walmart’s strategy that attracted several consumers. Consumers in China were well known for going from store to store and comparing prices, quality, and the variety of merchandise offered. Bargain priced merchandise is a priority to consumers in China, and the lack of transportation contributed to how consumers shopped at the stores. In China, most people had to shop by using their bikes or on foot whereas consumers in the US were able to travel by car. Shoppers usually would make several trips a week, sometimes daily versus shopping in bulk.
  • The first Walmart store opened its door July 2nd 1962 in Rogers, Arkansas. Walmart’s founder, Sam Walton, believed that the future of retailing revolved around discounting. Walmart, avoiding direct competition with retail giants like Sears and Woolworth’s, opened stores in rural communities, also known as “one-horse” towns. As the company began to grow in these areas, they were able to grow quickly, staying under the radar of their competitors (Wang & Farhoomand, 2006).Walmart’s tremendous success has been attributed to its model of selling brand-name products for less (EDLP), but discounting had been around well before Walmart started. Walmart set itself apart from its competition by offering quality merchandise, assortment, price level, environment, customer support and longer store hours. Walmart, attempting to keep EDLP as an overriding commitment in business, went to their suppliers and helped them make their processes more efficient to drive prices down, and passed these savings on to their customers (Wang & Farhoomand, 2006).The hallmark of Walmart is the overall value they offer to their customers. Walmart was founded on three cardinal beliefs: providing great customer service, showing respect for the individual and striving for excellence. Sam Walton encouraged his associates to make a pledge with him: “I want you to promise that whenever you come within 10 feet of a customer, you will look him in the eye, greet him, and ask him if you can help him.” This has since been named the “Ten Foot Rule”. Another well-known rule is the “Sundown Rule” which requires an associate to answer requests from customers or colleagues by the end of business on the same day. Whether the hallmark trait, the cardinal beliefs, the “Ten Foot Rule” or the “Sundown Rule,” all of these have been integrated into Walmart’s culture and are still being followed by managers and associates, regardless of country locale.
  • An income comparison dissects China into three regional populations. The less populated Coastal region has the wealthiest citizens with a population of 482 million and Gross Domestic Product (GDP) per capita of $2,117. The Interior region has nearly double the population, but with a significantly lower GDP per capita of $765. The much less populated Western region, with 83 million, makes up only 4% GDP share. “The widely dispersed consumption pattern in terms of both scale and variety meant to a retailer that it was almost impossible to develop a uniformed national merchandising or marketing strategy” (Wang & Farhoomand, 2006, p. 12).According to A Guide to Doing Business in China, "Only 4 percent of the country's people have household incomes of more than $20,000--but that translates into a market of more than 50 million who are spending increasing amounts of money on things such as services, education, health care, and travel as well as on processed and packaged foods" (Woetzel, 2004). "China’s food market is becoming segmented. The demand for quality by high-income households has fueled recent growth in modern food retail and sales of premium-priced food and beverage products. Food expenditures and incomes have grown much more slowly for rural and low-income urban households" (Gale & Kuang, 2007).
  • Over 20 years ago, Walmart ventured into the International market by opening and operating its first ground-breaking store in Mexico City. Eventually, the International market became its own division. Today, Walmart owns and operates over 4,434 stores in its international division located in fourteen different countries. In China, Walmart’s major competitors are Metro, Carrefour, and Tesco. Walmart intended to copy its same success by catering to smaller low-income areas using common distribution centers. Carrefour entered the Chinese market in 1995 using target marketing to focus on the local urban areas. Carrefour sales were reaching nearly $100 billion Euros in 2010. As a global contributor, their stores were leading the competition in Latin America, Asia, and Europe. Since that time, Carrefour has had much negative press and has started pulling out of the Chinese market (Huei, 2011). Tesco entered the Chinese market in 2004 and, in early 2010, was experiencing a 6% annual growth in retail sales. They remain a fierce competitor for market share. Their intention is to quadruple current sales within five years (Fletcher, 2010). Metro entered the Chinese market in 1996, well ahead of their competitors. Though smaller in stature, they remain in China for the long-haul and are experiencing modest growth (Wang & Farhoomand, 2006).The risk for foreign companies to operate in China continues to be intensified by extraterritorial compliance regimes, such as the Sarbanes-Oxley Act. Companies from the U.S. must comply with Chinese law or face stiff fines. Chinese business lacks transparency and is accustomed to operating behind closed doors, away from any justice system, investor or potential partner. This makes it virtually impossible to make a full assessment of any Chinese company. Many important documents, such as financial or subcontracting transactions, lack transparency as well. This makes it difficult for Walmart to determine if the information they are able to gather is accurate or not.
  • China has long been a trading partner with Walmart. Walmart’s very first venture into China was facilitated by a joint venture between Walmart and China (Walmart China Factsheet). “The economies of both Japan and South Korea are expanding largely as a result of exports to China. From sectors such as power plants to packaged goods, its share of global growth makes it number one in the world” (Woetzel, 2004). This makes China a desirable partner to any retail company. A growing economy may experience stumbling blocks as it positions itself. This is where Walmart is an asset to China. Walmart has shown itself to be a good corporate citizen in all of its international markets. China is no exception. Local initiatives, designed to aid farmers in developing sustainable crops and minimize cost of production has proven to increase the income of the agricultural community. As Walmart’s presence grows in China, mutually beneficial relationships are being built within the communities to aid in development of a strong economy (Walmart China Factsheet).
  •  In 2001, the State Council prohibited the local protectionism in all forms in a bid to build and improve a unitary, fair and orderly market system in China. State Council also passed a law stating that no one can interfere with any unit or individual from any sales or purchases of products and services in any part of the country. Walmart was able to open their store in China shortly after these laws were approved. A few years later, foreign constraints were put on retailers operations which limited the regional expansion of Walmart stores. This constraint confined Walmart to southern China. In 2005, the Chinese market opened up with WTO and allowed Walmart to open up additional distribution centers, 1 in Shenzhen and 1 in Tianjin.
  • The obstacles that Walmart in China will need to overcome includes: cultural influencesobtaining market informationstrategic positioningcompany locationrole of local partnersthe foreign negotiation processand Chinese policies
  •  CultureGiven the dynamics of the Chinese population, Walmart should be assertive in locating and recruiting females for executive and associate positions. This allows for resources in target marketing, growth into local culture, and greater extension into the remote locations. Walmart needs to continue its employment of international employee in order to maintain its global dominance. This will promote acceptance of western products and western culture in China.ITA barcode system for supplies and products needs to be expanded for the Chinese market. This would allow for real time data to be dispersed regarding products, shipping, and transportation. Utilizing the locals from the colleges and universities will continue to build a solid relationship with the Chinese population.InfrastructureThis is one of the most challenging processes internally as well as externally. Walmart focus needs to be on the location of its supply chains and warehouses which would allow for products to be delivered in a more efficient manner. Another recommendation would be to collaborate with the Chinese government to establish a centralized warehouse system that will benefit both the government and Walmart. The supply chain that is used in China needs to be upgraded to include local producers and suppliers. Corporate ResponsibilitiesThe Chinese market is very guarded. Walmart needs to form better relationships with the local suppliers. There also needs to be an effort focused on incorporating the local and regional producers in the supply chain. Walmart’s ultimate goal needs to be developing a competitive program encouraging the local and regional suppliers to form exclusive contracts with them. This approach will help Walmart to establish and maintain a competitive advantage over its competitors. In addition to Walmart’s ability to capture the market on suppliers, it needs to continue donating to the Chinese school system to promote education especially in IT at the university level. Walmart will also strengthen its presence by sponsoring fine arts and cultural events, investing in green products, and promote individual financial stability with programs such as the Direct Farm Program.
  • Walmart in China needs an external value-chain because it is a retailer, not a manufacturer. Walmart and its external value-chain coordinates with a number of suppliers and provides goods for sale to its consumers. The external value-chain includes asking the suppliers a set of getting-to-know-you questions. Example questions include: “What does your supply chain look like?” “How does your company work within this supply chain?” “How do your products reach the customers?” The strategic activities include having an aggressive logistics systems and technology that helps the suppliers to reduce shrinkage and internal costs. Walmarts relationships with suppliers and the enormous savings it achieves through hard negotiations and purchasing in large quantities will become more effective by localizing its supply source.By reconstructing Walmart’s external and internal relationships within the Chinese culture will maximize its strategic capabilities. Walmart corporate should team with Chinese government regulation and develop a welcoming a local relationship.For optimal success in China, Walmart’s Operational Strategy should include local sourcing, local talent development, a sense of corporate responsibility, and involvement within the local communities of China. Sourcing goods from within the country will help to minimize logistics and shipping costs and reduce lead times since the Chinese distribution centers will be replenished by local sources and not overseas suppliers. Local suppliers frequently have a better understanding of the needs of the local consumer, offering Walmart a unique opportunity to supply the consumer with the products they desire while helping the local economy by sourcing nearby. China has a vast resource of local workers for Walmart to employ since the population is well over 1.3 billion people. Walmart should utilize this great resource by hiring associates and managers from within the country. Maintaining a sustainable supply chain and everyday operations will be vital to cost control and good public relations within China. Walmart should focus on three important goals in its daily operations and global supply chain: 100% renewable energy minimized waste, and selling products that sustain the world’s resources and environment. Walmart should be a positive corporate citizen within the country. Associate participation in community service activities should be encouraged and corporate involvement in disaster relief and other local non-profit organizations will be vital for Walmart to gain acceptance from the local people. Walmart has many areas for growth opportunities, keeping in mind that it must be smart about the ventures in China. Walmart China must utilize organic growth, multiple formats, and smart acquisitions to expand the company. The company needs to expand and change the locations it currently operates to find ways that benefit the people of the local communities. Walmart could open new locations throughout China where there is a demand; utilize its multiple store format that fits the needs of the communities.
  • from interfering in a fair and orderly market system. The State Council also passed laws prohibiting any unit or individual from disrupting any sales or purchases of products and services in any part of the country. (Farhoomand, 2006) Another obstacle that Walmart had faced was the Foreign Constraints that was put on retail operations, which limited the regional expansion of their stores. In 2005, Walmart joined the WTO (World Trade Organization) which enabled them to open up additional distribution centers. In China (Mainland China), there was a regulatory ban of satellite usage which impaired retailers communicating with their suppliers to deliver the products. Although this communication problem caused Walmart and other retailers, it didn’t stop them from pursuing alternative methods to overcome this issue. Walmart found an alternate method to communicate with their suppliers to eliminate the problem. The lack of IT network was no longer going to be an issue for Walmart stores because they planned on launching a large scale project which would link their suppliers electronically to its own system. (Farhoomand, 2006)All retailers’ in China faced many obstacles, starting with the regulations issued by the local protectionism, technology ban, foreign constraints, and the ban of satellite usage. Walmart was determined to succeed in China despite the difficulties that occurred during their preparations to establish stores in this country. The strategies that Walmart used proved to be a success and showed with the additional stores that they opened across China, they were no longer isolated to just the southern part of China. 
  • Walmart has the use of information technology which supports its international logistics system. Walmart, for example, can view their inventories by individual products and evaluate how they are performing store-by-store and also country-wide. By hiring and promoting from within, Walmart allows its employees the opportunity to control their own future. The company also offer education reimbursement which shows the employees that Walmart values education.

Strategic Business Analysis, August 2011 Strategic Business Analysis, August 2011 Presentation Transcript

  • WALMART IN CHINA Strategic Business Analysis GB580-02N: Strategic ManagementTeam D: Yvonne Blankenship, Cindy Sterrett, Catherine Tedrick, Lisa Whaley and John Wheeler Kaplan University August 23, 2011
  • Introduction Sam Walton’s U.S. model didn’t fit well in China due to issues with: – Local Protectionism – Infrastructure – Technology – Consumer habits and Chinese culture
  • Walmart in ChinaToday, China has 223 Wal-Mart Super Stores and 5 Sam’s Clubsthroughout the country: [5] [4] [8] [1] [7, 2] [2] [2] [4] [8] [18] [4] [5] [10] [12] [10] [13] [12] [14] [7] [10] [9] [13, 1] [6] [38, 2] [3]
  • Local Protectionism Chinese government restricts expansion of foreign retailers – Limit cities that can have retail stores – Limit number of stores in a city Taxes and fees – Local government keeps percentage of tax revenue – Unregulated toll charges cities’ roads – Inconsistent enforcement of laws
  • Infrastructure Transportation challenges – Infrastructure protects local interests – Difficulty with customs Regional consumption – Regulatory control of retail and agricultural products. Geographical expansion – Initial government restrictions caused Walmart to stay within south China – China’s entry into the WTO in 2001 changes this; however the lift of regulations were not always enforced.
  • Technology Lack of infrastructure support to: – Utilize Walmart’s high-tech merchandise tracking – Have distribution centers within one day drive of stores Walmart stores sprawled across the country – Difficult to communicate with local suppliers – Orders were placed by fax
  • Chinese Culture Chinese prefer to shop daily for fresh foods. – Live animals – More trips with smaller purchases – Very poor use stores as “destination” Labor laws require unions Shoplifting laws not enforced – Consumers AND employees
  • Environmental Audit - Walmart’s Strengths Strong Business Model – Successfully duplicated in Canada, Britain and Mexico Technological Capabilities – Reduces supplier shrinkage and internal costs – Stores order from distribution centers located within one days drive Strong Supply Chain Experience Operating Information of Walmart Stores – Strong negotiations 1970 to 2005 (in Million US$) – Purchasing in large quantities – Localizing supply source Strong Financials – Averages $413/sf store space in U.S. Wang & Farhoomand (2006)
  • Walmart’s External Value Chain Computers, Sy stems, Progra ms Walmart Advertising Stores Agencies WalmartSuppliers online Customers Engineering, C Walmart onstruction Companies Corporate Government Regulation, Re Maximizing Strategic lationships Capabilities
  • Environmental Audit - Walmart’s Weaknesses Political and legal challenges Supply chain and distribution challenges/shrinkage Unpredictable market patterns Aversion to any kind of union
  • Environmental Audit - Walmart’s Opportunities World’s Most Populous Consumer Market Population of 1.3 Billion Improvement in the General Business Atmosphere Non-State Enterprises = 72.6% of Consumer Goods Sold Retail Market Growth in China 1980 to 2003 Wang & Farhoomand (2006)
  • Environmental Audit - Walmart’s Threats Three Chinas – Regional Income Disparity Vast Size in Land and Population Continually Operates in Red Intensifying Competition Local Protectionism Income Disparity Wang & Farhoomand (2006)
  • Strategic Analysis - Competitive Rivalry Walmart made many attempts to enter competition in China during the 1990’s Major Foreign Chain Stores in 2004 Major Competitor’s – Carrefour from France – Lotus from Thailand – Tesco from UK – Metro from Germany Local stores – Regional allegiance – Learn from foreign stores  Technology  Distribution Wang & Farhoomand (2006)
  • Strategic Analysis - Power of Customers American Shopper v. Chinese Shopper – Arrive in cars – Arrive on foot or bikes – Impulse shoppers – Shop with plans – Shop to shop – Visit stores for leisure Severe income disparity – Rural areas tend be low income who only shop for necessities – Mid to upper income live in more urban communities
  • Strategic Analysis - Power of Suppliers Suppliers have regional allegiances and far more bargaining power Multiple suppliers are needed due to regional buying patterns Lack of IT network and developed roads slowed the supply chain process Government regulations don’t allow for local distribution centers
  • Strategic Analysis - New Market Entrant Barriers to entry that Walmart faced were: – Strict Chinese government regulations on competition to protect domestic companies. – China’s strict limitations on where and how many stores could be opened – Local protectionism – China’s underdeveloped infrastructure – both through roadways and technology
  • Product & Technology Development Largest barrier for Walmart entering China was lack of technology and an IT Network – Regulatory ban on use of satellite – No web-based system for contacting their 15,000 suppliers EDLP Level of Product Differentiation Transportation
  • Global Analysis - Home Country Walmart opened its first store in 1962 founded on the principle of discounting Opened stores in small rural towns Every Day Low Prices model Three cardinal beliefs: – Provide great customer service – Show respect for the individual – Strive for excellence
  • Global Analysis - Customer Country Three Chinas Income disparity and 20021population and GDP per capita in China by autonomous region, municipality, and province regional divisions of wealth Three Chinas – Coastal Region has wealthiest citizens; 482 M population – Interior Region has nearly
  • Global Analysis - Competitor Country Walmart biggest competitor in China is Carrefour – Used target marketing – focus on urban areas – Utilizing local suppliers Carrefour and Walmart China Store Map in 2005 Walmart failed to duplicate domestic model Cultural differences Difficult to fully assess Chinese companies – Walmart China Operating Strategy  Local Sourcing  Local Talent Development  Corporate Responsibility Wang & Farhoomand (2006)  Community Involvement
  • Global Analysis - Partner Country Walmart has established itself as a good citizen in China China has been trading partners with Walmart for years Growing economy
  • Global Analysis - Supplier Country In 2001, State Council prohibited local protectionism from interfering in the fair and orderly market system Foreign Constraints on retail operations in China In 2005, Walmart opened up 2 more distribution centers
  • Obstacles to Global Strategy Cultural Influence Strategic Obtaining Positioning Market Information Obstacles toChina’s Overcome Role of LocalPolicies Partners Foreign Company Negotiation Location Process
  • Recommendations Culture IT Infrastructure Corporate Responsibility
  • Recommendations Do we want to use any of this language or should we toss this slide?
  • Conclusion Walmart was able to overcome the following challenges – Government protectionism at the country, province and local level – Chinese government had strict regulations on use of technology Technology restrictions – Satellite usage impaired Walmart used alternative business model
  • Walmart’s Potential Capabilities IT Management Innovation Efficient Potential Inventoryrelationshipswith suppliers Capabilities Control Understand Target Market
  • Walmart in ChinaIn the future, China could have 377 Wal-Mart Super Stores and 15 Sam’sClubs throughout the country: [9,1] [7] [2] [11,1] [2] [4] [11, 2] [3] [2] [3] [3] [10,1] [13,1] [26,1] [2] [11,1] [15] [14] [20] [17,1] [13] [22] [20,2] [23] [15] [16] [21, 1] [10] [47, 2] [5,1]
  • ReferencesWang, I., & Farhoomand, A. (2006). Walmart Stores: "Every Day Low Prices" in China. Hong Kong, China: Asia Case Research Centre, The University of Hong Kong. Still need to add these in
  • ReferencesI’m still working on sources all the photos:S1. Walmart China Employees (2011). Retrieved from www.mingtiandi.com/real-estate/20110401/Walmart-joins-retailer- migration-into-china-real-estate/S2. Sam Walton (2004). Retrieved from www.businessweek.com/magazine/content/04_32/b3895024_mz072.htmS3. City Walmart (2010). Retrieved from www.bnet.com/blog/retail-stores/walmarts-huge-overseas-expansion-distracts-from-its- domestic-saturation-problem/4028S4. Walmart Truck (2010). Retrieved from www.sixthsigma.com/2010/02/walmart-green-supply-chain-will-target.htmS5. Map of China(2011). Retrieved from www.Walmartchina.com/english/walmart/wminchina_map.htmS6. Frogs & Turtles. Retrieved from http://www.hollywoodgrind.com/walmart-items-only-sold-in-china/ on 8/22/11S10. Chinese Associates Union (2010). Retrieved from http://chinadigitaltimes.net/china/labor-unions/S16. Chinese Road, Photographer Andy Yleung. Retrieved from www.flickr.com/photos/30010486@N06/sets/72157622361194363/ on 8/22/11S17. Satellite (2010). Retrieved from http://www.psfk.com/2010/11/monocolumn-china-versus-usa-in-the-satellite-wars.htmlS20. Walmart Stores Retrieved from www.walmart.com on 8/22/11S__. Distribution Center(2002). Retrieved from http://carsdiecasttoys.blogspot.com/2009_02_12_archive.html