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‘Always Low Prices’: Wal-Mart’s internationalisation strategy

In Management, Marketing, Real Estate on January 17, 2013 at 1:19 pm


1)       Is Wal-Mart a multinational enterprise? Why?

Wal-Mart may be considered a multinational enterprise because it has operations in nations other than the country it is headquartered in. Wal-Mart is based in Arkansas and holds an 8% share of the US market. While it operates under the Wal-Mart name in the 50 states and Puerto Rico, the MNE conducts businesses under 55 different names across 15 countries. It appears in Mexico as Walmex, Asda in the UK and India as Best Price.

An MNE is defined by the geographic spread of its business, not by its international success. Wal-Mart has become the world’s biggest company in terms of sales revenues through the success of its scale strategy in the Americas, Britain and China. However, this formula failed to advance the firm in Germany and South Korea.

2)       Why is Wal-Mart making foreign direct investments in Europe?

Foreign direct investments are equity funds invested in other nations by MNEs. These companies will then have control of foreign affiliates, providing access to markets, economic unions, technological and managerial knowledge and labour pools. Wal-Mart has directly invested in Europe since the turn of the twenty first century, with the purchase of Interspar and Wertkauf. Wal-Mart continues to invest to increase its sale revenues, especially since experiencing a slump domestically. As of 2011, the international unit generated over $109 billion in revenues, accounting for roughly 26% of total sales.

European operations protect the MNE from fluctuations in the value of the US dollar, by generating earnings in other currencies. This is an essential consideration for a company which makes a lot of purchases overseas. Wal-Mart has also learnt to conduct business differently, adding valuable expertise and talent to future expansion into developing economies. For example, Asda has succeeded as much through its long-term relationships with suppliers as its low-cost strategy.

3)       Using Porter’s model, what are the determinants of Wal-Mart’s competitive advantages?

Wal-Mart is a very American enterprise. The profitability of its domestic retail stores drove its international expansion and continues to be its most profitable operation. The determinants of Wal-Mart’s success can be categorised, according to Porter’s model, into factor conditions, demand conditions, related and supportive industries and environmental conditions.

Factor conditions include the inexpensive land and wealthy suburbs which enabled Wal-Mart to set up massive retail centres with expansive parking. This complemented the MNE’s scale strategy, used to drive down prices. This condition also accounts for Wal-Mart’s success in decentralising control over its domestic retail operations. As well as providing a large pool of unskilled workers, the US’s entrepreneurial culture has encouraged the development of managers capable of independently running stores. This aspect of Wal-Mart enabled the business to respond to the 2010 Haiti earthquake.

The US government prizes consumption as a key economic and social activity and rewards business which provide mass-produced and durable goods by maintaining low minimum wages. This should be considered an environmental condition linked with the demand conditions which determined the success of Wal-Mart’s ‘always low prices’ formula.

Despite criticism from community and consumer groups who fear the homogenisation of America’s consumer goods and neighbourhoods, the firm’s unparalleled price tags have proven too powerful a lure to the citizens of the United States. Objections have also been raised because of Wal-Mart’s dependence on imports from low-cost countries, such as China. The import of billions of dollars’ worth of goods reduces the importance of domestic supportive industries. However, these have made the suburbs in which Wal-Mart’s retail centres are established more attractive to visit.

4)       Is Wal-Mart’s competitiveness in Europe dependent on the same determinants listed in question 3? Why?

Wal-Mart has had to diverge from its North American strategy to be competitive in Europe. European retailers still rely on the economies of scale to be successful, but do so within a local context marked by relatively high wages and price of retail estate development. European retailers are dependent on local suppliers. This environment favours firms which have been long-established. The importance of relationships with supporting industries means Wal-Mart has competed by merging with established European firms, such as Asda in the UK.