Walmart Inc.

Introduction

Wal-Mart Stores, Inc. (Wal-Mart) was incorporated in 1969. The company operates retail stores in different formats around the world. The company operates under a pricing philosophy known as Everyday Low Prices (EDLP). Wal-Mart is organized into three segments: the Wal-Mart International, the Wal-Mart US, and the Sam’s Club. The international segment comprises of the company’s operations in 26 countries. The company also operates online retail platforms.

Wal-Mart operates wholly-owned subsidiaries in Mexico, Japan, China, and Argentina. The same case applies to 5 Central American and 12 African countries. The company has adopted the joint-venture approach in India. In the US, the Wal-Mart operates retail stores in every state. The main areas of specialization include grocery, apparel and home, entertainment, health, and wellness. Store formats vary though the main ones include discount stores, neighborhood markets, and supercenters.

In 1962, the first Wal-Mart store was opened by Sam Walton, the company’s founder, in Arkansas. By 1967, the Walton family had established 24 stores. During the 1970s, Wal-Mart went national. During the 1980s, annuals sales for the company reached $1 billion. By the early 1990s, Wal-Mart had grown to become America’s top retailer. It also intensified efforts to venture into the international market. In 2002, the retail store, for the first time, held the top position in the Fortune 500 list. In 2009, the company reported annual sales of over $400 billion. In 2010, Wal-Mart opened its first retail in India through a joint venture that led to the establishment of Bharti Wal-Mart. Since the mid-2000s, the company has been toying with the idea of venturing into the Russian market. Currently, the retail store continues with its search for business opportunities in  Russia. The host country under analysis in this report is Russia.

The retail industry is characterized by sale of a wide range of merchandize for personal and household use. This means that a wide market coverage targeting people from all walks of life is necessary. Moreover, retailers offering lower prices easily gain competitive advantage. Competition is normally high since few barriers to entry both locally and internationally exist. There is also a tendency for retailers to establish retail chains across the country and around the world. Numerous business opportunities exist through mergers, acquisitions, and joint ventures.

This business plan is divided into four sections. The first one is retail market analysis, which focuses on global-country-industry analysis. The second section is Wal-Mart’s competencies, whereby a company-specific analysis is presented. The business plan uses OLI theory, OL-advantages, resource based view, and dynamic capability to expound on company-specific analysis. Thirdly, the business plan analyzes Wal-Mart’s mode of entry. In this section, focus is on country-company strategic alignment, which is analyzed using Dunning’s OLI eclectic paradigm. The last section examines the company’s operational strategies. Specifically, aspects of company’s strategy-structure integration are examined. The Integration-Responsiveness Framework is used to develop Wal-Mart’s internalization plan. In the conclusion part, the risk management plan is summarized, its feasibility is evaluated, and a contingent exit plan suggested. The main sources of information for this report include the Wal-Mart website, annual company reports, company newsletters, government databases, reputable online news outlets, and scholarly sources.

Market analysis 25% (global-country-industry analysis)

The Russian market is very attractive for Wal-Mart. In 2012, Russia had a population of 143.5 million. This high population makes the country a desired destination for a multinational retail store like Wal-Mart. It is not surprising, therefore, that Wal-Mart has continued to express interest in the Russian market since 2002. As years went by, this interest continued to intensify. Today, all indications are that Wal-Mart’s decade-long search for business opportunities will finally come to fruition soon with the company’s eventual entry into the Russian market.

Country-specific incentives/restrictions

One of the most commonly used approaches in market analysis is the OLI (Ownership, Location, and Internalization)paradigm. In the OLI paradigm, companies are expected to follow a three-tiered approach in determining the benefits that they stand to derive from their pursuit of direct foreign investment. The three components include ownership advantages, location advantages, and internalization advantages. A good example of product/company-specific advantage is comparative advantage. Location-specific advantages are derived whenever a company gains strategic positioning through operations in a foreign country. In terms of market internalization, emphasis is on the ability by a company to exploit the actual opportunities available in the foreign country as opposed to those opportunities that are only accessible through agreements with foreign firms.

Of the three elements of the OLI paradigm, location advantages ought to be emphasized on. This is because Wal-Mart is set to derive the greatest benefits from location advantages by setting up shop in Russia. Russia is one of the largest as well as populous countries in the world. By venturing into Russia, the company will have access to many resources, including labour and raw materials, which are readily accessible from different parts of the country. This means that Wal-Mart will get new opportunities of creating value.

The Russian market is highly attractive for foreign retail chains. There are many retail chains that Wal-Mart can choose from in its efforts to select an ideal mode of entry. Some of these stores include Lenta, Kopeika, and Karusel. It is worth pointing out that these retail chains operate in a vibrant economy. In 2012, the Russia’s GDP grew by 3.4 percent.  However, this growth marked a slight slowdown given that the country had reported GDP growth of 4.3 percent in 2011. Nevertheless, many positive changes continue to take place in the Russian economy, all of which represent positive indicators for foreign retail-industry investors.

In the Russian market, many country- and industry-specific incentives exist with regard to FDI, foreign ownership, as well as domestic industry structure. Similarly, a number of restrictions exist as well. The Foreign Investment Law of 1991 continues to provide a major incentive for foreign investors. One of its stated objectives is to provide national treatment to foreign investors. Other aims include protecting the rights of investors, freedom from commitment to use local goods, freedom to employ any personnel regardless of any considerations on nationality, and an efficient dispute resolution mechanism in the form of international arbitration.

In terms of FDI, it is unfortunate that limited incentives for competition exist in the country. The main barriers to FDI include barriers to trade, administrative barriers, and weak creditor rights. These barriers continue to exist because the pre-World War II era policy paradigm for FDI continues to govern the country. In this paradigm, the role of FDI is restricted to access to new inputs for production on the one hand and access to new markets for outputs on the other. This approach to FDI, although beneficial, restricts operations to exploitation of natural resources and cheap labor as well as protection of local markets. Evidently, it leaves out the need to maintain world standards in terms of price and quality. Russia also maintains high tariffs as well as non-tariff protection strategies aimed at ensuring continued vibrancy of the domestic market. Foreign investors are subjected to tax preferences. Moreover, “national rights” are yet to be granted to foreign investors. Furthermore, foreign investors continue to be subjected to complex registration procedures.

Industry-specific incentives/restrictions

The Russian retail industry is faced with a number of restrictions. To start with, the risk of corruption and bribery in Russian is high. Furthermore, the brick-and-mortar connection makes the retail industry highly restrictive to foreign investors. Major real-estate acquisitions are a major requirement for foreign retail chains venturing into the country. The construction process is also cumbersome because of strict laws, corruption, and a complex tax regime. During operations, government inspections pose a major risk because of the hefty penalties imposed because of non-compliance. Today’s complex web of the Russian legal code is difficult for foreign retail-industry investors to navigate, meaning that cases of non-compliance will inevitably arise. Other restrictions arise in aspects of gifts and gratuities, selling activities, and logistics.

Gifts and gratuities are permitted in the Russian culture. However, the line dividing gifts from bribery is very thin. During selling activities, certain government officials with financial interest in the retail sector may have the power to drive third-party partners either to or away from the business. In terms of logistics, Russia imposed new tariffs on imported goods in 2009. From the point of view of comparative advantage, this translated into average tariff rates that are significantly higher than in the European Union. This situation is normally exacerbated by unreasonable custom delays. The move towards higher tariffs on agricultural imports may also be understood from the point of view of the strategic trade theory. In this regard, Russia seems to be promoting the notion of imperfect competition.

Assess feasibility of market demands, agglomeration & location bound resources and infrastructure network

In terms of feasibility of market demand, the main hindrance is no doubt the notoriously difficult Russian business environment. Whereas the demand may be there, factors beyond the control of Wal-Mart mainly in the form of legal and political barriers may impact negatively on overall business outcomes. Against the backdrop of these challenges, Wal-Mart has in the past attempted to push for negotiations with X5 Retail Group, a Russian food retailer.

Wal-Mart may need to assess the dynamics of agglomeration occasioned by Russia’s rapid urbanization. Within Russia, there is a tendency for competing retail firms to establish outlets in the most populous cities with a view to benefit from agglomeration advantages. However, if competition for inputs among domestic and foreign retail chains in Russia continues to increase, the potential benefits of agglomeration economies may diminish. The best option is for Wal-Mart to ascertain that there is abundance of location-bound resources and a well developed infrastructure network that can facilitate the realization of agglomeration economies in the long run.

Push-Pull motivations for internationalization and give reasons for your business expansion

The main push motivation for Wal-Mart is the continued reduction in market share in its US (home market) segment. This has compelled the retail chain to embark on an aggressive internationalization strategy. In contrast, the main pull motivation is the Russian expansive market of 143.5 million people. As the Russian economy continues to grow, the purchasing power of its people continues to increase. This view is supported by the theory of national competitive advantage. The bottom line is that Wal-Mart envisages a situation where the company is likely to incur low transaction costs in Russia using the entry mode of acquisition. In this undertaking, Wal-Mart’s internationalization strategists count on the company’s success in countries with cultural practices that are radically different from those of the US, for example, India, China, Argentina, and Japan.

Company’s Competencies (20%): company-specific analysis

Wal-Mart has numerous ownership advantages to exploit particularly with regard to its mode of entry into the Russian market. Ownership advantages are simply the resources that a firm can comfortably transfer across its national borders to enable it gain competitive advantage in a foreign country (Peng & Meyer 2009). The main ownership advantage is that Wal-Mart is already an established multinational enterprise. It has an established, world-renowned trademark, retailing philosophy, and organizational structure. These advantages can enable the company overcome the liabilities association with competition in the Russian retail market.

On the other hand, internationalization advantages refer to those advantages that exist in the context of the multinational firm itself as opposed to those that take the form of market transactions (Peng & Meyer 2009). Wal-Mart has succeeded in establishing stores in different parts of the world, thus giving it unique leverage in efforts to organize a specific mode of entry internally.

 

Wal-Mart possesses numerous specific advantages of entering into a foreign market. First, its EDLP philosophy is unique. Secondly, it has already succeeded in penetrating foreign countries, including Argentina, Mexico, China, India, and Japan. The resource-based view creates an excellent platform for an analysis of Wal-Mart’s unique advantages. The point of view is based on the notion that performance is fundamentally driven by the specific resources of the firm. Both capabilities and primary resources are regarded as essential drivers of business success. One of Wal-Mart’s primary resources is its human resources. The company has employed some 2.2 million associates (employees) around the world. The company also takes pride in its exemplary performance since its establishment. The company started trading publicly in stock in 1970. By 1980, Wal-Mart had employed some 21,000 associates. In September 2013, the company announced that it would hire 55,000 seasonal employees during the holiday season and confirm thousands of others to full-time positions.

During the second quarter of 2013, the net sales of Wal-Mart International grew by 2.9 percent to reach $33 billion. The company’s consolidated operating income grew by 1.4 percent during the last year to reach $6.8 billion. The company remitted some $3.4 billion to shareholders through share repurchases and dividends. This exemplary performance demonstrates the company’s dynamic capability as far as its entry into the Russian market is concerned. This potential financial capability puts the company in a position where it can successfully enter into the Russian market using the acquisition strategy.

Mode of Entry (15%) country-company strategic alignment

The best mode of entry for Wal-Mart is acquisition. The company should aim at purchasing a retail chain that has been successful or has a huge potential for success in the Russian retail market. This will enable Wal-Mart benefit from ownership, location, and internalization advantages. Indeed, this option is the best one when viewed in the context of Dunning’s OLI eclectic paradigm.

The acquisition mode of entry is appropriate for various reasons. To start with, it fits in with the need for caution in Wal-Mart’s efforts to enter into the Russian market, especially given the country’s notoriety for posing numerous difficulties for foreign businesses. Moreover, this strategy will enable the company adopt a more ambitious approach. During the last decade, Wal-Mart has not succeeded in maintaining a delicate balance between caution and ambition. The company has been so cautious that it has failed to break into the country’s retail market.

Another reason why acquisition is the right entry mode is that so far, Wal-Mart has achieved tremendous success through acquisitions. The company’s international business is worth $100 billion today. This approach is not unique to Wal-Mart; it has been used by successful peers such as Tesco and Carrefour. The mode fits in with the company’s business model and core competencies. This is evident in Wal-Mart’s strong in high-population countries such as Brazil and China. These high-population markets also happen to be highly fragmented, a feature that gives Wal-Mart numerous opportunities for the acquisition of smaller, regional chains. This method has already been proven to work well in the U.K. and Chile. Furthermore, acquisitions are not prone to the legal and political barriers that exist in countries such as Russia. This internationalization process is also advantageous because the short-term barriers are outweighed by long-term opportunities for foreign retail chains like Wal-Mart. Lastly, by conquering Russia, Wal-Mart would have acquired an excellent springboard into the neighboring Ukrainian market.

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