Example Of Wal-Mart At New International Location- Report
Selecting structure and mode of operations
Report (text excluding title page, references and figures) 2095
Theories of internationalization, such as OLI theory, Uppsala model and network theory, were explained in Course Work 1 with special reference to Wal-Mart and its foray into international markets. Joint venture route was recommended as the entry mode, as it ensures link with the existing business partner in the target market, reduces risks and provides competitive advantage. Exporting goods to target countries was suggested as another way of capturing global market share. When a multi-national corporation (MNC) like Wal-Mart enters a new market it brings along with it a legacy of learning from markets where it ventured earlier, whether it is a success (Canada & Mexico) or failure (Germany and South Korea). This learning from one’s own retail overseas operations contributes to the success of subsequent international ventures (Palmer & Quinn, 2005). Another subtle recommendation in the first course work to limit the number of target markets and focus on existing ones in up-grading and value-addition. Based on the strategies formulated in Course Work 1, this Report would focus on identifying suitable organizational structure for those strategies.
Linkage between organizational strategy and structure
The need for consistency and congruence across organizational elements remained the focus of many studies (Chandler, 1962; Ghoshal & Westney, 1993; Miles & Snow, 1994). According to Sengul (2001) a firm’s strategy and its structure have a reciprocal relationship. A firm’s strategic goals should be in line with its organizational structure, failing which desired results cannot be achieved in spite of capital, talent and resources being adequately available in the firm. Organization structure of firms opening up in international markets should match not only the firm’s strategy, but also culture, nature of markets, consumer behavior and local competitors.
New target market for internationalization- Entry through JV route
This study looks at entry of Wal-Mart into an emerging market in South Asia. The retail market in the country is fragmented with more of unorganized retail spread across the country. Mall culture has just started and few players have established malls in metro cities. Wal-Mart strategic group perceives a good opportunity and enters this country through joint venture (JV) mode and based on its experience in Latin American markets, it chooses 60:40 equity partnership, so that the controlling stake is retained with the parent company. JV was chosen over the Wholly-owned-subsidiary (WOS) model, as WOS worked out to be too expensive, risky and there was high degree of uncertainty about political and economic scenario, bureaucratic hurdles and prolonged legal system for resolving disputes.
Transnational strategy and Combination structure for the new market
In order to gain efficiency, flexibility and local responsiveness, it is suggested that Wal-Mart should adopt transnational strategy (put forth by Bartlett & Ghoshal, 2000). This model rests on the foundation of ‘capability-based’ and ‘asset-based’ frameworks and is a complex configuration of ‘assets’ and ‘capabilities’ which are plenty in Wal-Mart as well as the target market. By adopting this strategy multiple objectives can be achieved by Wal-Mart, mainly, achieving location- and experience-curve economies, local responsiveness and transfer of knowledge from other countries, between different divisions within the country and between headquarters and divisions scattered world-wide. Wal-Mart as well as the newly formed JV., through transnational strategy, can make their operations highly flexible by standardizing where feasible and adapting where practical and appropriate. To implement transnational strategy, a combination/hybrid structure (Fig. 1) is used, which draws from both the world-wide geographic area structure and the world-wide product divisional structure.
The global matrix structure, which is suitable for implementing transnational strategy, will help Wal-Mart in minimizing the limitations of ‘world-wide area structure’ and ‘world-wide product divisional structure’. Geographical areas are grouped continent-wise, while products are grouped under Strategic Business Units, to leverage scale of manufacturing or sourcing and sales volume. Some functions, such as strategy formulation, pricing, long-term planning as well as some resources (not available or scarce in the local market) are centralized, while others like short-term planning, seasonal discounts and packaging (for example, small one-time use packs of shampoo, tea, instant coffee or spices) are decentralized. Thus the new JV firm has a fairly independent network of specialized units. Subsidiaries in the target market play the role of ‘strategic centers’ for products like handicrafts, jute and coir products, and readymade garments. In some products which are available locally, the JV firm plays the role of a ‘transnational cost leader’ while for electronic items and game consoles and miniature devices, the JV is a ‘transnational differentiator’ (Heather, 2009). This typology is mapped as 7 and 8 in the top right-hand cell of the structural matrix as shown in Fig. 2. According to Heather (2009), it is possible to have firm strategies that incorporate both cost and responsiveness pressures, but allow one element to dominate the other. He further expounds that a transnational differentiator configuration allows for firms with differentiated and adapted products to focus more on integrated operations to achieve cost advantages, while a transnational cost leader may focus more on services for its low-cost standardized products.
Integration between various SBUs is multi-pronged, involving formal and informal, with more emphasis on informal through knowledge networks to capture and disseminate huge amount of tacit knowledge available in all SBUs within the country and world-wide locations.
Legend: Configurations: 1- Regional Cost Leader; 2- Regional Differentiator;
3- Multi-Domestic Cost Leader (adapted products); 4- Multi-Domestic Differentiator (adapted products); 5- Global Cost Leader (standardized products); 6- Global Differentiator (standardized differentiated products); 7- Transnational Cost Leader;
8- Transnational Differentiator
Managing the Process of Internationalization
Delliotte (2012) perceive consumption as a socio-cultural process as well as an economic interaction. Their report emphasizes the need [for Wal-Mart or any retailer venturing into new local markets] to understand the demographic characteristics of the population, such as age, income, family size and structure. Global companies need to pay attention to local culture and traditions, tastes, preferences and shopping habits, which differ from country to country and even in different parts of the same country. The proposed location has a diversified culture. Hence, Wal-Mart has undertaken a thorough market research involving reputed firms for capturing consumer-related factors for starting the joint venture.
The 60:40 JV entity gives Wal-Mart the controlling stake. Once the JV partner was identified and the company registered in the target country, Wal-Mart sends the transition team to acquaint the JV partner company with the practices followed in sourcing, pricing and export-import and redoing the store layout, in-bound and out-bound logistics. Development costs and risks are shared with the local partner. Local partner brings in his/her knowledge of local markets, competitors, culture, language, political system, bureaucracy and corporate affairs.
Product sourcing for the new entity plans to have a combination of (i) importing products from global suppliers; (ii) products manufactured in the target country by MNCs such as Procter & Gamble, Nestle, Unilever; and (iii) products from local markets. Localization in the product-mix is initially planned to be 60 per cent. Imports to the extent of 40 per cent are in the segment of special and high-status electronic and consumer goods, which are preferred by brand-conscious consumers.
Running operations at new location: Retail space is leased, instead of out-right purchase in the new country. Handicrafts and Food retailing division will be based locally, while fashion apparel and cosmetics are based overseas to take advantage of scale of operations and sourcing contracts. Trade-off between cost structure and governance, as well as the need for localized autonomy and decision making is weighed carefully with the JV partner and local managers. Currah and Wrigley (2004) attribute better performance of global retailers in local networks to the inter-firm alliances that gives distinctive advantage in bargaining power with governmental agencies and suppliers.
Exports, Imports, Logistics and Supply Chain
In order to offer products at lowest price and right time, it is necessary for Wal-Mart to reduce product cost and lead times. Products sourced or manufactured at a centralized location and exported to other country markets, will be advantageous in the sense that scale economies are leveraged from global sales volumes. Similarly, handicrafts, tea and spices are imported from the new entity and exported to other countries where Wal-Mart has its operations. Continuous replenishment system of inventory is followed in the JV which utilizes technology (RFID) and ERP systems.
Compared with the traditional warehousing strategy, Cross-docking logistics (CDL) ensures zero inventories, thus reducing distribution costs, accelerating distribution and good turnover (Belle, Valckenaers & Cattrysse, 2012). Multi country destination Cross-docking distribution centers (DC) are proposed to be established by Wal-Mart to avoid cargo entering destination bonded warehouses for re-export (www.DAMCO.COM). Tax-free warehouse located in Panama serves as the cross-dock DC, at which multi-destination and multi-product container arrives from Central America as well as Asian countries, for sorting and export to final destination countries. This considerably reduces cost (of re-export) and lead time (up to 8 days) and better container utilization.
Spoke-and-hub system of transportation, which is successfully implemented in many similar projects, is suggested for the new location. Orders for products are placed centrally, in order to gain huge discounts for bulk orders and achieve cost advantages (Wei Song & YanjiMa, 2006), products are received at a central warehouse and later transported to individual outlets.
Trade-off between Local Responsiveness and Cost Efficiency
Fit between strategy and structure
For the new international entity of Wal-Mart, trans-national strategy is adopted, while the structure chosen is of Global matrix (combined/hybrid) structure. Under this structure, decision-making is balanced with certain functions centralized and certain others decentralized. Geographical areas are broadly sub-divided into continents or huge markets, while products are grouped under SBUs.
For Wal-Mart’s foray into a new international location, entry strategy of joint venture and export of certain products was formulated in Course work 1. In continuation of that, this Report, deals with the selection of structure, suitable for the transnational strategy – a hybrid structure with geographical headquarters, as well as Strategic Business Units. Executives working in the new country units are answerable to the SBU Head and Asia Head. A blend of centralization and decentralization is proposed based on availability of products, level of localization and standardization. Further, because of wide basket of products being sold in the new entity, product differentiation and cost differentiation, where applicable are preferred for this entity. Since there is a huge cultural difference between this country and the headquarters, gradual knowledge transfer over long term is proposed. One of the recommendations given in first course work about restricting the number of target markets is echoed by Marcel Corstjens & Rajiv Lal (2012) who categorically say that the number of countries in which a retailer operates should never be a proxy for its international success. Instead of planting flags in all corners of the world, retailers, according to them should focus on a limited set of opportunities where they are most likely to be successful in generating operations of scale. Learning from its failures in South Korea, Wal-Mart should match its global strategy with structure of the firm in the new joint venture while taking into account the soft aspects, such as culture, consumer behavior, traditions and local priorities.
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