A case study of the International Division at Wal-Mart
Wal-Mart is the largest retail chain store in the United States and the largest enterprise in the whole world going to its size and amount of sales made. Wal-Mart International division seconds the US operations units with net sales of about $135.2 billion at the close of the day in the year 2012. The international division has more than 800,000 associates who control the global power and influence (Jimenez, 2012, par. 2). The NYTimes describe the Wal-Mart’s revenue as equivalent to the revenue of combined six retail chain stores. In the fiscal year ending 2013, the company boasted about 140 million shoppers weekly with a rolling net sales worth $279 billion of sales recorded (Walmart Stores, Inc, 2014, par. 4). The U.S. division recorded the highest sales margins with a total of 58.8% of the net sales cumulatively in all retail stores across the various states in the United States. Wal-Mart International division recorded a 29% in the same period while Sam’s Club recorded 12.2 % of the total sales (NYTimes, 2014, par. 6). Walmart International division has set bases in about 30 countries with different modes of operation (NYTimes, 2014, par. 5). Wal-Mart operating retail stores, grocery stores, clubs, discounts warehouses and general merchandise stores.
The company is unique from its worthy competitors due to its ‘every-day-low-price’ strategy that makes it a darling of many consumers. It is divided into sections stationed in the US, Sam’s Club and the International Segment of Wal-Mart. The company sells a mixture of products from electronic items to all sorts of clothing, sports and fitness tools, groceries, accessories and other assorted items. According to Bremer, Eiddlin and Candaele (2006, p. 6), the revenue recorded per year is higher compared to the GDP of most developing countries. A consumer analysis conducted by Fortune ranked Wal-Mart as the second largest chain outlet in the whole world based on its balance sheet of $469.2 billion as revenue (Hayes, 2013, p. 48).
History of Wal-Mart
The retail store was founded in the year 1962 by Sam Walton who along with his brother Bud operated a retail store in Arkansas before they combined their efforts to operate the Wal-Mart that was originally the used franchise of Ben Franklin. The entrepreneur Sam Walton used a model that was so unique from the other entrepreneurs in terms of cultural sensitivity and expansion from the rural areas of operation. Walton began by opening a number of stores Arkansas. However, he later made an expansion to regions such as Oklahoma and Missouri in the year 1968 (Brenner, Eidlin and Candaele, 2006, p. 15).
The retail stores continued to expand and increased in its output up to the year 1972 when Walton listed it on the New York stock exchange (Lorea, 2009, p. 30). The Walton group as well introduced Sam’s Club warehouse retail store. That gave room for other expansions across the states of Iowa, Indiana, and Nebraska in the year 1983. The net sales attained in the year 1980s was about $25.8 billion sales spread over 1,500 stores under the stewardship of 271,000 human resource personnel. However, the sales declined by the year 1992 due to the demise of the founders Wal-Mart and his brother who died three years later (Brenner, Eidlin and Candaele, 2006, par. 7).
In its expansion, it became the largest retail store outlet in the United States. This led to the expansion to Canada where Wal-Mart acquired 122 Woolco stores and reinforced them by constructing three other stores in Argentina and Brazil in the year 1995. In the year 1994, the retail chain stores penetrate to China, Germany in the year 1997. Later on in the year 1998, the company entered Korea through a joint venture. After that, the expansion grew to the UK where it acquired the ASDA grocery. After that, it grew to Japan where the company acquired some stake in Seiyu and subsequently increased its stakes from 36% to 67 % by the year 2007 (Brenner, Eidlin and Candaele, 2006, p. 25).
The international division at Wal-Mart, under the stewardship of Cheesewright, is facing so many challenges in terms of profitability and the lawsuit cases from its former employees. Wal-Mart is in consideration to reduce its expansion to key local markets especially the underperforming retail stores in the emerging markets of countries such as China and Germany. The company has faced serious allegations of bribery especially in its entry to Mexico market where it is being accused of corruption to be favored during the acquisition of permits.
Objective of the Case Study
The objective of this case study is to review the peculiar situations that the international division in which Wal-Mart is operating. This will be made possible through an analysis of the company’s internal and external environment. Analysis of the case study will also look into Wal-Mart’s challenges of foreign exchange approaches for multi-national corporations, its mode of entry into international markets, multi-cultural and ethical issues that are related to the company and stiff competition the company is facing from other global players.
Analysis of the potential of the business performance at Wal-Mart
This analysis is going to use the PEST analysis method to identify Wal-Mart’s business size, political, growth, economics culture, and the market trends. Politically, the management of Wal-Mart has to a large extent influenced the political field through their generous contributions to the state and charitable events. The Walton family has been known to be supporting the Republican Party candidates from their massive income sources (UFCW, 2013, par. 12). Therefore, it is expected that their support for the Republican candidacy will most likely impact on sales margins and the balance sheet as well. The issues that the company finds difficult to control in foreign and local retail environments include; terrorism and other political instabilities that affect its operation. The implication is that, if the company faces such challenges in the course of its operation in foreign countries, then its decline in the market share will affect its sales and profitability (Alden and Buckley, 2014, par 7).
Economically, the purchasing power of Wal-Mart is pegged on the global economic conditions. These economic conditions are dynamic and can affect the company’s performance financially and in a negative way. The issues which affect global economic conditions in major world economies e.g. the United States such as the cost of fuel, energy production cost, interest rates, levels of inflation, rates of unemployment and the general economic slowdown have an effect on destabilizing the equilibrium forces of the Wal-Mart products.
Socially, due to the social influence of the people, many who prefer shopping at the Wal-Mart international division do so because of the one stop shop for all their needs (Nyakreal, 2013, p. 50). Technologically, the company was able to go digital with a satellite network in the year 1987 that enabled the interconnection between Wal-Mart stores and clubs through video link, audio and data communication (Brenner, Eidlin and Candaele, 2006, p. 14). This has enabled the company to attain more competitive advantage over other companies in terms of supply chain, management of logistics, and marketing and selling of its products to a larger market share (Manjoo, 2012, p. 45).
Wal-Mart’s Foreign Exchange Strategies
In order for multinational companies to conduct trade across the international borders, they have to face specific foreign risks. These forces most multinationals to come up with foreign exchange strategies to enable them maintain a steady supply and demand for their global products and services. The foreign exchange strategies are aimed at restructuring, building brand new stores and expanding into other territories. It is also aimed at purchasing products at cheaper prices, hiring local human resource and remunerating them in their local currencies as well as maintaining its profit margins while in the foreign markets.
For Wal-Mart retail store to fix the currency exchange rates for its products in some foreign markets such as China, it employed certain foreign exchange strategies to enable it buy contracts with its suppliers. This will serve to maintain its cost of products and profit margins with the net impact of shielding itself from the fluctuations of the dollar (Carpenter and Dunung, 2011, par. 2). In order for the company to manage some of the foreign exchange risks, the company has managed to employ swaps in currency and investment hedging that is aimed at reducing the impacts of the foreign exchange influx. The year 2012 saw an accumulated swap of up to $313 million a decrease from the previous year’s $471 net worth of swaps. Further to this, the company faced $67 million exchange gains in the year 2012 and $74 million exchange losses in the year 2011. The company’s foreign exchange in Japanese Yen resulted in the losses of $ 533 million in the year 2011. However, in the year 2012, there was a gain of $ 328 due to the 10% fluctuation of the US Dollar against the Japanese Yen (Wal-Mart Annual Report, 2012, p. 66).
SWOT analysis of the international division at Wal-Mart
Level of technology in use
Large scale operations
International presence operations
Variety of products
Low cost leader
Frequency of lawsuits
High employee turnover ratio
Increased online shopping transactions
Acceptance of brand products internationally
Health eating advocacy
Growing tendency in retail marketing internationally
Increased competition from other companies that embrace technology
Resistance from the foreign local
Increasing price of label products
Wal-Mart being the largest retailer in the world has enabled it to exercise its strong purchasing power hence reducing the price of its commodities. The impact of this strength is the increased economies of scale that results in reduced prices to the advantage of its consumers. On the other hand, the company embraces technology in its information systems that have enabled it to cut costs through real-time tracking of orders, stock taking, sales and marketing. This has resulted in an all effective control and management of logistics and supply chains. Product differentiation has enabled the company to attract more customers because they can access products and services in one roof (Yglesias, 2013, p.34). The lower cost of its label products as compared to its competitors has enabled the company to attain the higher economies of scale due to high numbers of consumers at its retail stores. Moreover, its international presence has reduced its overreliance in the local US stores. This has significantly resulted in a faster growth in the volume of sales as opposed to the volume of sales in the local market (Yglesias, 2013, p. 45).
The international division at Wal-Mart has in the late past experienced a high frequency of lawsuits that are associated with its labour policy that has cost the company a huge outlay of money to hire lawyers. The international division has been associated with complaints of poor working conditions by its workers, low wages in relation to the magnitude of work they do unpaid leave and gender discrimination among other issues. This has significantly destroyed its corporate image and hence has led to a high employee turnover. The company has in the past faced negative publicity due to its practices that has received a lot of public scrutiny in the past. The practices range from claims of bribery, poor working conditions and treatment of its workforce and foreign corruption (Business Standard 2013, par. 5).
The company has experienced a lot of opportunities in the past that has resulted in exponential growth in the emerging markets. This has presented the company division with opportunities to increase its revenues. The international division includes operations in Germany, Mexico, Brazil, China and Indian markets where there is need to increase and sustain future growth. Moreover, the company has seen a rising acceptance of its label products in the foreign markets. This implies that Wal-Mart has a better opportunity to increase its number of the number of private label products sold at its stores and earn higher profit margins (Walmart 2013, par. 8).
The company’s retail stores have witnessed an increased demand for the healthier foodstuff that has translated into a higher demand for fresh grocery produce. This simply means that the company can harness the opportunity to increase its revenue from the sale of grocery products. The increase in the online consumer transactions saw the increase in revenue as from the year 2011 that realized $197 billion. This presented unrivalled opportunity for the company to extend further its brand online presence in the retail market so as to increase its market share. This will also serve to save the costs related to hiring of employees (Walmart 2013, par. 6).
Stiff competition from other companies that have embraced online technology like Target, and Amazon are threatening the market share of Wal-Mart. There is a possibility of an increase in the level of competition despite the fact that it offers its label products at low prices that present a real threat to the market share of Wal-Mart. Besides, the increased negative publicity of the Wal-Mart superstores has forced the international division to close shop or change its strategy in the foreign markets (Yglesias, 2013, p. 13).
Wal-Mart’s managerial implications
At the time when Wal-Mart embarked on its international expansion plans, the international division was the centre of focus aimed at handling all its operations abroad. After the implementation of this plan, challenges began to emanate because managers who were heading the various retail divisions abroad had to operate in a rigid environment. They ha to get permission from the headquarters before they made any operational strategies. The implication of this situation was that managers were faced with a lot of bureaucracies in terms of the slow decision-making process from managers who once operated in the local market. After the realization that the strategy was hurting its operations, the management began to restructure this approach that led to the acquisition of the ASDA supermarket chain base in Britain.
As part of the solution to this problem, the company should give the local management great responsibilities of ensuring that they can acquire merchandise and run operations without undue restrictions. In this case, the local managers know how much risk they are likely to take and thus enable them to assess the market trends. In addition to this, the management of Wal-Mart must come to the realization of the importance of the employees as crucial assets in choosing where to expand its operations. There is needed a lot of research on the market trends to enable the company learn from its competitors. The research should also focus on the consumer trends to enable the company to be sensitive to their needs. After the research has done its recommendations, then the company should then enter the market organically to introduce new stores or acquire already established ones. The areas of operation should then target the middle-income earners who have been associated with driving the economy.
As part of its strategy, the company should consider localization so as to counter the competition for the market share. The company has to counter the causes and consequences accruing from its performance ambiguities in the international markets. To counter the performance ambiguities, the company has to take time and analyse their causes and the opportunities that the new design might present to enable the company perform well. An effort to move from an over-reliance on output control measures and other bureaucratic methods to an environment that require formally and informally integrated mechanisms will help the company solve some of its problems. While the response of Wal-Mart towards reducing bureaucracy has not been viable, there is a need for the decentralization of inputs at the headquarters of Wal-Mart’s international division so as to be in harmony with its national operations. Therefore, having an international division is not the best structure for managing the operations of the giant retail store.
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