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1 Introduction | Strategic Market Planning

Introduction Wal-Mart the global retail giant with sales of USD 285 BN and effective operations across

nine countries with over 5000 stores and over 1.6 million employees worldwide was the

undoubted king of discount retailing. With its retail portfolio comprising discount stores,

supercentres, Sam’s club and neighbourhood markets, consistently healthy net margins of

around 3-4% (from Exhibit 3), revenue CAGR of 12.80% over the last 5 years (from $156

BN to $285BN) and with the confidence of having conquered the US market and having

driven competitors like Kmart & Woolco to bankruptcy, Wal-Mart clearly had its eyes on the

international market, more specifically, the emerging markets.

Situational Analysis: WalMart in China With the opening up of the Chinese Retail Industry in 2005, the retail world had gone into a

tizzy. The world’s most populous state, an emerging middle class with purchasing power and

willingness to spend, no wonder they were salivating. Wal-Mart had additional strategic

interest in it, with over USD 20 BN worth Chinese goods flowing through its inventories

worldwide; a successful Chinese model would have significant cost repercussions. However,

over the past decade since its entry into China, Wal-Mart had lagged behind leading retailers

like Carrefour, and ranked a lowly 20 (from Exhibit 1). It had been driven out of Brazil,

Indian retail market was out of bounds till 2005, and with no operations in Russia, China was

the only BRIC country where Wal-Mart could make its presence felt in the near future. With

a forecasted CAGR of 8-10% translating into a total retail market of US$2.4 trillion by 2020,

Wal-Mart just couldn’t let this opportunity slip.

Key Success Factors (KSFs) in the US Before analysing and dissecting the China strategy in detail, it would be useful to see what

made Wal-Mart the insurmountable mountain it was in the U.S. market. Location, price and

assortment were the top 3 factors consumers treasured (as per Exhibit 5) and Wal-Mart


2 Key Success Factors (KSFs) in the US | Strategic Market Planning

ensured it was always ‘exceeded consumer expectations’, prime focus being price and

quality. Listed below are the major factors which gave Wal-Mart its competitive advantage:

• Entry Strategy: Wal-Mart entered by trying to solve the people’s problem in rural

backwater towns and expanded quickly to saturate small one horse towns. Saturated

regions didn’t face direct competition from big players like Kmart who thought that

<50,000 population towns could not support a retail store. This strategy also meant

reduced costs due to lower land and real estate prices.

• Positioning: All successful firms came into existence because they solved a problem,

Wal-Mart solved two; the second being the customers’ frustrations with timing their

purchases right. ‘Every Day Low Prices’ meant that one didn’t ‘have to wait for a sale to

get their money’s worth’. They simply ‘owned’ the lowest price positioning category.

• Pricing and competitor surveillance: They just didn’t carry the slogan, but implemented

it, crashing prices as soon as they saw a competitor offering any good for a lesser price.

They sold the same merchandize for 20% less (customers saved approximately 15% on

every cart of groceries)

• Supplier Partnerships: Described as a ‘love-hate’ relationship, Wal-Mart improved the

efficiencies of its supplier partners too and carved out long standing deals at unbelievable

prices. Their ‘Roll Back’ philosophy passed on benefit of drop in producers price to

customer adding value.(Case in point being the price of fans dropping from $20 to $10)

• Distribution System: Wal-Mart’s hub and spoke model giving its own fleet of trucks and

99.5% on time delivery record gave it unparalleled economy in distribution. It invested

heavily in its unique ‘cross-docking’ inventory system by which goods were continuously

delivered to stores often without having to inventory them, lowering costs as well as

giving the individual managers more control at the store level. This is the prime reason


3 Key Success Factors (KSFs) in the US | Strategic Market Planning

why they could maximise floor area by not having to stock inventory in their stores itself,

resulting in astonishing sales of US$414/sq. feet compared to US$222/sq. feet for Kmart.

• Assortment: Wal-Mart was a one stop shop for all household needs and facilitated

buying quality goods at affordable prices in bulk.

• Investment in IT: David Glass pioneered the use of technology and Electronic Data

Interchange (EDI). For example, “Wal-Mart built an automated reordering system linking

computers between Procter & Gamble ("P&G") and its stores and distribution centres.

The computer system sent a signal from a store to P&G identifying an item low in stock

which would then sends a resupply order, via satellite, to the nearest P&G factory and

proceed to ship the item to a Wal-Mart distribution centre or directly to the store. A win-

win proposition, it helped P&G can lower its costs and pass some of the savings on to

Wal-Mart. (Thompson & Strickland, 1995, p. 866)”

Wal-Mart’s geographic locations, cost-leadership, assortment & distribution systems, all

played a vital role in Wal-Mart’s success. Though some more important than others, each part

of this giant machine was required to function smoothly. Not only did these sources provide

competitive advantage, but also were inimitable. Why couldn’t competitors like K-Mart copy

their strategies? The devil lies in the details, and a man of such detail was Sam Walton. In

fact, Kmart founder once claimed that Walton "not only copied our concepts, he strengthened

them. Sam just took the ball and ran with it" (Thompson & Strickland, ‘95, p. 859)

• Culture: Each organisation has its unique culture which is not duplicable. This culture,

described as "one part Southern Baptist evangelism, one part University of Arkansas

Razorback teamwork, and one part IBM hardware" has worked to Wal-Mart's advantage

(Saporito, 1994, p. 62), with Sam Walton’s close association with day to day operations

rubbing off on each and every employee. His going in disguise to competitors’ stores is

like the stories told in books.


4 Strategic Model in China – Can it replicate the American Model? | Strategic Market Planning

o Employee culture: Wal-Mart was completely non- unionised with an open doors

policy. It had low turnover and extremely happy employees. Cross training

removed boredom for them, while stock options and profit sharing were

motivating and imbibed self-esteem amongst rank and file workers also.

o Frugality & cost control: Not only was the frugal culture restricted to lower rung

employees, top managers too flew economy class and stayed at budget hotels.

‘Saving was as important as earning’, and everyone abided by this rule.

• Strategy execution: Ideas come ‘a dime a dozen’, and often execution is key. Here is

where Sam Walton excelled, with his speed and perfection, immediate entry and fast

expansion before others could even blink meant that he captured and saturated

underserved markets long before anyone else realised their potential. Thus their locational

strategy became impossible to copy as there was no scope left in those markets.

• Focus on Service: While the stores could have given the consumers the same assortment

of goods, the combination with price and service made Wal-Mart unbeatable. ‘Great

Customer service, respect for individual and striving for excellence’ were the 3 cardinal

principles everyone abided by and rules like the Ten Feet Rule, Sunset rule, etc. meant the

customers had an experience very different from other stores in respect of service.

Strategic Model in China – Can it replicate the American Model? As described earlier, Wal-Mart had not been able to deliver the same results in the Chinese

market. It was thus clear that the Wal-Mart could not create the competitive advantages in

China based on its American Model. Many factors contribute to large scale differences

between the two countries leading to dilution of Wal-Mart’s competitive edge in China:

• Diverse Population and Income Disparity: A look at Exhibit 14 clearly shows the

income disparity in every region, with GDP per capita (US$) ranging from $381 in

Guizhou to $4909 in Shanghai. The rural market in China was not like America, where


5 Strategic Model in China – Can it replicate the American Model? | Strategic Market Planning

the size of population determined the urban/rural status, but was actually lacking in

purchasing power making their rural entry strategy redundant here.

• Local Protectionism: This greatly hampered Wal-Mart as evidenced in the case through

the Shanghai example and made their centralised accounting policy a handicap for them

as each state wanted to get their own share of taxes from Wal-Mart’s profits. The 2001

ruling against local protectionism bodes well for Wal-Mart’s future in China.

• Impossible to reproduce logistics model: China suffered from lack of adequate

infrastructure to reproduce the distribution model which was a key competitive advantage

in the US. Density of land transport was only 157/1000 km compared to 720/1000 in US

and 3138/1000 in Japan and there were high tolls on expressways.

• Regulatory restrictions and bureaucracy: Growth was confined to only 3 stores per

city, and only a few cities in southern China. Government had to approve each branch and

these combined with Wal-Mart’s own ethics of doing business correctly and abiding by

regulations hampered its growth while competitors openly flouted rules. Also the ‘magic

number’ of 120 stores per distribution centre was simply unattainable in this scenario.

• Employees: The same source of strength was a weakness in China where there was the

concept of unionized work force and Wal-Mart’s policies did not go down well.

Management turnover was high and labour officials condemned Wal-Mart for squeezing

suppliers and making workers suffer.

Other important factors like lack of a well developed IT Network and regulatory ban of

satellite usage, Chinese culture of ‘many trips little purchase’, ‘fresh means alive’ mentality

for groceries, and shoplifting (5% compared to 0.3% worldwide) meant that the American

model was clearly unsuited to China and clearly required a rethink.


6 The Chinese Retail Industry | Strategic Market Planning

The Chinese Retail Industry Having understood the differences that exist between the Chinese and American markets, it is

imperative we carry out a macro level analysis of the industry in China before proceeding to

recommending the way ahead for Wal-Mart in China. A look at the Industry forces would

reveal the following:

Thus we can see that that the Chinese industry is an attractive one from the point of view of

the incumbents, the only major drawback being intense competitive rivalry.

External Analysis A look at the political, economic, social, and technological fabric of China would reveal:

• Political: China’s entry to the WTO removed most of the restrictions that retailers were

facing regarding the number, location and size of branches, eliminating barriers for

foreign competitors to compete in China. Those restrictions were among the key reasons

for Wal-Mart’s lagging build up of their China branches and distribution channels that

made it difficult for them to effectively compete using their original competitive

advantages from the US. Going forward we can only see more opening up of the sector.

Suppliers Power : Low-Retailers command huge bargaining power-Switching cost is low for retailers -Many potential suppliers and inputs readily substitutable

Barriers to Entry : High-Economies of scale for existing large firms-Access to distribution channel not easy-Retaliation by existing retailers to newcomer

Buyers Power : Moderate-Buyers Switching cost is low-Price sensitivity is high

Threat of Substitute : Moderate-Low level of differentiation between similar format stores. -Large unorganized sector which operates on a smaller scale and competes against giants.

Rivalry : HighMany competitorsHigh industry growthDifferentiation aspect very subtle

Porter’s Five Forces Analysis of the Chinese Retail Industry

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8 The Road Ahead: Recommendations | Strategic Market Planning

building local supplier contracts, stretching local rules and regulations, and using local

promotion marketing schemes, Walmart was more focused on doing things the American

way. This contributed to the fact that Walmart has been struggling throughout many of the

difficulties described above with the local customer, government and suppliers.

The Road Ahead: Recommendations With the withdrawal of their President Cassian Chueng at this delicate juncture, the strategic

direction for the road ahead for Wal-Mart in China needs careful attention. We can draw the

strategic road map for Wal-Mart as follows:

ProductMarket Investment Strategies • Mergers & Acquisitions: The Chinese Industry as seen above is a highly fragmented one

with a lot of small players. The next natural step in the industry would have to be that of

consolidation and Wal-Mart can use its extensive financial muscle to negotiate good deals

to expand into other cities wherever possible, and pursue organic growth where not.

• New Store Formats: New store formats should be invested in for the Chinese consumer.

‘A bigger number of smaller shops with a more of wet-market feeling might be more to

the local taste than the American style shops.’2

• Invest more in own brands: Own brand sales are much more profitable for retailers, and

in China where Wal-Mart’s cost competencies in the US do not hold, increasing own

brands on shelves will add to profitability and also improve cost efficiencies.

Customer Value Proposition • Emphasis on ‘Quality’: Wal-Mart is known for low prices, and in China where everyone

is going for low prices (often at the expense of quality), Wal-Mart should position itself

as a ‘quality’ retailer where you not only get low prices, but also the best quality.

2 "What’s new with the Chinese consumer”, Ian St-Maurice, Claudia Sussmuth- Dickerhoff and Hsinhsin Tsai, The McKinsey Quarterly, October 2008


9 The Road Ahead: Recommendations | Strategic Market Planning

• Create an experience: We have seen that the Chinese customer is different. They often

treat malls as a source of leisure. It is important to change store formats to create an

‘experience’ along the lines of maybe an IKEA store.

• Image Makeover: Seen as an out and out American brand while a strength in the US, is

obviously a weakness in China. There have been lot of protests against Wal-Mart in

China for it supplier squeezing and anti-unionization policies,3 and adapting to local

culture is imperative for building customer loyalty.

Assets, Competencies and Synergies • New competencies for logistical efficiency: The lack of a well developed infrastructure

means that Wal-Mart will have to rethink its operations. A few options are:

o Asset sharing with companies like Carrefour to negate the 3 store per city rule and

move towards the ‘magic number’ of 120 stores per distribution centre. As China is a

growing market, it would be a win-win situation as it is not a zero sum game.

o Stocking in store: If asset sharing is not feasible, the older model of stocking more in

store for reducing transportation costs might be more viable in China.

• Leveraging local partner: ‘Working together with the local partner to understand where

& how the local regulations can be used or adjusted for Wal-Mart’s success’.4

Finally, at a functional level, Wal-Mart might be better off following a decentralized policy in

China, giving more power to local managers and supplier network as it is a less homogenous

market as compared to the US (“Bringing best practice to China”, The McKinsey Quarterly)

We should keep in mind that as the Chinese economy grows expands; it will ultimately

resemble a developed one in the long run, one where Wal-Mart is unbeatable. The above

strategic & tactical recommendations should ensure a profitable survival till that point.

3 The Walmart you don’t know: http://www.fastcompany.com/magazine/77/walmart.html 4 "Ready for warfare in the aisles – Retailing in China”. The Economist, August 5, 2006

walmart case analysis[1]

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