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Wal-Mart in China Case Study


Introduction

Wal-Mart has undergone remarkable growth through the implementation of the international market expansion strategy. Some of the markets in which the firm has experienced optimal performance include Brazil and Mexico. The international market expansion strategy has increased Wal-Mart’s capacity to generate sales revenue. One of the markets that Wal-Mart has identified critical to its future sustainability includes China.

Statement of the problem

Despite its commitment to global market expansion, Wal-Mart has not succeeded in all its target international markets. One of the markets that have proved challenging to Wal-Mart’s revenue generation strategy includes China. Wal-Mart’s motivation to enter the Chinese market arose from identification of the prevailing market opportunity.

China ranks amongst the fastest growing economies in the Middle East. Successful exploitation of the available market opportunity in China can contribute to remarkable improvement in the company’s long-term sustainability.

Wal-Mart intends to strengthen its market performance in China through the implementation of the ‘every day low price’ strategy. This strategy has remarkably improved Wal-Mart’s performance in other emerging markets such as Brazil and Mexico. However, the strategy has proved ineffective in fostering the firm’s market dominance. The limitation of the strategy in the Chinese market has arisen from the complexity associated with the Chinese retail industry.

One of the core factors that have contributed to the company’s poor performance entails the influence of different market forces such as an increase in the intensity of competition. Despite the firm being in operation in the Chinese market for over a decade, the low pricing strategy has not contributed to significant improvement in the firm’s capacity to generate value for the company.

Purpose of the report

This report entails a strategic case analysis of Wal-Mart’s performance in the Chinese market. The report details a macro-environmental analysis of the prevailing market conditions in China. The macro-environmental analysis is undertaken by employing the PESTLE and SWOT frameworks.

Moreover, the report evaluates the gaps in Wal-Mart’s approach to market segmentation, customer analysis, positioning, and marketing mix strategies. Thus, provides insight on the issues that have contributed to Wal-Mart’s poor performance. The report further provides alternative solutions that the firm should consider in promoting its performance in China.

Analysis

PESTLE Analysis

Wal-Mart’s operation in the international market is subject to different forces emanating from the political, legal, economic, social, and technological environments

Political and legal factors

China has implemented different legal and political policies in improving its attractiveness to foreign investors. One of notable structural changes that the Chinese government has enacted entails relaxing the requirements necessary for foreign companies to establish operations in the country. At the time of its entry into the Chinese market, all foreign companies intending to operate in China were required to partner with local Chinese firms.

This requirement provided the local companies a high stake in the foreign company and hence the level of control. The government has eliminated such restrictive requirements through the establishment of free economic zones. Moreover, foreign companies are provided the right to acquire local Chinese companies. This aspect has provided Wal-Mart an opportunity to implement the market expansion in China.

Despite China’s ranking amongst countries with the highest corruption risk, the Chinese government has put efforts in improving the legal environment. This aspect has led to the creation of an environment conducive for business operations. The legal structures have enabled China to counter malpractices such as corruption and bribery. Wal-Mart was found guilty of failure to adhere to consumer safety by selling products [pork] past their expiry date.

The Chinese government imposed a US$ 572,000 fine and ordered 13 of the firm’s stores be closed at Chongqing (Farhoomand 21). This aspect underlines the Chinese government’s commitment to promoting investor confidence and customer safety. Wal-Mart’s failure to adhere to comply with the legal requirements in the host country might affect its reputation and hence its market performance.

Economic factors

China has undergone remarkable economic transformation since its adoption of the open economic regime. Its economic growth is indicated by the trend in its Gross Domestic Product [GDP] as illustrated by Graph 1 below. The trend in GDP is reminiscent of the increase in the Chinese purchasing power.

Hall and Lieberman emphasise the increase in consumer purchasing power influences the volume of goods that a consumer is capable of purchasing (138). In 2012, the Chinese National Bureau of Statistics projected the retail grocery segment to grow by 11% until 2015. Conversely, the US grocery market segment would grow by only 4.5% (Farhoomand 18). Thus, Wal-Mart may gain remarkable increment in its sales revenue by exploiting this market segment.

China GDP

Source: (“China GDP” par. 1)

Social factors

China’s population of 1.3 billion citizens makes the market attractive to global retailers. The huge population indicate the likelihood of generating high sales revenue. The country’s social structure is changing rapidly due to the country’s economic growth. One of the notable changes relates to growth in the size of middle-class consumers. This category of consumers is progressively inclining towards consumption of high quality and authentic products.

The Chinese middle-class consumers prefer consuming products that contribute to the improvement of their status. Some consumers usually associate high prices with prestige. Ferrell and Hartline support the view that high price contributes to the creation of a feeling of prestige and individuality (43). Since its entry into the Chinese market, Wal-Mart has failed to understand the Chinese consumer behaviour.

Thus, the firm has not been able to adjust its strategies accordingly to be in touch with the local customers. This aspect explains the ineffectiveness of the company’s EDLP strategy in the Chinese market. On the contrary, Sun-Art retail group, a local retail Chinese firm, has attained a relatively high market share compared to Wal-Mart because of its decision to localise its strategy (Farhoomand 18).

Technological factors

The China has implemented an extensive Information Communication Technology [ICT] infrastructure in its quest to promote the development of a knowledge economy. The infrastructure is comprised of different telecommunication networks such as computer and mobile telephone networks. Thus, the rate of internet penetration has been improved substantially. The ICT infrastructure has promoted the rapid growth of e-commerce.

The technological changes have increased usage of different online shopping platforms. However, only about 0.8% of the small and medium enterprises in China have succeeded in establishing valuable e-commerce capabilities (Dahlman and Aubert 201). Wal-Mart has put substantial effort in implementing e-commerce technologies. This aspect has improved the firm’s capacity to reach the technology savvy customers such as the youth. Moreover, e-commerce has improved the firm’s ability to create a unique customer experience.

Competition structure

One of the key approaches that can be used in evaluating the market structure entails the intensity of competition. The intensity of competition provides critical insight on the most appropriate strategy to implement in countering the competitive pressure (Morris, Devlin, and Parkin 137).

The Chinese retail industry is characterised by a high degree of concentration, which has arisen from the presence of different industry players. The attractiveness of the Chinese market to retail firms’ future sustainability has led to the entry of numerous domestic and foreign companies. The country’s total retail sales double every five years (Farhoomand 18).

Moreover, the relaxation of the legal requirements necessary to establish operations in the industry has further led to growth in the intensity of competition. Thus, most retail firms are attracted to exploit the available market opportunity. Wal-Mart faces intense competition from the local and foreign companies operating in China. The core foreign competitors include Carrefour and Tesco. Other competitors include the Taiwanese, Korean and Hong Kong retailers operating in mainland China.

The domestic retailers in China have developed an adequate understanding of the foreign companies’ competitive model. Subsequently, some of the Chinese local retailers have imitated the foreigners’ business model hence limiting the capacity of the retail firms to exploit the market opportunity.

The imitation of strategy has made the local retailers fierce competitors. Ferrell and Hartline affirm that local retailers account for over 90% of the total retail sales in China (28).

Moreover, a substantial number of Chinese retailers have developed economies of scale. The huge size of the Chinese retail sector coupled with a large number of competitors makes presents a challenge in the retailers’ quest to manage and implement a smooth market expansion strategy. Consequently, gaining a huge market share and hence becoming a market leader is a challenge.

SWOT Analysis

Wal-Mart’s performance in the Chinese market can be evaluated based on its strengths, weaknesses, opportunities and threats as illustrated herein.

Strengths
  1. Market entry;Wal-Mart has established a market presence in different locations in China through strategic acquisitions. The firm has established over 370 stores in mainland China.
  2. Store format; the firm has adopted different store formats to attract different customer groups. The store formats have enabled the firm to improve its product portfolio.
Weaknesses
  1. Overreliance on brick-and-mortar store format; the company has over- relied on brick-and-mortar retail stores in as the core format in generating sales revenue. Thus, the firm has not succeeded in exploiting the opportunities associated with the online shopping format compared to retail firms such as Amazon.
  2. Human capital strength; Wal-Mart has experienced a series of voluntary turnover amongst its key personnel charged with the responsibility of overseeing the implementation of the EDLP strategy in China.
  3. Competitive strategy; Wal-Mart’s strategy is not aligned with the customers’ product tastes and preferences.
Opportunities
  1. Change in consumer behaviour-the consumers’ inclination towards high quality and valuable products present an opportunity for Wal-Mart to generate high sales revenue by improving the quality of its product portfolio.
  2. Online marketing-Wal-Mart may improve its marketing capacity across China by improving its e-commerce capabilities. Online shopping will enable the firm to reach the rural areas.
  3. This strategy will further minimise the cost of operation by minimising the establishment of brick-and-mortar retail stores.
Threats
  1. Reputation; the prevalence of issues related to product safety in Wal-Mart’s stores in China might adversely affect the company’s market reputation.
  2. Intense competition;the increase in the intensity of competition in the Chinese retail sector makes it challenging for Wal-Mart to generate and sustain high-profit levels from retail operations in China.

Customer Analysis

Wal-Mart has targeted the Chinese mass market. The firm’s decision to target the mass market is informed by the large Chinese population. Thus, the firm’s customer group is comprised of customers belonging to a different social class and economic status. The integration of mass marketing has enabled Wal-Mart to integrate an extensive product portfolio. However, the change in consumer behaviour has made the concept of mass marketing ineffective in Wal-Mart’s quest to generate high sales revenue.

Market segmentation and positioning

An organisation’s market segmentation and positioning strategy influence its capacity to generate sales revenue by understanding and exploiting the customer needs of a specific customer group (Ferrell and Hartline 45). Wal-Mart has incorporated behavioural market segmentation and positioning approach. The firm has achieved this goal by establishing different store formats that include Discount Compact Hypermarket, Neighbourhood Market, Sam’s Club and Wal-Mart Supercenter.

The supercenter format enables the firm to offer customers an assortment of low-priced products. Thus, it has been able to address the price sensitive customer group. The Sam’s Club format enables Wal-Mart to address the customers’ image enhancement needs by stocking high-quality brands from the local and international market. The firm’s Sam’s Club stores operate as a membership store, which ensures that members are offered hospitable treatment.

The Neighbourhood Market has enabled the firm to target residents in large and prosperous communities in China. Conversely, the firm has succeeded in targeting customers in tier two and three cities. Through this format, the company has been in a position to provide a convenient shopping experience for the low-income consumers.

Marketing mix strategies

  1. Pricing strategy – Wal-Mart marketing activities in China are based on the low-cost strategy. The low pricing strategy is based on the ‘everyday low prices’ model. The firm’s rationale for adopting this strategy is to improve its capacity to access the Chinese mass market.
  2. Product strategy; the firm has integrated an extensive product strategy in its quest to satisfy a large number of customers. This aspect has enabled Wal-Mart to offer customers different product categories.
  3. Promotion strategy; Wal-Mart has adopted integrated marketing communication strategy to create awareness to a large number of customers in China.
  4. Distribution strategy; the firm has established retail outlets in different locations in China. Currently, the firm operates over 370 different retail stores in China. This format has contributed to significant improvement in the firm’s ability to reach the target customers.

Alternative solutions

Despite Wal-Mart’s presence in China for over a decade, the firm has not been able to exploit the available market opportunity successfully. The firm should consider the following options in resolving the problem faced.

Investing in consumer market research

One of the factors that have contributed to Wal-Mart’s failure in implementing the EDLP strategy in China entails the lack of understanding of the Chinese customers’ tastes and preferences. The firm has deployed the EDLP strategy in a market that is increasingly being characterised by a rapid change in consumer behaviour.

To deal with this challenge, the firm should invest in an extensive market research. One of the benefits of investing in consumer market research is that the firm will be in a position to understand the consumers’ buying patterns. The consumer market research will enable the firm to adjust its marketing strategies such as pricing, promotion and product strategy.

Despite the benefit of market research, Wal-Mart will be required to review and adjust its strategies regularly to align with the changing market conditions. Thus, conducting a market research on the target mass market might be an expensive undertaking to the firm.

Investing in e-commerce

Despite the fact that China has established an extensive ICT infrastructure, Wal-Mart has not been able to exploit the opportunities associated with e-commerce. To develop competitiveness, Wal-Mart should consider improving its investment in e-commerce. This approach will minimise the firm’s overreliance on brick-and-mortar retail stores.

The integration of an effective e-commerce platform will enable Wal-Mart to reach a large number of Chinese customers. Moreover, e-commerce will play a critical role in Wal-Mart’s quest to develop a strong relationship with customers and suppliers. However, the effectiveness of the firm’s e-commerce platforms might be hindered by risks such as technological changes and cyber security challenges.

Retuning the strategic positioning strategy

Wal-Mart should consider adjusting its positioning strategy by investing in the concept of differentiation. Therefore, the firm should not over-emphasise on low pricing strategy considering that the growth of a large middle-class population in China has made most Chinese consumers insensitive to price.

On the contrary, Chinese consumers are inclined towards consumption of luxurious products that contribute to improvement in their personality and social status. The limitation of the product differentiation strategy is that the firm might incur a significant cost due to the rapid change in consumer tastes.

Investing in eco-friendly products and promotion of consumer safety

Wal-Mart has been accused of engaging in unethical business practices such as selling expired products. This aspect has led to a significant damage to the company’s reputation. The firm should consider restoring its image by investing in ethical business practices such as offering customers safe products and investing in eco-friendly products.

However, implementing this strategy will require the firm to pressure its suppliers to ensure that they adhere to ethical production practices, which is a challenging task considering that China is considered as one of the leading countries regarding the production of counterfeit products. Thus, the firm might not successfully implement this alternative.

Recommendations

Based on the above alternatives, the firm should consider implementing the following options.

  1. Investing in customer market research – this option will enable the organisation to offer products that are aligned with the customers’ tastes and preferences. Moreover, consumer market research will provide Wal-Mart insight on how to localise its products hence aligning with the Chinese culture.
  2. Product differentiation; the firm should invest in extensive product differentiation. This approach will contribute to remarkable improvement in the firm’s capacity to address the product needs of different customer groups. Product differentiation will enable the firm to adjust its pricing strategy successfully by integrating premium pricing. Thus, the firm will succeed in communicating the value and quality of its products.
  3. E-commerce; Wal-Mart should invest in secure online shopping platforms in its quest to reach the entire Chinese market. This move will improve Wal-Mart’s marketing capability in the rural areas. However, the firm should ensure that the online shopping platforms are secure.

Works Cited

2015. Web.

Dahlman, Carl, and Jean Aubert. China and the knowledge economy; seizing the 21st century, Washington, DC: World Bank, 2011. Print.

Farhoomand, Ali. Wal-Mart in China, Hong Kong: Asia Case Research Centre, 2012. Print.

Ferrell, Charles, and Michael Hartline. Marketing strategy, Mason: Thompson South-Western, 2008. Print.

Hall, Robert, and Marc Lieberman. Economics; principles and applications, Mason: Thompson South-Western Learning, 2008. Print.

Morris, Stephen, Nancy Devlin, and David Parkin. Economic analysis in healthcare, Chichester: Wiley, 2007. Print.

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