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Walmart and North American Free Trade Agreement Case Study

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Updated: Jun 26th, 2021

Walmart’s Success and NAFTA

Walmart’s initial strategy and competitive advantage helped the company gain immense success because of the orientation at very low prices, thus creating a unique value proposition. Due to the extensive efforts to diversify and enter new markets through branching out into smaller stores, Walmart got access to new suppliers and destinations. Its strong system of distribution that allowed for an enhanced reduction of expenses subsequently helped the company to set lower prices compared to competitors.

However, without the North American Free Trade Agreement (NAFTA), Walmart did not present a threat to the largest retailers in Mexico such as Soriana, Gigante, and Comerci. This meant that prior to signing the agreement, the company’s message of “Everyday low prices” was impossible to fulfill. Also, there had been a high level of uncertainty when it comes to the demanded products, which meant that Walmart offered its customers in Mexico a poor selection of goods. As the NAFTA had gone into force, the improvement in the private and public infrastructure allowed Walmart to become more efficient in its distribution and become as successful as in Europe and the US. With the increase in the number of manufacturing plants in Mexico, Walmart could collaborate with local suppliers without the need for setting high prices.

Because of the already strong strategy of low pricing, Walmart managed to beat its competitors that were forced to lower their prices but were unable to do so in many instances. The negotiating power that the company had was so strong that it allowed to get better deals compared to rivals. Therefore, it is likely that a company that did not have such leverage that Walmart had could achieve success with NAFTA’s help.

Recommendations to Compete with Walmart

As revealed from the case study, Mexico’s largest retailers such as Comerci did not have enough resources to compete with Walmart, a foreign corporation. There were multiple reasons for this. First, the existing strategy oriented at low prices was a large advantage. Second, the majority of Mexican retailers approached their pricing on goods differently, using the “high and low” strategy – putting some products on sales or deep discount instead of allowing for all prices to get lower (Scilly). Third, Walmart had to be very inventive when optimizing its operations in Mexico. For instance, the company signed free trade agreements with several companies in Central America and established a multi-dimensional approach to operations for addressing a variety of consumer segments.

Therefore, to compete against Walmart in Mexico, its rivals such as Comerci should reconsider their approach and offer customers lower prices altogether by avoiding extreme sales of some products while maintaining high prices for others. Also, there is a need for working on their negotiating power since it is the greatest strength that Walmart has exhibited. Being well-integrated into the Mexican market, Commerci and other companies should look into collaborating with native suppliers and work on their inventory levels through introducing innovative information systems. This can positively influence the reduction of costs and allow them to lower prices, subsequently attracting more customers to the stores. The example of Walmart’s central distribution system has shown that information systems could play a defining role in strengthening the competitive advantage and reducing costs.

NAFTA’s Advantages for Suppliers

NAFTA proved to be extremely beneficial for enhancing the performance of suppliers with which Walmart collaborated. The free trade zone made it possible for suppliers to build plants in Mexico while also being able to ship their products to Canada and the United States. As another advantage, Walmart could buy goods made in Mexico without paying high tariffs on imports. For example, when the Chinese manufacturer of electronics, Hisense, built a plant in Mexico, it could ship its products under the brand of Sharp to multiple locations, including Walmart stores. The low labor costs inherent to the Mexican market along with the increased access to a variety of retailers made it possible for suppliers strengthen their competitiveness and become more successful. In contrast to China, where labor costs are high, Mexico was a more attractive market due to its proximity to NAFTA. As shown in the case of Walmart’s success in the region, the production of Hisense electronics was successful and resulted in the better integration of the supplier in the unique conditions of the market.

NAFTA showed to help suppliers gain the trust of their clients while also becoming more efficient in accessing the materials of better quality, thus enhancing the competition (Flammer). With the improved power of suppliers comes the wider variety of items that retailers can sell at their stores. Wider price ranges also allow shops to set low prices, therefore increasing the purchasing power. In the context of Mexico, NAFTA was the force that helped the country achieve economic growth while avoiding high rates of inflation.

Why Free Trade Agreements are More Beneficial than Customs Unions

As a unique trade agreement, NAFTA laid the foundation for the economic growth through the cooperation of Canada, Mexico, and the United States (“NAFTA”). Since 1994, when the Agreement was signed officially, the free trade environment has brought significant benefits to the mentioned economies overall as well as delivered tangible results to the families of workers, farmers, manufacturers, and consumers. In contrast to the free trade area, customs unions represent trade blocs made up of a free trade area that has the same tariffs on goods that come outside the union (Bloom). For example, Turkey is a customs union member with the EU, but the deal does not cover a large variety of products such as agricultural goods or food.

Walmart benefited from NAFTA being a free trade area because it allowed the company to maintain a common corporate culture that suppliers in the region shared (Moreton). With the signing of the agreement, the retailer was able to select suppliers with the lowest prices while its rivals continued buying them from local distributors that set high prices (Daniels et al. 233). If NAFTA were a customs union, Walmart would be unable to pick and choose the most affordable prices thus offering clients the best deals possible.

Another reason for NAFTA’s contribution to the success of Walmart in Mexico was the fact that the company had varied sales in different countries. However, with the introduction of the free trade agreement, the company flourished in its operations through establishing strong partnerships. In addition to this, the Agreement that relied on free trade was more beneficial for Walmart because of the company’s strong competitive advantage of a unique distribution system and bargaining power. If NAFTA was a customs union, it is unlikely that Walmart could have used its full competitive potential.

Works Cited

Bloom, Jonty. BBC News. 2017, Web.

Daniels, John, et al. International Business: Environments and Operations. 14th ed., Pearson, 2013.

Flammer, Caroline. HBS. 2013, Web.

Moreton, Bethany. Harvard University Press Blog. 2016, Web.

NAFTA Now, Web.

Scilly, M. Small Business, 2018, Web.

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