Introduction
Walmart’s success in Mexico can be attributed to its competitive cost-reduction strategy. The implementation of NAFTA helped to solve most of the problems that Walmart was facing. Part of the success comes from the new manufacturing companies that established in Mexico. The production of goods in Mexico reduced Walmart’s reliance on imports.
Improved infrastructure played a role in enhancing the effectiveness of the firm’s logistics system. Walmart faces reduced growth in the U.S. market, and varied success in the international markets. There is a culture clash between subsidiaries’ managers and the group’s executives. The firm can use local brands to enter new markets. There is a greater opportunity if Walmart can exploit the unmet needs in the emerging markets.
Analysis
The implementation of NAFTA helped to solve most of the problems that Walmart was facing (Daniles, Radebaught and Sulivan 365). Walmart is known as a low price retailer. Without NAFTA, Walmart was finding it hard to maintain low prices. A tariff rate of 10% made it difficult to compete with local firms (Daniles, Radebaught and Sulivan 365). It shows that Walmart relied on imports, before the formation of NAFTA.
Walmart’s success can be attributed to NAFTA, which is based on imported goods. Part of the success comes from the new manufacturing companies. As a result of the new manufacturing companies, Walmart does not need to import some of the products. The tariff rate is 3% in the post-NAFTA era (Daniles, Radebaught and Sulivan 365).
Walmart can obtain the goods at a free-tariff rate if they are manufactured in Mexico. The manufacture of goods in Mexico helped Walmart to avoid imports. Freight costs and tariffs are eliminated as a result of local production. NAFTA helped to reduce the cost of imported goods.
Part of the success comes from improved infrastructure. Better infrastructure has helped Walmart to solve the logistical problems that it encountered when it entered Mexico (Daniles, Radebaught and Sulivan 364). The firm was finding trouble to use its experience in logistics because Mexico lacked supportive infrastructure. The Mexican government and the private sector have been involved in improving infrastructure.
Any American firm would have encountered similar logistical problems. Walmart’s central distribution centers have reduced part of the problem. The distribution centers provide a central location, which reduces the overall distance that goods need to be transported. It can be noted that Walmart’s competitive strategy provides its ability to succeed.
Walmart has continuously reduced prices as part of its competitive strategy (Daniles, Radebaught and Sulivan 364). Walmart relies on low prices to capture a larger market share. The ability to negotiate with suppliers for lower prices is Walmart’s competitive strategy. Walmart captured a large market share through acquisitions, which gave it a higher bargaining power over suppliers.
Competitors collaborated to have a similar advantage. However, they are disappointed by Walmart’s continuous reduction of product prices. Walmart’s success in competitive pricing can be attributed to its strategy to gain a large market share, and collaborate with suppliers. Another American retailer would not have succeeded with a different strategy. Walmart’s strategy in reducing costs gave it a competitive advantage.
Comerci and Soriana have combined their purchases to gain a higher bargaining power over suppliers (Daniles, Radebaught and Sulivan 365). Walmart’s main strategy is to reduce costs by working closely with suppliers. Comerci and Soriana are forced to combine their purchases because they have lost their market share.
Comerci and Soriana need a continuous improvement strategy to reduce cost. The firms need internal controls to reduce costs continually. If they can continually reduce costs, they will be able to match Walmart’s competitiveness.
Walmart’s strategy in Mexico and Central America is to focus on cost reduction, and an efficient logistics system. The effectiveness of the logistics system has been used to support suppliers, and the distribution network (Daniles, Radebaught and Sulivan 364). Walmart segmentation makes it easier to target specific demographic groups.
Bilateral agreements have reduced the tariff rates of imports from 49 countries (Daniles, Radebaught and Sulivan 365). Walmart has gained a wider range of option in countries from which it can import goods. NAFTA reduced tariff rates in North America making it easier for the firm to import product from the U.S. into Mexico.
Geographical proximity has an impact on free trade agreements as it can be seen in the NAFTA agreement. It has an impact on the cost of freight. It affects the speed at which goods may be imported. When countries are located close together, goods take less time on board.
Some of the challenges the firm may face as it expands include culture clashes, logistical problems, intense rivalry from local brands, and misunderstanding consumer preferences in different countries. Intense rivalry emerges when competitors copy Walmart’s pricing strategy. Misunderstanding consumer demand comes from entering new markets. Logistical problems are attributed to poor infrastructure, and different trends in new markets.
Alternatives
Enter new markets using local brands, and then convert to Walmart after some time (BDC par. 4)
Walmart used the same approach in Mexico (Daniles, Radebaught and Sulivan 363). It can work in markets where people are loyal to local brands. The firm may also use local brands permanently.
Advantages
- The firm can capture a large market share rapidly because it is able to benefit from the local brand.
- It provides time to win local brand loyalists, before changing to Walmart.
- It provides time learn and integrate new cultures.
Disadvantages
- It may build the local brands instead of promoting Walmart as a brand.
- It may be necessary to have separate marketing programs to capture different brands, which may increase marketing costs.
Find markets for products that can be made locally as new products
Eyring, Johnson and Nair (par. 5) suggest that the best way to succeed in the emerging markets is to find unmet needs, and develop products to meet the needs.
The firm can seek to find out why some products are not very successful, and find ways of increasing the attractiveness of the products. Eyring, Johnson and Nair (par. 3) discuss that multinationals fail to succeed in emerging economies because most of them think that reducing costs is the only formula to succeed.
Advantages
- New products in new markets have a potential for rapid growth in revenues.
- Customers in emerging markets have a tendency of trying new products (BDC par. 3).
Disadvantages
- New products may need a lot of marketing to create awareness.
- New products may turn into slow moving stock.
- New products may need importation, which increases cost.
Walmart can succeed by targeting the largest social class in a country
Eyring, Johnson and Nair (par. 5) explain that when a company targets high-income earners in emerging economies, they may not be very successful. The reason is that high-income earners do not form a large part of the population in emerging economies.
Advantages
- Middle-income earners are increasing in emerging markets.
- Revenues rely on the sale of basic commodities, which can get support from middle-income earners.
Disadvantages
- The largest social class may have a low purchasing power, especially in emerging markets.
- The major difference between high-income earners and middle-income earners may be in the purchase of durables. Middle-income earners may purchase less of durable products than high-income earners.
Walmart needs to update its automatic logistics system to recognize products with a high percentage of discounts, which they would not want to be reordered
Advantage
- It will prevent reordering of products that do not maximize profits.
Disadvantages
- It will be costly to regularly update the programmed system to match emerging needs.
- It will need verbal communication between managers of units, executives, and developers of the program.
One of the ways of managing culture diversity is by managing the flow of information
Nataatmadia and Dyson (581) discuss that knowledge sharing can applied down-upwards within an organization to improve multicultural understanding. Nataatmadia and Dyson (582) support written communication as opposed to verbal communication for communities where English is learnt in the classroom rather than from practice.
Advantages
- Written communication creates time for better statements and understanding between members.
- Written communication gives time to non-native English speakers to understand the subject.
- Managers can learn new things about the people’s culture.
Disadvantages
- Written communication may require support software such as intranet or internet.
- It involves additional cost.
- Written communication may reduce openness, which is necessary for sharing knowledge.
The Arkansas executive can allow managers in individual countries to create their own organizational culture provided that they meet the firm’s objectives
The organization can have only the core parts of its organizational culture standardized.
Advantage
- The subsidiaries can meet the organization’s goals without having a culture clash between managers and employees.
Disadvantages
- Walmart’s organizational culture may be lost when each subsidiary is identified with a different organization culture.
- It may difficult to transfer the same success Walmart has in the U.S. to other countries if managers cannot adapt to Walmart’s organizational culture.
Conclusion
Walmart has the alternative to manage by objectives, and allow subsidiaries to form their own organizational cultures. Sharing knowledge can be used to reduce culture clashes between managers.
Walmart continuously reduces prices, which may prevent competitors from catching up with its low price strategy. Competitive pricing may not always be successful. Exploiting the unmet needs is a formula that may work best in emerging markets.
Recommendations
The firm can enter new markets using local brands. Acquisitions are a good penetration strategy in new markets with strong local brands.
Television advertisement provides a better coverage, but is very expensive. In the U.S., in 2011, it was about $110,000 on average for a 30-second ad (Crupi par. 1). They can be used in the early stages, before the firm reverts to other methods of advertisement. Later, the firm can scrap out advertisement costs, which can be used to lower the cost of products.
Works Cited
BDC. Doing Business in Emerging Markets. 2010. Web.
Crupi, Anthony. In Their Prime: Broadcast Spot Costs Soar. 2011. Web.
Daniles, John, Lee Radebaught and Daniel Sulivan. International Business. 14th ed. 2011. Upper Saddle River, NJ: Pearson Education. Print.
Eyring, Matthew, Mark Johnson and Hari Nair. New Business Models in Emerging Markets. 2011. Web.
Nataatmadia, Indrawati and Laurel Dyson. “Managing the Modern Workforce: Cultural Diversity and Its Implications.” Proceedings of the 2005 Information Resources Management Association International Conference. San Diego. (2005): 580-584. IRMA. Web.