Assignment 2

Wal-Mart Case Study Assignment

By: Dr. Milena Loubeau

Founded in 1962 by Sam Walton, Wal-Mart has evolved as an industry leader in the retail

industry. Wal-Mart employs approximately 1.6 million workers around the world. At the onset, Wal-

Mart’s main customers were rural customers who live in areas where competitors were not present. As of

fiscal year ending 2005, Wal-Mart reported annual revenue of 285 billion dollar. Wal-Mart’s first

Chinese store opened in 2005. As of 2005, Wal-Mart operates 5,289 stores in nine countries

(Farhoomand, n.d.).

In 1996 Wal-Mart’s management decided it was a lucrative move to penetrate the China market.

However, this expansion has not been without challenges. The purpose of this paper is to summarize the

case study of “Wal-Mart Stores: “Every Day Low Prices” in China. A conclusion will also be drawn to

address why Wal-Mart should withdraw from the Chinese market and why the company has no choice but

to write-off this expensive “experiment”.

Case Summary

Wal-Mart has experienced unprecedented success in opening international stores. However, the

company’s expansion in China has not been without challenges. Wal-Mart’s main competitive strategy in

the U.S. has been opening stores in areas where its competitors have not penetrated or decline to penetrate

because those competitors will only open stores in areas with a population of less than 50,000. For

example, Wal-Mart would open stores in rural areas, which were previously ignored by its competitors.

Wal-Mart focused on opening stores in small town; with a distance of one hour within each store

(Farhoomand).

Another strategy Wal-Mart adopted was its pricing strategy by offering its products at “Every

Day Low Prices”. Such strategy has proven to be very effective for Wal-Mart because it was able to meet

the needs of its customers by delivering on its promise, which was an always low price. Furthermore,

Wal-Mart also “roll-back” prices on other merchandise. Subsequently, Wal-Mart was able to offer its

products to customers by reducing costs by 20% (Farhoomand).

In additional to pricing strategy, culture also played an essential role in Wal-Mart’s success.

Employees were trained to provide superior customer service, show respect to customer, and to strive for

excellence. Those latter mentioned beliefs served as the pillar for Wal-Mart’s success.

Another aspect of the Wal-Mart store’s U.S. model was cost control, which is done by reducing

operating costs. Also, Wal-Mart was successful in negotiating low prices with suppliers, during which

time costs saving is passed on to the customers. Information technology also assisted in reducing costs

because management uses technology to create efficiency in delivering merchandise within one day to

any store location. Technology was also used as a mean to provide management with real time

information about the merchandise needed at a particular location, which in turn transcend into

productivity efficiency. Wal-Mart is known for its ability to promote within and to have had a union free

workforce, with the latter being accounted as one of the cost driver in the retail industry (Farhoomand).

Albeit unprecedented success in the U.S., Wal-Mart met some challenges in China.

The Chinese market presents some challenges for Wal-Mart, which could be listed as follows:

1. Difficulty for foreign firms to increase market share

2. Income disparity between the rural and urban population

3. Local government impose stiff regulations for foreign firms

4. Infrastructure deficiency:

a. High highway costs

b. Transportation regulation

5. Proximity of stores limitation due to government regulation

6. Slow expansion

7. Inadequate distribution channel

8. Lack of Information Technology infrastructure

9. Chinese consumers’ behavior parallel that of the U.S. consumers

a. Low spending

b. Demand higher quality

c. Increased shoplifting

10. Regulatory restrictions

a. Government imposed limitation on proximity of stores

b. Unionized workers

c. Employees loyalty toward the company

After reading the case study, one concluded there are two practical reasons why Wal-Mart should

withdraw from the Chinese market. First, Wal-Mart should close its Chinese’s stores because the U.S.

culture could not be transferred to China, which has been the pillar of the Wal-Mart success. Wal-Mart

has not been successful in duplicating the U.S. culture to China because of cultural differences that exist

among the two countries. For example, there is a large gap between the American and Chinese middle

class. As noted in the case study, “…the growing differences in income were reflected not only in the

extent but also the diversity of consumption patterns” (p. 11). Such large disparity in consumption

patterns makes it difficult if not impossible for Wal-Mart to compete in China as it has been successful in

creating a niche market in the U.S.

Second, governmental regulations favor Chinese businesses over foreign businesses. For

example, Chinese firms receive favorable treatment from local regulatory agencies. As noted in the case,

“out-of-province trucks are arbitrarily stopped at city borders and subjected to tolls that local trucks are

not required to pay” (12). The inequity in treatment put Wal-Mart stores at a competitive disadvantage

when compared to Chinese firms.

Wal-Mart was successful in creating a niche market for U.S. consumers. However, Wal-

Mart experienced unprecedented challenges when it ventured in to the Chinese market. Albeit Wal-Mart

invested tremendous resources to penetrate the Chinese market; however, because of the many challenges

the company has not been able to overcome after several years of operation in China, serve as proof that

Wal-Mart should withdraw operation from the Chinese market. Ignoring the failure and inability to

compete in China and to continue operation in spite of the many failures will prove to be more costly to

the company. Discontinued operation from the Chinese market will prove to be a more lucrative move

and it will be a more cost effective strategy for the long-term growth and success of the company.

Reference

Farhoomand, A. (n.d.). Wal-Mart Stores: “Every Day Low Prices” In China. Asia Case Research Centre.

The University of Hong Kong. 06:297