Why Wal-Mart, Bharti Split in India, Case Study Example

Wal-Mart’s globalization strategy over the last two decades has been met with both successes and failures and one of the major lessons from Wal-Mart’s experiences is that location characteristics do matter. Wal-Mart’s successes usually occurred when its entry and competitive strategies were well aligned with local characteristics or fulfilled a largely unmet need of local customers. Wal-Mart entered Mexico through a joint venture with the country’s leading domestic retailer Cifra which was a wise move in most aspects. First of all, Cifra had an established track record in Mexico and, thus, knew the local characteristics extremely well which benefitted Wal-Mart. Second, Mexico doesn’t have as high per capita income as its North American neighbors, thus, Wal-Mart’s low price strategy was extremely suited to price-sensitive Mexican customers. Wal-Mart’s entry into Canada was also successful despite acquisition strategy but local characteristics were suited to it. First of all, Canada’s market characteristics are quite similar to the U.S. Second, Wal-Mart retained the managers and employees at Woolco stores it acquired which allowed it to benefit from local knowledge, just like a joint venture.

Wal-Mart was successful in Central America despite acquisition strategy because it responded to local customers’ shopping lifestyles by allowing stores to retain their local identity instead of turning them into superstore format. The company’s success in UK was also due to strategy that was quite similar to Mexico though Wal-Mart went for outright acquisition in UK unlike Mexico. In both cases, Wal-Mart acquired companies with already established market position who understood and served their customers well.

But the stark differences among international markets also mean Wal-Mart was bound to have certain missteps. Wal-Mart was largely a failure in Brazil where it failed to customize product selection to cater to local tastes. Similarly, it also didn’t study the local market characteristics well which, among other thing, emphasize occasional sales and discount strategies instead of year-round low price strategy. The company’s failure in Argentina was due to one major factor that it chose the wrong market to enter. Argentina’s local characteristics were ill-suited to Wal-Mart’s management style and competitive strategies. For example, the supplier networks were unreliable due to frequent supplier boycotts and small-store concept was dominant as opposed to hypermarkets. In addition, Carrefour had a strong position in already very small hypermarket retail sector. Some of the same factors also gave trouble to Wal-Mart in China but Chinese entry could be justified on the basis of long term prospects due to the massive size of Chinese market.

Wal-Mart entered some market through acquisitions and some markets through greenfield investments. But Wal-Mart’s experiences clearly demonstrate that acquisition strategy yield far superior results as compared to greenfield investments because international markets often vary in local characteristics not only among themselves but also as compared to the U.S. One of the markets where greenfield investment was pursued is Brazil. The company’s early missteps in Brazil such as offering merchandise not suited to local tastes reflect the fact that it is important to understand local markets before targeting them. The company also pursued greenfield investment in Argentina but again failed because it tried to impose supermarket format on customers that had other preferences. In addition to customers, it also entered the market with poor understanding of other stakeholders such as suppliers. On the other hands, company’s acquisition strategies have been met with success to a greater degree than greenfield investments. In the case of Mexico and UK, the company acquired local players with already market leading positions. In the case of Canada, it retained most of the workforce, thus, benefitting from their local knowledge. Canada was also a success due to its quite similar local characteristics to the U.S. In short, acquisitions are superior to greenfield investments because they offer several benefits. First of all, the acquired company already has local knowledge and some local awareness which means the company can get to business at a quicker pace. Second, acquisition may provide access to superior assets such as locations and locations are one of the most valuable assets in retail business. Third, acquired companies may offer valuable lessons as to what works and what doesn’t which enables the new owner to avoid costly mistakes.

India has not worked out well for Wal-Mart so far as evident by the fact that Wal-Mart and Bharti Enterprises have already terminated their partnership (NDTV, 2013). But going to India was still the right thing to do because no country comes close to matching China’s location characteristics than India. First of all, both China and India have over one billion people. Second, both countries have been enjoying record economic growth rates for quite some time and both have growing middle income class which usually forms the most attractive market for any international company seeking economies of scale. Both India and China are also characterized by a large number of mom-and-pop shops. Thus, Wal-Mart went to India to with a long-term vision just as it did in China and it is reasonable to assume the company didn’t expect immediate success even before it had entered the Indian market. Customers’ preferences and shopping habits do not change overnight but a major company like Wal-Mart cannot wait for the right market conditions because doing so will allow the competition to establish themselves which will make future entry only more challenging. Wal-Mart’s entry should be seen as an effort to build brand awareness because the company’s future growth prospects primarily lie in international markets. There is a reason why even the stock price reflects the future growth prospects in international markets even though most of the revenue is still generated in home market.

As far as joint venture as a mode of entry is concerned, it was the right choice though it was not entirely voluntary. Like China, Indian Government requires an international retailer to find a local partner who should own at least 49 percent of the stake. Thus, this choice was also shaped by local political and legal realities. But, nonetheless, Wal-Mart should still have chosen this mode of entry even if it were allowed to choose greenfield investment path. Indian market is quite different from the U.S. and local market characteristics do not align with Wal-Mart’s competitive strategy. In addition, Bharti Enterprises is a major Indian company with deep pockets (NDTV, 2013) and local knowledge of the retail sector which allowed Wal-Mart to limit its risk exposure. Wal-Mart’s Indian operations have not been quite positive so far but the long-term rewards may easily exceed the short-term setbacks as India improves regulatory environment for international investors, improves its infrastructure, and clamps down on corruption and inefficient bureaucracy in the public sector.

In my opinion, joint venture is the best way to enter a new market, especially when international markets’ characteristics are quite different from home market’s characteristics. As far as acquisition is concerned, it may come at a premium price compared to greenfield investment. Second, acquired companies are usually those who were struggling and, thus, may not a have a positive reputations and bad reputation is not always easy to turn around. Location characteristics that may influence the company to go for acquisition are crowded market which cannot afford more players due to factors such as thin profit margins. Acquisition may also be influenced by the new owner to learn more about the local market as some retain management and employees, even if to a certain degree. As far as greenfield investment is concerned, it may expose the company to huge risks, especially in markets that are quite different from home market. Greenfield investment may be cheaper than acquisition but it may be challenging to acquire attractive assets such as real estate. Location characteristics that may influence a company’s decision to pursue greenfield investment include an infant market with few market players and cost if it may be quite cheaper to develop your own assets and establish operations.

Joint venture may be influenced by the company desire to pool risks with a local player who understands the market. The companies with limited financial resources may also be attracted to joint ventures since it requires few resources than outright acquisitions and greenfield investments. Another benefit of joint ventures is that it helps avoid costly mistakes that may even force the company to exit a market as happened to Wal-Mart in Germany and South Korea. Location characteristics that influence the company’s decision to opt for joint venture include quite different market structures, political and legal factors that, among other things, do not allow solo operations, and high operating risks due to factors such as threat of nationalization, widespread corruption, and political instability.

Firm’s characteristics that affect which mode of entry a company chooses include attitudes towards risk, competitive strategy, and resources. For example, a company with limited resources is less likely to pursue acquisitions and may be even greenfield investments. Similarly, those with preference for low risks may be more likely to choose joint ventures. Industry characteristics that may influence the mode of entry include industry structure, competitive and operating strategies of industry players, barriers to entry, and industry concentration. A highly concentrated industry may make acquisition more suitable strategy. Similarly, low barriers to entry may increase the probability of an organization opting for greenfield investment, especially if an organization has huge resources and doesn’t want to share potential rewards with a potential local partner.

Reference

NDTV. (2013, October 9). Why Wal-Mart, Bharti split in India. Retrieved November 15, 2014. Web.