Background
Founder Sam Walton established the company in the year 1962 and since then the exponential growth and expansion of the company has garnered the establishment goodwill, reputation along with challenges in the route to become the leading retailer in the world. The organisation is a market leader in the retail industry; it is a multinational organisation that is headquartered in United States. The vision of the company is to provide high quality products at a reasonable and discounted price. The company runs a chain of large discount department stores, grocery stores as well as hypermarkets and a chain of warehouse stores on a global basis. The revenue earned by the company in the financial year 2016 is 485.9 billion USD. Walmart has established as a highly profitable business which is focused around low-cost strategy with the help of logistical efficiencies to gain a competitive advantage in the market (walmart.com 2017). The president and CEO of Walmart China is Dirk Van den Berghe.
There are four segments in which Walmart operates in: the US segment, the international segment Discount Compact Hypermarket (DCH) and the Sam’s club segment. In these segments the areas of operation are: grocery, health & wellness, entertainment, apparel & home. Apart from the bricks and mortar stores around the world to keep up with the dynamics of the changing business environment the company has also included e-commerce as a part of the operation (Greenspan 2016).
The company is has always been on the lookout to offer the customers premium quality products at a reasonable price the objectives of the company are as follows:
The issue that is going to be discussed in this study is related to the management issues faced by in the company in the current scenario in China. It deals with the challenges faced in order to combat the competitive market of china and tough business environment. The company has opened several stores in several cities around the country but the issue is that its share of China’s supermarket sales is constantly decreasing. In the past decade China has been regarded as one of the most difficult markets. The rate of sales income is far lower than the increasing rate of sales revenue and hence the gross profit tends of the retail market is showing continuous decline (Watch and Vail 2015).
The strategy of the company has always been to produce low cost so as to offer the consumers in a discounted price gaining a scope of competitive pricing. Over the years the growth policies of the company has worked on the favors and have helped the organisation build a market leading empire. Walmart also recognized the opportunity in the Asian market and has expended in China. The size of the population of the potential target market of China is lucrative for Walmart. But the current scenario is a little tricky for the position the company is in today (fortune.com 2017).
Figure: Number of stores in China
Source: (corporate.walmart.com 2017)
The following PESTEL Analysis will help to determine and understand the business environment of China and what are the challenges faced by the western companies that are operating in China. The changes in the business environment impact the operation of a business in a large way. The internal business environments are under the control of the company where as the external business environment are not under the control of the company and hence it is important to strategies and be ready to combat the changes in the external environment from beforehand (Watch and Vail 2015).
Political: China is a politically stable country that has its foundations defined and proper guidelines laid for international trade. The company has opened the market for internal business in 1979 and this was worked in the favor of both the country and the companies. The conflict situation in between China and the US has also reduced in the past decade facilitating international trade even further. However, the issue that has been faced by the company is that there are certain pockets of market in the country which faces issue with instability. For example the territorial conflict that China and Japan have in between the countries restricts the organisation to open stores and operate in those areas. There is also an increased issue of corruption in the political sphere starting form bribery and theft which overall impacts the operation of the company.
Economic: The factors like inflation rates, taxes and the economic trends of the country have helped Walmart establish its ground in the country. The industry factors also worked in the favor of the country. The problem that the company is facing now is that the cost of labor is continuously increasing in China; this factor was regarded as one of the advantages of the country. The economic authorities of the country are also insufficient in its stabilities which make the policies and decision making process for the company difficult (Greenspan 2016). The price hike of the other inputs of operation is also increasing in the past decade which is making it difficult for the company to maintain the low-cost strategy (Yanrong 2013).
Social and cultural factors: in the market segmentation the demographic segment of the Chinese market aligns perfectly with the objective of the company. On the other hand, the psychological and behavioral patterns of the people of china are very different form the people of US or the western countries. This has made it difficult for the company to understand the needs and requirements of the customers. In order to stay true to one of the objectives of the company: service to the customer. It is imperative for the company to understand the requirements of the consumer (walmart.com 2017).
Technologies: Among all the aspects in the pest analysis this is a factor that completely works in the favor of the company. The Chinese people are accustomed to innovative technology incorporation in their lives and there is scope of technological development as well. There is a technological agreement that is singed in between the U.S. and China in several fields like renewable energy, health and sustainability (walmart.com 2017).
Legal: the liberalization of the Chinese economy has made it possible for foreign investors to operate in the Chinese market. Over the years there are also several laws that have been formulated by the legislation in order to facilitate foreign trade. However there are certain legal aspects of the country which are unique and western countries cannot cope with these situations. For instance, a company that is originated in the US may be subject to several taxable slabs of the country which in turn increases the cost of production and therefore the cost of products. The income tax is paid by Walmart in China is be eligible for the foreign tax credit provided under the U.S. tax law, but the business tax may not be equally appropriate (fortune.com 2017).
Environmental: There are issues in implementation of environmental related regulations in the country. The lack of guidelines in the sustainability approach is a problem for the company. The company is involved in several sustainability projects in the country, which has gathered a lot of good reputation for the company as well (cdn.corporate.walmart.com 2017).
One of the biggest issues that are faced by Walmart is the competition in the market and the preference of the people using home grown products instead of outside products. This intense competition in the market is followed by low market concentration rate. The international trade liberalization has lead the companies from around the world invest in the Chinese market and with the help of the analysis of the strategies implemented by leading brands like Walmart local companies have also easily set up the business (Chan 2011). The low entry barrier of the industry has led to the formation of intense competition from the local market. Market concentration rate is the the instrument or tool to measure the market structure and is regarded as the basic and the most significant aspect in determining market structure. The variables in this approach include the number of firms and the difference of their scale. It shows the competitiveness of the market and the amount of market share that a firm encompasses. In the retail market of china the structure that is determined is vast and scattered in nature. There is less opportunity for a company to achieve competitive advantage and become the market leader. Hence, Walmart has failed in gainng competitive advantage in the Chinese market. Everyday low price (EDLP) pricing strategy of Walmart has proven to be the mill ticket for the international market but the implementation of the same has been difficult in the Chinese market. The reason for this issue in the Chinese markets is extensive availability of cheap products and communities operated markets. There are also facilitates of business centers in china that help the customers with consumer products that are sold by Walmart at a low price. Therefore Walmart is unable to implement its advantage of the supply chains which is the focus of its competitive edge in the China’s retail market. Also there has been an inconsistency in the business format in the Chinese market which makes the image of the brand unclear in the minds of the perspective buyers (Yanrong 2013).
Sun Art Retail Group Ltd. and China Resources Enterprise Ltd are the direct and the most important competitors of the company. Apart from this one of the major threat of the company is form the small and medium local companies that are prevalent in the market. The Chinese are known to appreciate their home grown products and services and hence it is obvious that the company has a lot of rivals form the local markets (Donaldson 2013).
Critical analysis of the issue
For the longest time after liberating the economy and opening the doors for international trade the Chinese market has been deemed as the beacon of opportunities for companies that were looking for a scope to enter the Asian market. Walmart opened its first store in china in the year 1996, over the years of operation companies like Walmart has faced several barriers on the process of operation. As is discussed above one of the major issues that the company is facing is implementation of the policies which work in the west to gain competitive advantage (Michelson et al. 2017). The pricing strategy of a company helps the operation of the business in achieving the objectives and goals, there are several forms of pricing that can be adopted by a company: value pricing, penetration pricing, marginal cost pricing and many more (fortune.com 2017). Depending upon the factors of production and the scale of operation a company decides on the pricing strategy that will be adopted by the company (Chan 2011). In order to gain an edge over the competitors in the market the pricing strategy implemented by Walmart is the competitive pricing to be more specific as discussed above the EDLP (everyday low pricing). In this method the people get a discounted price of the products on a daily basis without sale or ay special occasion. Fierce competition and complexities in the market have failed this strategy of Walmart in gaining competitive advantage. The companies operating in the retail industry are distinguished by large sales of operation and low profit margins. The lack of support from the government to the foreign investors has been identified as one of the biggest issue that Walmart is facing. The competitive position of Walmart over the years has been based on the exclusive interface of the logistics system and the distribution system. The operation of Walmart has been distributed in four segments as discussed above but the issue is that there are a few neighborhood markets set up by Walmart but the rest of the three segments are all alike and have no difference in the operation. This has resulted in causing confusion and lack of trust among the consumers.
The following explanation of the porter’s generic strategy of the company will help analyze the situation better. This theory explains the three options that a company has to gain competitive advantage over the rivals firstly cost leadership, differentiation and focus. Walmart is known to have competitive advantage as one of the strategies of expansion the plan in the Chinese market (Yanrong 2013). The
Figure: Porter’s Generic strategy
Source: Author’s Creation
Since it is analyzed above that cost leadership strategy has failed to serve in the favor of Walmart. In the Chinese business environment the option that is viable for Walmart is the process of differentiation (Gilling and Ulmer 2016). With the help of product differentiation the company can induce in the minds of the consumer that the items that are available with the Walmart are of better quality that what is available elsewhere (Tanwar 2013). This high awareness of the brand in the Chinese market is a great advantage for the company and is one of the main reason for the instant acceptance of the company, hence incase of product differentiation it can be anticipated that the changes will be well accepted. Differentiation of the products requires resource and investment which is in abundance at the disposal of the company. For example: Walmart introduced packaged meat and fish for the Chinese market and garnered immense criticism as the Chinese always opt for fresh meat and fish. The differentiation in the process of offering meat has been introduced and the company has received positive feedback from this step that the company took to rectify the issue (Chan 2011).
The first step in the direction of solving the problems of Walmart in China is a critical market research. The research will ensure that the requirements and the issues of the consumers are highlighted and given precedence over the strategies that was incorporated previously. The company needs to align with the culture of the country in order to gain the popularity back. The study of consumer behavior will help the company gain an insight regarding the advantage the local markets are having over the multinational unit (Michelson et al. 2017). By focusing on market research Walmart will get a scope to develop sensitivity to market opportunities and carry out a strategic breakdown of competition. The analysis of the consumer behavior will lend the company an insight regarding the buying habits and the shopping environments in order to give the consumers a better shopping experience.
Walmart should consider repositioning the brand in the Chinese market and should be clear about the format of operation among the people. The Segments should be clear in the minds of the people for them to understand which the segment that they prefer (Yanrong 2013).
References
Chan, A., 2011. Walmart in China. Cornell University Press.
corporate.walmart.com. 2017. China. [online] Available at: https://corporate.walmart.com/our-story/our-business/international/walmart-china [Accessed 5 Dec. 2017].
cdn.corporate.walmart.com. 2017. CHINA. [online] Available at: https://cdn.corporate.walmart.com/eb/fb/908c8ac145658b7b4683bd8769db/china-market-fact-sheet-may-2017.pdf [Accessed 5 Dec. 2017].
Donaldson, J.A., 2013. Walmart in China. Pacific Affairs, 86(1), pp.140-142.
fortune.com. 2017. Why Walmart Stumbled on The Road to China. [online] Available at: https://fortune.com/2016/02/21/why-walmart-stumbled-on-road-to-china/ [Accessed 4 Dec. 2017].
Gilling, R.I. and Ulmer, J.M., 2016. Major Challenges in Supply Chain Management. Insights to a Changing World Journal, 2016(3).
Greenspan, R., 2016. Walmart: Five Forces Analysis (Porter’s Model). Panmore Institute.
Lombardo, J., 2015. Walmart: Organizational Structure & Organizational Culture. Panmore Institute.
Michelson, H., Boucher, S., Cheng, X., Huang, J. and Jia, X., 2017. Connecting supermarkets and farms: the role of intermediaries in Walmart China’s fresh produce supply chains. Renewable Agriculture and Food Systems, pp.1-13.
Tanwar, R., 2013. Porter’s generic competitive strategies. Journal of Business and Management, 15(1), pp.11-17.
walmart.com. 2017. History and Mission. [online] Available at: https://help.walmart.com/app/answers/detail/a_id/6 [Accessed 4 Dec. 2017].
Watch, C.L. and Vail, B., 2015. In China, Walmart Is Unionized, But Workers Have No Power on the Job.
Yanrong, L. I. U., 2013. Strategy Adjustment of Walmart China. Management Science and Engineering, 7(4), 88.
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