Introduction
Wal-Mart is an American based company, which deals with the distribution, wholesale, and retail of various household items. The company has succeeded in opening different branches in almost every country in the globe. For instance, Wal-Mart has branches in 28 different countries all over the U.S, North America, Europe, and Asia (Donaldson 2013). Wal-Mart operates under the brand name Walmart in some countries although it has slightly changed the name of some stores such as Walmex, Asda, and Best Price (Donaldson 2013). The success of the company can be attributed to its strategic planning in the market.
Wal-Mart ventured into the Asian market, specifically China due to the countries technology development, high population, and the upgrading of China’s globalization market (Donaldson 2013). The operations in the foreign countries are similar to those offered in the parent company. Therefore, Wal-Mart operates as a Foreign Direct Investment in China as one of their market hosts. China remains a place of interest because of its major economic power that has interested many investing companies. Similarly, China is recognized as one of the leading manufacturers of various products at favourably lower costs, giving Wal-Mart an advantage of accessing their products (Donaldson 2013). Furthermore, the human resources, materials, infrastructure, knowledge, and capital are readily available resources in the Chia, which offered an advantage for Wal-Mart (Donaldson 2013).
This report covers the discussion of the elements in Wal-Mart’s management and the competitive advantage derived from its internalization in the Chinese market. Furthermore, the analysis incorporates the Dunning’s eclectic framework that has helped Wal-Mart to succeed in China by developing a great competitive advantage (Yanrong 2013). Therefore, the paper analyses Wal-Mart’s success in China and the process of the internationalization of the company in the same country.
Dunning’s Eclectic Framework
Dunning’s Eclectic Framework I
Wal-Mart decided to internationalize its business in China instead of subcontracting because of the profitability obtained using this strategy. China has grown into a stable country businesswise, which made a foreign direct investment (FDI) the best viable option for Walmart (Dunning 2015). The Chinese market has favoured growth and development of Wal-Mart in many ways. For instance, the growing population of the Chinese people offered an advantage on the size and value of their market share. Similarly, the low-prices offered in all the company’s products have attracted a large number of customers all over the country (Dunning 2015).
The Dunning’s theory explains the internalization through an analysis of their competitive advantage that started from having a low-priced strategy. Therefore, Wal-Mart had collaborated with other leading manufacturers of various products that offered enough resources made available to the consumers at discounting rates. The success of the company was based on the availability of equitable resources from their suppliers as Wal-Mart managed to outsource their products to other retailers under its brand name (Chiu, Lo and Susy 2015). However, China had had various companies with similar products, which offered a stiff competition for the MNE.
China’s economy is rising and growing steadily and could soon reach that of the United States. The Chinese economy grows due to the availability of quality production, development of transport and infrastructure, and the growing market size (Chiu et al. 2015). Furthermore, the increasing population offers cheap labour to the firms in the country. Additionally, the Chinese location factor includes the political stability and the government policies that could be helpful to Wal-Mart’s growth. The government policies favour foreign investment where companies such as Wal-Mart are given priority in the investment policies. Further, with a culturally inclusive society, China offers a diverse market for investors like Wal-Mart (Corina and Francesco 2012). Therefore, Wal-Mart has employed workers from China for easy communication and understanding the cultural diversity, which has helped market the company.
Wal-Mart China has taken the consideration of employing Location Bound FSAs, which have been adapted from the Chinese region. China has developed technologically and has various techniques that help in advancing the operations of business. For instance, the use of online purchasing, which was recently adopted by Wal-Mart in improving the e-commerce business, has made it easier for the multinational to develop its grip in the region (Stoian and Filippaios 2008). Location based FSAs cannot be transferred from one location to another. Additionally, Non-Location bound FSAs such as brands could be moved from one region to another (Turunen and Nummela 2016). Such exchange has been seen in Wal-Mart’s brand name, which has been used in different stores all over the globe. Wal-Mart has a wide range of managerial skills obtained from different experts all over the world, and they contribute largely to the development, advancement, and improvement of the complete cooperation.
Dunning’s Eclectic Framework II
The location of a company determines its competitive advantage in the market (John 2000). For example, Wal-Mart succeeded due to the effects and the contribution of the government and the availability of required resources. Raw materials from the many manufacturing and production companies in China have offered an advantage to Wal-Mart’s expansion and growth rate. Similarly, the company would wish to try the system where they earn in two ways: Producing or manufacturing products in their homeland and exporting to their branches worldwide as a way of generating revenues from both countries (Dunning 2014). However, Wal-Mart does not necessarily produce its products; rather, it acts as a wholesaling enterprise that purchases products at a discounted rate then sells them to consumers in retail or wholesale. Therefore, Wal-Mart chose the Chinese market because of the political stability, good environmental regulations, and friendly tax rates (Dunning 2014). These attributes add an advantage to the company’s competitive advantage because Wal-Mart could manage to lower their prices to get the maximum turnout of consumers.
Wal-Mart entered the Chinese market in 1996 after a long wait of trials. China had several challenging policies that had withheld the decision of Wal-Mart entry into the Chinese market. For instance, China had a policy stating that any Multinational Enterprise willing to enter into its market should allow the Chinese government to hold a 51% partnership (Saka-Helmhout, Deeg and Greenwood 2016). The policy could not favour Wal-Mart since the company wanted to act independently. Regardless of the unfavourable policies and conditions, Wal-Mart saw an opportunity to increase its revenues and becoming a multinational by entering into the Chinese market. The high population of China could offer an added advantage in the demand for its products. China has an average of 1.3billion people, and this number could mean a rising demand for consumer goods. Additionally, Wal-Mart saw another opportunity to expand their business in other parts of the world by utilizing the available resources and distribution channels found in China (Li and Guisinger 2014). Wal-Mart used the opportunity by purchasing the products and sourcing them at a higher price to other countries such as America.
The Chinese government and China’s favourable location have offered different investors a motivation to enter into FDIs. The path to investing in China was based on the factors that had added the advantage to the location. For instance, foreign direct investment is highly related to the location advantage in business. Some of the attributes fuelling the need for FDIs are corruption level, the rule of law, bureaucracy, and ethnic tensions (Stoian 2013). Similarly, other factors such as bureaucracy, ethnicity, and the rule of law were favourites that helped Wal-Mart choose China as a leading investment location. China tends to maintain a stable political environment through its undemocratic environment. Furthermore, Wal-Mart has a competitive advantage due to its size and their total value. Wal-Mart operates by purchasing products in large quantities at a low price hence; other competitors fail to access similar products from the manufacturers and producers. Similarly, Wal-Mart has employed more than 2.2million employees globally, giving it an added advantage over other major competitors.
Dunning’s Eclectic Framework III
The process of internationalization took place when Wal-Mart started getting interested in investing in other countries. Their mode of business was only opening their branches and not franchising. Franchising may be disadvantageous because of the sharing of the revenues generated. Besides, the parent company cannot control the prices of the franchisees (Verbeke, Amin and Osiyevskyy 2014). Therefore, most Wal-Mart’s outlets and branches are based on wholly-owned-subsidiaries. Wholly-owned-subsidiaries are branches opened by a parent company with similar services regardless of the location (Verbeke et al. 2014). Therefore, the parent company controls all the operations of the wholly-owned-subsidiaries. Similarly, a company could become a wholly-owned-subsidiary by moving from a subsidiary, which is partly owned by a parent company. The parent company could purchase almost all the shares and have full access and control over the company making it a wholly-owned-subsidiary. For instance, the company bought The Trust-Mart at US $1 billion, which was one of the most expensive purchases made by the MNE. This investment gave Wal-Mart access to over 30,000 employees and 108 stores in more than China’s 20 economically empowered provinces (Gereffi and Ong 2007). This purchase made it surpass some of its key competitors such as German’s Metro and Carefour.
The wholly-owned-subsidiaries are attained differently, but most are opened by parent companies. The organizational structure is based on the requirements of the parent company that chooses the whole management team that would run the enterprise. In an acquired wholly-owned-subsidiary, the parent does not have full control of changing the management (White et al. 2014). Only new subsidiaries are capable of being managed by the parent company. The acquired subsidiaries are only a transfer of the possession regarding shares and assets. The parent company controls every aspect of their operations as it shifts from being managed by their officials and follows the rules of the parent company. Furthermore, Wal-Mart in China is governed by their parent company as they were opened and managed by their parent enterprise. The first Wal-Mart incorporation began in China in 1996 was a success of another store that was a subsidiary of Wal-Mart but had no full control due to the policies set by the Chinese government. A subsidiary has the role of preparing the financial statement of their branch as well as reporting to their parent company (Li, Jiang and Shen 2016). Most subsidiaries such as the cover the stocktaking, management, control, employee supervision, and other internal responsibilities.
The company had collaborated with several Chinese companies in an effort of helping them attain their financial goals. For instance, Wal-Mart China teamed up with Citic Pacific Limited to start up other branches (Schaltegger and Horisch 2015). The collaboration helped Wal-Mart increase its access to new regions in China. Furthermore, the collaboration helped fasten the requirement of increasing consumer satisfaction by opening many branches. Therefore, the move helped both companies attain their business sustainability by investing in different places under their brand name.
Motivation for Internationalization
Wal-Mart showed its interest in the Chinese market through an analysis of their strategic location and other attributes. The motivation was gained from the perspective of acquiring the overall market from the high population of China. The variables available in the location advantage were based on the market seeking, resource seeking, efficiency seeking, and strategic asset seeking (Kim, Mahoney and Tan 2015). The first people to think of the Chinese market had observed the possibility of the growing China by a identifying their attributes that contributed to the desire for investing in the country.
Wal-Mart had targeted to expand its market from other parts of the globe by entering the Chinese market. The move was seen as substantial because it helped the rapid development of the company as well as extensive hiking in the revenues generated from the Chinese market. China had reported an increase in their overall development of the retailing market with an increase of 11% in a span of five years (Song 2014). Similarly, Wal-Mart was interested in China’s growing population that could offer a high market share.
The need for resources such as raw materials, labour, minerals, agricultural products, and supply-oriented products created a motivation for Wal-Mart. The company had aimed at promoting their relations with China regardless of their business policies. China was reported to have a high population rate of almost 1.3billion and most of them were at the age of 16 to 50 years, offering an advantage to the availability of labour (Moghaddam, Sethi, Weber, and Wu 2014). Cheap labour could help the industry grow while reducing expenses in human resource, promoting the focus of having low-priced commodities in the market. Additionally, the availability of many manufacturing companies developed the desire of having raw products at a discounted rate. Therefore, Wal-Mart was motivated by the vital available resources. The efficient seeking nature of Wal-Mart was based on the availability of cheap labour in China that changed their perspective towards investing in the country (Moghaddam et al. 2014). Furthermore, the strategic seeking was based on the advantages of the competitive analysis.
Recommendation and Ethical Considerations
Most multinational enterprises tend to manipulate the residents and employees of the host country in many instances. For example, Wal-Mart faced complains about the payment differences between the Chinese employees and American employees working in China (Omri and Becuwe 2014). The company was paying high wages to the American workers and paid poorly to the Chinese employees regardless of their working positions (Omri and Becuwe 2014). Thus, Wal-Mart had to restructure its remuneration packages.
Furthermore, the working conditions seen in the host Wal-Mart differ from that of the parent company. Workers in the U.S. are favoured against those in China, which is termed unethical. Similarly, the parent company employees receive huge and various job welfare and benefits compared to the host employees (Omri and Becuwe 2014). Another unethical aspect in the host company is the working hours. Although China is a 24-hour economy, most employees have complained of being overworked and asked to extend their shifts, which is hard to see in the parent company (Omri and Becuwe 2014).
The external aspects of Wal-Mart’s ethics are those that try to protect the entire environment around the business. For instance, protecting the environment should be one of the key responsibilities of Wal-Mart in China. The company had worked ethically by collaborating with other non-profit organizations in the fight against global warming (Omri and Becuwe 2014). Similarly, the company has helped the local distributors in purchasing their products at a good price in an effort of promoting the economic value of the local dwellers. Additionally, Wal-Mart is recognized in protecting the human rights globally by joining other organizations such as World Health Organization WHO in promoting health facilities and other human right activities.
Conclusion
Wal-Mart saw opportunities in extending its enterprise by investing in other countries such as China. China offered readily available resources such as cheap labour, products, low-cost manufacturing companies, great technology development, infrastructure, and other resources that helped in promoting Wal-Mart’s business. However, entering into an agreement with the Chinese government was the major challenge Wal-Mart faced because of the policies that indicated any responsible organization starting a business in China was to allow the government to have a 51% stake. Wal-Mart took time before deciding to become a multinational enterprise in China regardless of their welcoming resources. Eventually, Wal-Mart made their debutant entry in China in 1996 with their first business, which was a start of their journey to success. The company made significant profits in China after entry, promoting the economic value of its brand and the Chinese market share. Wal-Mart has succeeded in ensuring the utilization of the available resources in China that has helped in the growth of the local economy as well as the market share. Nevertheless, Wal-Mart has been faced with challenges in implementing the strategic planning of their operations in China, mostly pertaining to employee satisfaction. However, the company’s future in China is still bright as it takes in even more strong measures to increase its market share
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