Wal-Mart in the NAFTA Market
Case Synopsis
Wal-Mart is the world’s largest retailer with fiscal 2003 revenues of $244.5 billion. The company’s international division operates 1,500 units internationally employing more than 330,000 associates. Its Mexican operation (its earliest foray out of the United States) operates 671 units and had revenues of $10.6 billion. Wal-Mart entered Canada by acquiring 122 Woolco stores and today is the dominant retailer in that country. Wal-Mart entered both Mexico and Canada prior to the NAFTA. The company has retained much of its basic business model in these countries and therefore has capitalized on NAFTA, but has also made significant adaptations to match local tastes. The case outlines Wal-Mart’s basic business model and describes how this model was successfully adapted in both Mexico and Canada.
Educational Objectives
The case has the following educational objectives:
- To introduce the concepts of a business model and the value chain to explain how a firm develops and maintains a competitive advantage.
- To illustrate how NAFTA has shaped the strategies of a large successful United States company.
- To describe how even a successful business model has to be adapted to meet local tastes in order to replicate its success.
- To illustrate competitive market differences among the three NAFTA countries – the U.S., Mexico, and Canada – as it relates to retailing.
Teaching Plan
Because of its dominance in the market place, Wal-Mart evokes ambivalent feelings among people. They admire it for its success, but, at the same time, resent it for some of its putative business practices such as squeezing suppliers, turning a blind eye to sweatshop-like conditions in some of their foreign suppliers, non-union stance, etc. Students, typically being more idealistic, are apt to be critical of some of Wal-Mart’s business practices. The key to teaching this case successfully is to steer the class discussion away from Wal-Mart’s stakeholder relations and focus on its operations. The emphasis should be on discussing Wal-Mart’s logistics and marketing practices and how, as a learning organization, it successfully adapted some of these practices to become dominant in Mexico and Canada.
The four questions listed and discussed below follow a logical pattern and should be used in that order in the classroom discussion. Once Wal-Mart’s basic business model and value chain are discussed in fine detail (Questions 1 and 2), the stage is set to examine country-specific adaptations. Students from either country (Mexico or Canada) or those that have visited these countries should be called upon to share their personal observations about Wal-Mart to liven up the discussion. There is likely to be strong identification with the case because it focuses on a retailer that everyone is familiar with. The instructor should use this to drill home the key case points.
Depending upon the time available, the instructor should ensure that the key take-aways from the case are firmly established. Students can be called on to identify key generalizable issues or the instructor can list them. The emphasis should be on the importance of the value chain supporting the business model. NAFTA allowed Wal-Mart to retain its basic business model and the supporting value chain, yet make adaptations (in store format in Mexico and product mix in Canada) to succeed in specific markets. The instructor can end the class discussion by posing the question: can Wal-Mart “export” its Mexican business model to Latin American countries and its Canadian model to Europe?
Questions for Discussion
- What were the key features of Wal-Mart’s basic business model?
- Wal-Mart’s basic business model is fairly simple: to sell nationally advertised, well-known brand names at low prices. The brand names draw customers in to the stores. Since brand name products are available at competing chains (Target, K-Mart, etc.), Wal-Mart’s competitive advantage lies in its pricing. “Every Day Low Pricing” or EDLP is the cornerstone of its marketing philosophy. This means that customers don’t have to wait for special sales or markdowns. Everyday store traffic is maximized and promotion expenses are minimized. Wal-Mart’s business model attempts to create a virtuous cycle – low pricing increases foot traffic, which in turn allows the company to profit from volume, which in turn allows it to buy in bulk from suppliers, which in turn allows it to charge low prices.
The instructor can start the discussion of Wal-Mart’s business model by asking the following question: Do they shop at Wal-Mart? If so, why? What attracts them to Wal-Mart versus (say) Target or K-Mart? By approaching Wal-Mart’s business model from the customer point-of-view the instructor can illustrate what the company is trying to do, i.e., attract customers by offering valued goods at low prices. Astute students may point out that Wal-Mart’s prices on all products is not always the lowest. Its EDLP strategy conveys the impression that Wal-Mart has low prices.
- Wal-Mart’s basic business model is fairly simple: to sell nationally advertised, well-known brand names at low prices. The brand names draw customers in to the stores. Since brand name products are available at competing chains (Target, K-Mart, etc.), Wal-Mart’s competitive advantage lies in its pricing. “Every Day Low Pricing” or EDLP is the cornerstone of its marketing philosophy. This means that customers don’t have to wait for special sales or markdowns. Everyday store traffic is maximized and promotion expenses are minimized. Wal-Mart’s business model attempts to create a virtuous cycle – low pricing increases foot traffic, which in turn allows the company to profit from volume, which in turn allows it to buy in bulk from suppliers, which in turn allows it to charge low prices.
- How does Wal-Mart’s value chain help support its business model?
- As the case indicates, Michael Porter’s value chain approaches competitive advantage from the activity level. A firm has to configure its activities such that they help establish and defend a competitive position. Value chain analysis examines the interrelationships among the activities so that there is internal consistency in what it does.
Wal-Mart’s value chain supports its business model. The case details Wal-Mart’s primary and support activities. In addition, case Exhibit 2 visually depicts the company’s value chain. The instructor has to question students on each aspect of Wal-Mart’s value chain and force them to apply the acid test: does the value chain activity support the company’s business model?
Wal-Mart’s positioning strategy is overall cost leadership, as per Porter’s typology. A cost leader attempts to maintain a low cost structure by focusing on factors such as economies of scale, spartan store ambience, etc. Wal-Mart’s logistics activity is an example. It saves on distribution costs in a variety of ways. Distribution center location is one such factor. Wal-Mart goes against the conventional wisdom in retailing by building scale efficient distribution centers first and then locating stores in close proximity to the distribution center. Cross-docking allows goods to spend minimum time in inventory. The objective metric for this is Wal-Mart’s inventory turns vis-à-vis its competitors: 7.6 in 2003 vs. 6.1 for Target and 5.4 for K-Mart. In the extremely low margin world of discount retailing, Wal-Mart’s low distribution costs prove to be an insurmountable barrier for competitors.
Wal-Mart emphasizes scale efficiencies particularly by enabling the vast majority of square footage in stores to be used for selling. Its stores are huge – discount stores average 98,000 square feet, while Supercenters average 187,000 square feet. By frequently replenishing its stores, Wal-Mart can afford to keep its in-store inventory low and yet not be afraid of stock outs. Once again, objective performance metrics support Wal-Mart’s strategy. Its sales per square foot were $433 vs. $286 for Sears and $184 for K-Mart.
Costs savings also stemmed from its EDLP strategy. The company was able to minimize its promotions costs, 12-13 circulars vs. 50-100 for the typical retailer, and once again support its business model. Technology is another area in Wal-Mart’s value chain that helps explain the retailer’s dominance. Its mines customer data and uses it in decision making. It connects its stores and distribution centers so that there is real-time information flow.
As the discussion examines each aspect of Wal-Mart’s value chain, the instructor has to constantly force students to look at value chain activities in relation to the company’s business model. The consistency between the two is the key element that the instructor has to dwell upon.
- As the case indicates, Michael Porter’s value chain approaches competitive advantage from the activity level. A firm has to configure its activities such that they help establish and defend a competitive position. Value chain analysis examines the interrelationships among the activities so that there is internal consistency in what it does.
- What adaptations did Wal-Mart have to make to its operations in Mexico? What influence did NAFTA have on these adaptations?
- It is important to note that Wal-Mart entered Mexico in 1991, three years before NAFTA. It is also important to note that Wal-Mart stumbled mightily in Mexico in the beginning. This brings to center stage Wal-Mart’s abilities as a learning organization. While the company makes mistakes like any other organization, it learns from its mistakes. The class can share a laugh at Wal-Mart’s ill-fated decision to stock its Mexican stores with ice skates, etc. The key is to note that Wal-Mart learnt from these mistakes.
In the pre-NAFTA period, Wal-Mart was not successful in Mexico because it had to deviate considerably from its business model. Tariffs made procurement more expensive. In addition, poor infrastructure reduced its logistics efficiency. The information technology system used U.S.-centric metrics often leading to faulty data for decision making. NAFTA changed all that.
NAFTA allowed well-know manufacturers such as Sony to locate operations in a way that minimized transportation costs for retailers. By locating distribution centers in Laredo (U.S.), Wal-Mart could continue using its logistics advantage.
At the store level, Wal-Mart had to make significant adaptations. Walmex (Wal-Mart’s Mexican operations) has greater diversity in store formats than the parent company in the U.S. Smaller stores matched well with Mexico’s requirements, yet suited Wal-Mart’s competitive advantage emanating from procurement and logistics.
Pre-NAFTA, Wal-Mart had to vary its business model in such a way that it did not really have a competitive advantage. Post-NAFTA, Wal-Mart could continue using its basic business model, except that it had to adopt newer store formats.
If time permits, the instructor can go through each activity in Wal-Mart’s basic value chain and see what adaptations it has made in Mexico. Once again, students who are familiar with Walmex operations should be encouraged to share their personal observations.
- It is important to note that Wal-Mart entered Mexico in 1991, three years before NAFTA. It is also important to note that Wal-Mart stumbled mightily in Mexico in the beginning. This brings to center stage Wal-Mart’s abilities as a learning organization. While the company makes mistakes like any other organization, it learns from its mistakes. The class can share a laugh at Wal-Mart’s ill-fated decision to stock its Mexican stores with ice skates, etc. The key is to note that Wal-Mart learnt from these mistakes.
- Examine Wal-Mart’s foray into Canada.
- Wal-Mart entered Mexico through a joint venture with Cifra, a local retailer. In a similar way, Wal-Mart entered Canada by acquiring 122 Woolco stores from Woolworth. In both cases, Wal-Mart got instant infrastructure. However, Wal-Mart entered Canada in 1994, the same year as NAFTA. It is likely that Wal-Mart learnt from its Mexican foray about the need for product/store adaptation. From the very beginning, Wal-Mart changed the product mix that it carried in its Canadian stores. As the case points out, hockey equipment was prominently featured in stores. In addition, to cater to the large Muslim community in Toronto, Wal-Mart carried “hallal” foods. Since many of Wal-Mart’s competitors (such as Zellers) carried upscale clothing, the company had to change its product mix. It launched the new George line (once again, an example of organizational learning, since the George line was first introduced in its U.K. operations) and began carrying B.U.M. Equipment and other branded goods.
By holding on to those value chain activities that benefit from scale, such as logistics and procurement, Wal-Mart can afford to adapt its product to match local needs and, at the same time, not drive up its operating costs. This is a great example of consistency complementing adaptation. Like a true cost leader, Wal-Mart emphasizes those activities that benefit from scale advantages. However, to meet local needs, Wal-Mart changes its product mix.
- Wal-Mart entered Mexico through a joint venture with Cifra, a local retailer. In a similar way, Wal-Mart entered Canada by acquiring 122 Woolco stores from Woolworth. In both cases, Wal-Mart got instant infrastructure. However, Wal-Mart entered Canada in 1994, the same year as NAFTA. It is likely that Wal-Mart learnt from its Mexican foray about the need for product/store adaptation. From the very beginning, Wal-Mart changed the product mix that it carried in its Canadian stores. As the case points out, hockey equipment was prominently featured in stores. In addition, to cater to the large Muslim community in Toronto, Wal-Mart carried “hallal” foods. Since many of Wal-Mart’s competitors (such as Zellers) carried upscale clothing, the company had to change its product mix. It launched the new George line (once again, an example of organizational learning, since the George line was first introduced in its U.K. operations) and began carrying B.U.M. Equipment and other branded goods.
Useful Links from PNA
- Asda Wal-Mart
- Corporate Governance and Business Ethics in North America: The State of the Art
- Developing a Framework for Assessing Innovation, Productivity, and Business
- 'Discounting Rights' - Wal-Mart's Violation of U.S. Workers' Right to Freedom of Association
- Network-Centric Security for Canada-U.S. Supply Chains
Suggested Bibliography
Brunn, Stanley D., ed. (2006). Wal-Mart World: The World's Biggest Corporation in the Global Economy. New York: Routledge.
Derham, Michael Thomas (2006). "Here Comes Wal-Mart; Gringo grocery store goliath Wal-Mart has expanded its Latin American dominion to Central America, where it hopes to replicate its Mexican success." LatinFinance, September 1; Pg. 30(2).
Dicker, John (2005). The United States of Wal-Mart. New York: Jeremy P. Tarcher/Penguin.
Fishman, Charles (2006). The Wal-Mart Effect: How the World's Most Powerful Company Really Works and How It's Transforming the American Economy. New York, NY: Penguin Press.
Hawkins, William (2006). "NAFTA Highway or New Silk Road?" The Washington Times, September 24, Pg. B04.
Rarick, Charles A. (2003). Cases and Exercises in International Business. Upper Saddle River, NJ: Prentice Hall.
"The Age of Wal-Mart [videorecording]: Inside America's Most Powerful Company," CNBC, produced by Lori Gordon, written by David Faber, Lori Gordon and Glen Rochkind. New York, NY: CNBC (2004).
Tilly, Chris (2006). "Wal-Mart in Mexico: The Limits of Growth," in Nelson Lichtenstein, ed., Wal-Mart: The Face of Twenty-First Centruy Capitalism. New York: New Press.
"Wal-Mart Nation," CBC Newsworld, produced by Ultramagenetic Productions and directed by Andrew Munger in association with CBC Newsworld, available from http://www.walmartnation.com/.
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