Unit 6 Case Study Analysis: Wal-Mart Stores: “Everyday Low Prices” in China

GM520-03N
Strategic Human Resource Management

September 15, 2014

Professor
Dr. Vincent Pellettiere

Introduction The Arkansas based company Wal-Mart had been attempting to gain a foothold in China since 1996 and has encountered a variety of problems in doing so. Initially, the company was hindered by Chinese business regulations which were saturated with layers of bureaucracy and forced the US retailer to go slowly. Meanwhile, its chief competitors were bending the rules to their advantage and making greater progress in establishing a secure foothold in the world’s largest consumer market. Wal-Mart was faced with logistical difficulties, regulatory hurdles, and an apparent need to adjust their business model to better fit the Chinese consumer culture. The result was a very challenging business environment that would put the retailer’s business model to the test.
Major Issues One major issue that Wal-Mart faced was that of molding their domestic business model to fit the Chinese consumer culture. In the United States, Wal-Mart had seen great success by targeting smaller communities that were underserved by their chief competitors K-Mart and Woolworths. The basic format involved building a store in a rural location and then driving out competitors by making it impossible to compete with the retail giant’s exceedingly low prices (Truss & Gratton, 1994). Once they had achieved dominance in a market, they would maintain their hold by offering a wide variety of goods at the lowest possible prices. The intent was to bring brand names out of dense population centers and into the smaller markets without bringing the associated costs.
However, in China strict government control of market access prevented Wal-Mart from building stores in smaller markets. Additionally, Chinese consumers were more concerned with price than brand loyalty, so the strategy of offering brand names at low prices was not necessarily a big draw. Chinese consumers also tended to view shopping as an extracurricular activity that did not result in a significant number of actual sales. Rather, they would window shop and spend the day roaming around with friends or relatives without purchasing anything. The typical Chinese consumer would often take “at least five trips to buy as much as an American shopper got in one” (Farhoomand & Wang, 2008). A second issue was that of competition. Chinese regulations regarding business operations were very tightly controlled when Wal-Mart made its entrance into the market. Several competitors Carrefour, Metro, and Lotus had entered the market at nearly the same time further squeezing the available Chinese consumer dollars. Wal-Mart took the tack of attempting to follow the rules as set forth by their host nation, which led to great delays in growth and a very slow spread to other areas (Mello, 2015). Initially, they were allowed only three stores per city, and each new store had to be approved by the central government, which could take an inordinate amount of time. Wal-Mart’s competitors did not feel as bound to these regulations and regularly skirted them. Their philosophy was that the business environment would eventually change and when it did they would simply pay the punishment and move forward. This gave them a great advantage over Wal-Mart as far as brand placement and market access.
Recommendations
It is recommended that Wal-Mart pursue a policy of continuing to adjust their Chinese business model to fit better with the Chinese consumer culture.
While in America Wal-Mart had made a name for itself by providing inexpensive brand name goods to underserved markets, the same was not necessarily possible in China due to the difference in the way