Walmart Case
Discussion Questions: 1. Why did Mexico make such a good proving ground for Wal-Mart’s foreign expansion strategy?
There were various strategic reasons why Mexico made such a good proving ground for Wal-Mart’s foreign expansion strategy.
Since the early 1990s, when Wal-Mart had realized that its U.S. growth prospects were ultimately limited by market saturation, they decided to enter Mexico retail market considering the North American Free Trade Agreement (NAFTA) that would lower barriers to cross-border trade and investment.
As Mexico is very well connected by land, the planning and control of the flow of goods and materials through an organization or manufacturing process was easier with the company’s hub-and-spoke-based distribution system, where central distribution warehouses were strategically located to serve clusters of stores.
Under the government of Carlos Salinas, a Harvard-trained economist, a tight monetary policy had lowered Mexico’s inflation rate into the single digits resulting the country’s economy to grow at 4 to 5 percent a year by the early 1990s. With about 30 million of its 80 million people classified as middle class, Wal-Mart with its “always low prices” could target the middle class people for their products.
When Wal-Mart entered most towns in Mexico, its primary competitors were small “mom-and-pop” stores that had a much higher cost structure. Wal-Mart quickly gained significant share in these towns and did not have to face competition from such stores.
Also, to mitigate any initial investment risk, the company decided to enter into a joint venture with a large Mexican retail chain called Cifra, which operated about 120 discount and grocery stores in 1991 and generated sales of about $2.2 billion.
2. What is the source of Wal-Mart’s competitive advantage? What barriers did Wal-Mart have to overcome in transferring its competencies to Mexico?
Competitive advantage:
1. A first class management team.
There were various strategic reasons why Mexico made such a good proving ground for Wal-Mart’s foreign expansion strategy.
Since the early 1990s, when Wal-Mart had realized that its U.S. growth prospects were ultimately limited by market saturation, they decided to enter Mexico retail market considering the North American Free Trade Agreement (NAFTA) that would lower barriers to cross-border trade and investment.
As Mexico is very well connected by land, the planning and control of the flow of goods and materials through an organization or manufacturing process was easier with the company’s hub-and-spoke-based distribution system, where central distribution warehouses were strategically located to serve clusters of stores.
Under the government of Carlos Salinas, a Harvard-trained economist, a tight monetary policy had lowered Mexico’s inflation rate into the single digits resulting the country’s economy to grow at 4 to 5 percent a year by the early 1990s. With about 30 million of its 80 million people classified as middle class, Wal-Mart with its “always low prices” could target the middle class people for their products.
When Wal-Mart entered most towns in Mexico, its primary competitors were small “mom-and-pop” stores that had a much higher cost structure. Wal-Mart quickly gained significant share in these towns and did not have to face competition from such stores.
Also, to mitigate any initial investment risk, the company decided to enter into a joint venture with a large Mexican retail chain called Cifra, which operated about 120 discount and grocery stores in 1991 and generated sales of about $2.2 billion.
2. What is the source of Wal-Mart’s competitive advantage? What barriers did Wal-Mart have to overcome in transferring its competencies to Mexico?
Competitive advantage:
1. A first class management team.