ASSIGNMENT 2 SEMESTER : STRATEGIC MANAGEMENT (STRM ...
Page 1 of 11
ASSIGNMENT 2ND SEMESTER :
STRATEGIC MANAGEMENT (STRM) BUSINESS MANAGEMENT 3 (BM303)
CHAPTERS COVERED
:
CHAPTERS 2 - 9
DUE DATE
:
3:00 p.m. 21 AUGUST 2012
TOTAL MARKS
:
100
MATERIAL REQUIRED
:
Case Study 1 Case Study 2
INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete ‘Instructions to Students for Completing and Submitting Assignments’ must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1. You are required to submit ONE assignment per subject. 2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be contributed by the examination, however, the examination papers will count out of 100%. 3. Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam. 4. Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page. 5. The IMM GSM requires assignments to be presented in a typed format, on plain A4 paper. Unless otherwise specified, this assignment must be completed within a limit of 1500 words, excluding the bibliography. Students who exceed the word limit may find that only part of the submitted assignment will be marked. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front of each assignment. 7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM. 8. The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 21 August 2012. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 21 August 2012 and up to 5:00 p.m. the following day, after which no assignments will be accepted. 9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website, www.immgsm.ac.za, on Friday, 5 October 2012.
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 2 of 11
SPECIFIC INSTRUCTIONS Marks will be awarded for: Logical argument and sound reasoning Evidence of independent research (i.e. consulting and using relevant sources of information) Relevant application of knowledge Neat presentation and structure. Answer ALLthe questions below. Please note that the answers to the questions below need to be detailed and show that effort and thought has gone into the compilation of each answer. Prescribed textbook: Jones, G.R. & Hill, C.W.L., 2010. Theory of Strategic Management with Cases. 9th ed. USA: South Western, Cengage Learning.
Read the attached case studies on Walmart and answer the questions that follow. Please note ALL questions in this assignment must be answered in the context of the attached case studies (Walmart). QUESTION 1
[35]
Discuss the building blocks of competitive advantage as they might apply to Walmart in South Africa. What can Walmart do to ensure it develops a competitive advantage and thereby avoids failure? QUESTION 2
[35]
Discuss how Walmart may apply competitive positioning and the value creation frontier (as possible strategies at the business level) in the context of the South African retail industry. QUESTION 3
[20]
Walmart’s focus on global discount retailing is an example of horizontal integration in a single industry. Discuss the benefits of single industry horizontal integration.
PRESENTATION
[10] ASSIGNMENT TOTAL: 100
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 3 of 11
CASE STUDY 1: WALMART IN SOUTH AFRICA: THE GOOD, THE BAD AND THE UGLY Published: 20th Oct 2011 Article by: Consultancy Africa Intelligence CAI
In one of its historically largest purchase operations, American retail giant Walmart bought 51% of South African retailer Massmart in May 2011 by paying US$ 2.4 billion. Massmart sells in 14 African countries, but the majority of its operations are in South Africa (265 retail stores in South Africa versus 25 in the other 13 countries). The Massmart group is based in Johannesburg and includes Game, Dion Wired, Makro, Builder’s Warehouse and Masscash. Walmart’s revenues stand above the US$ 400 billion mark, over South Africa’s GDP of approximately US$ 350 billion. They operate in 14 countries apart from the US, have a procurement division that employs 1,400 individuals, and work with 6,000 factories all over the world but mainly from China. The transaction reflects Walmart’s clear intention of profiting from the opportunities of a country with a sharp increase in consumer spending power and where the supermarket buying experience reaches almost all socio-economic levels of the population. Local perceptions and reasons for concern Before being cleared by South Africa’s authorities, the operation suffered ample resistance from local groups, especially from South African Commercial, Catering and Allied Workers’ Union that feared the aforementioned purchase would represent important job losses and respective declines in local manufacturing and production. They opposed the transaction arguing that the unrestrictive entrance of Walmart into South Africa’s retail market would cause the closure of local businesses and consequently the loss of many jobs due to the expected increase of imports by Walmart and by its followers. Given the opposing views and relatively pacific protests of local unions and the high rate of unemployment (close to 25% according to official figures, but 40% unofficially , South Africa’s antitrust commission approved the takeover, imposing some general conditions to protect local jobs: no job cuts will be conducted for two years after the Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 4 of 11
takeover, existing labour agreements will be honoured for the next three years (the South African Commercial, Catering and Allied Workers’ Union will remain as the firm’s main bargaining partner) and US$ 14.6 million will be oriented towards creating a fund to develop local suppliers. Even after these conditions were established, some union leaders manifested their discontent, stating that there was no guarantee that Walmart was going to respect these contractual clauses. At the same time, the ruling African National Congress is being pressed by its radicalised youth wing to adopt a more protectionist stance. Three Government departments (the Economic Development Department, the Department of Trade and Industry and the Agriculture Department) and the shopworkers' union, Saccawu, have lodged an appeal with the South African competition tribunal asking it to review its initial decision. The unions estimate that as many as 4,000 jobs could be lost from industries such as general merchandise, and in food and beverage production if Massmart were to shift some of its procurement from local to imported sources. The unions are presenting the example on how Walmart has stoked controversy in the US with allegations of anti-union policies, overpriced health insurance, predatory pricing and poor relations with staff, some of whom, it is claimed, have been paid below the minimum wage. Walmart indirectly responded to these questionings by showing a clear interest in investing in Africa’s largest and most developed market and by explicitly communicating its intention of expanding to other economies. For example, they indicated they plan to buy most of its fresh food locally, leveraging from South Africa’s offering and from their global sustainable agricultural practices. They stated they will open 54 new stores (net) over the next three years and add 6,300 new hires to its 27,000 existing employees. Walmart has made clear they will respect local regulations and will exploit the opportunities the local market offers in a responsible way. Still, its detractors remain worried about the retail giant’s purchase power and the effects of massive and cheap imports over local suppliers and other retail players. The South African Government has already voiced its concern over the merge, mentioning that the sheer scale of Walmart’s international operations made Government’s intervention necessary. Walmart’s revenue is estimated to be US$408 billion – larger than South Africa’s GDP. In 2004, Walmart, if it was measured as a Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 5 of 11
country, would have been China’s 8th largest trade partner and would have a GDP larger than 75% of countries worldwide. Walmart’s procurement division employs more than 1500 employees sourcing from over 6000 factories across the world (though largely from China). Many still see Walmart as an enormous corporation that has been criticised in the past for its “easy hire-easy fire” approach and for not promoting enough the female workforce; things have changed, however, and Walmart has made important improvements in employment and in eco-friendly policies. For instance, over the last years, Walmart has significantly focused on climate change issues by implementing zero waste corporate initiatives, and has also launched relevant sustainable agriculture policies, including supporting farmers and their communities, producing food that consumes fewer resources and creates less waste, and helping develop eco-conscience. If implemented in South Africa, this type of programs could have a positive impact in the local market by encouraging a more efficient allocation of resources, by sending a positive signal to the investment community and clients, and by indirectly pushing other players to adhere to the industry’s best practices. Some local stores like Woolworths and Pick ‘n’ Pay have timidly started to show some sensibility towards green policies, but many of them still fly numerous products from different parts of the world, contributing to global warming and pollution problems. A brief comparative analysis of Walmart’s influence in other emerging markets If we consider conditions in emerging markets to be somewhat similar (in terms of a less structured government vision and strategy, a less unionised workforce, rapidly growing internal demand and also an over-reliant dependency on imports for many consumer goods) then we can try to use Mexico’s and Brazil’s example as what could possibly happen in South Africa. Walmart in Mexico (Walmex) provides access to a larger market, but it puts continuous pressure on its suppliers to improve their product's appeal, while forcing them to accept relatively low prices relative to product appeal. Simulations of various models (such as the one from the US-based National Bureau of Economic Research) show that the arrival of Walmex separates potential suppliers into two groups: those with relatively high-appeal products choose Walmex as their retailer, whereas those Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 6 of 11
with lower appeal products do not (and in effect, cannot, as lower appeal products have a low frequency of purchase). For the industry as a whole, the associated market share reallocations, adjustments in innovative effort, and exit patterns increase productivity and the rate of innovation. Another positive impact of Walmart’s presence in Mexico is that the retail sector modernised its warehousing, distribution, and inventory management. The profound changes in the retail sector, initiated by Walmex and partially diffused to other retailers, have resulted in a significant decline in distribution costs faced by Mexican suppliers while the spectacular expansion of Walmex’s retail network has allowed its suppliers to reach a larger segment of the Mexican market. Overall, the high-quality firms have sold more and become more productive in response to Walmex’ investment in Mexico, while low-quality firms have lost ground in both dimensions. Walmex had succeeded for two main reasons: one, because it started out being so big; by the mid-1990s Walmart had gradually acquired 62% of Cifra, the largest retailer in Mexico; second (and of critical importance), Cifra brought with it a thorough understanding of the Mexican consumer. Walmart entered Brazil in 1995, raring to replicate its success in Mexico. The country was still emerging from decades of hyper-inflation and economic mismanagement. However, a price war soon ensued between Walmart and Careffour, and Walmart saw its business waver; it also made the mistake of not making big acquisitions until 2004. However, even as it bought Bompreço in the country’s north-east, and Sonae in the south, its sales have suffered as it has tried to convert them to its trademark “everyday low prices.” Walmart’s unchanging cheap prices contrast with the more dynamic “high-low” strategy of discounts and mark-ups, and Brazilians have not got used to the American way. Columbia Business School Professor Nelson Fraiman argues that “Large firms like Walmart have gone to countries like Brazil and failed — the same way they’ve gone to countries like Korea and failed, the same way they’ve gone to countries like Germany and failed — mainly because of not understanding the local culture. The U.S. can become better at learning about the people and working together as equals, rather than imposing a series of systems and procedures that work here, but don’t
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 7 of 11
necessarily work there. Little details are what usually kills American companies that forget to pay attention.” If Walmart is able to leverage on its experience in other developing nations like Brazil and Mexico and adapt is good governance and operational practices to South Africa’s market, it could solidify its position in the global retail market, but most importantly in emerging Africa. This won’t come without its challenges though. Walmart will need to be clever in managing and training a comparatively less educated workforce when compared to the US and even to some developing countries, and in ensuring optimal productivity levels. It will have to comply with the particularities of local laws (including the Black Economic Empowerment Act), adapt to the local culture and to successfully replicate its model on African soil in order to extract the most out of its operation in this continent. Moving towards a coherent regional strategy The incursion of Walmart in Africa, initially through South Africa but with expansion plans to other countries of the region, not only denotes the importance of the emerging middle-class consumer market for global corporations and its expected growth, but also sends a positive signal to the investment community regarding the openness and possibilities of doing business in the continent. Walmart also plans to open two stores in Nigeria, according to Nigeria’s Ambassador to the United States, Prof. Ade Adefuye, who mentioned in June 2011 that representatives from the famous retail store had visited him at the Nigerian Embassy in Washington DC as regards the plan to open the retail store in Nigeria. “It is an indication of the growing confidence in Nigeria’s economy,” Adefuye stated, adding that he was currently engaging with the leading US store on the conditions and requirements that would have to be met to do business in Nigeria. Walmart is also planning to enter Senegal, Angola and the Democratic Republic of Congo. A win-win move? The somewhat measured and appropriate intervention of the local antitrust authorities when local opposition was high helped dissolve any doubts regarding
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 8 of 11
potential government intervention or inadequate popular measures that could end up affecting the entire deal and perspectives for future operations. Libertarian Ludwig von Mises Institute is also optimistic about Walmart: “Walmart is one of the great shining examples of what a market economy can achieve. If I were to give a tour of the United States to visitors from a socialist country, who are used to experiencing chronic shortages of almost everything, Walmart would be one of the first places I would take them. It is a perfect symbol of one of the most remarkable things that we have — an enormous variety of high quality, low cost products that are available to virtually everyone throughout the United States.” While increases in productivity will cause a net gain to the economic system, they also cause a shift in the points of the economic system where human labor is most valuable, changing the landscape of the job market. Some jobs disappear, while some jobs come into existence for the first time. Also, Walmart could help boost the local SME growth; by allowing small producers to deliver their products locally (using Walmart’s modern distribution systems) and have them distributed nationwide, Walmart can help small producers to become viable competitors of the larger players. Producers will weigh the larger market size versus the lower quality-adjusted price they receive when deciding whether to use Walmart as a retailer. Additionally, the entrance of a global player like Walmart in South Africa, although criticised by local unions and other players, could help “raise the bar” in terms of productivity, service delivery, transparency and price-efficiency (prices are expected to go down) within the industry, forcing local players and manufacturers to become more competitive and creative in order to survive in an open and free market. The presence of Walmart will also give producers incentives to engage in process or product innovation. Making product improvements allows suppliers to escape the mandatory price cuts from one year to the next that kick in when producers do not upgrade their product. Similarly, suppliers can obtain higher prices by introducing new product varieties. If that is the case, the most benefited will the local consumer.
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 9 of 11
Flores-Arraoz, M. & Musca, V., 2010. Walmart in South Africa: the Good, the Bad and the Ugly. [Online] Available at: http://www.polity.org.za/article/walmart-in-southafrica-the-good-the-bad-and-the-ugly-2011-10-20. [Accessed 30 March 2012]
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 10 of 11
CASE STUDY 2: International vs. Local Retailers: The real impact Retailers will hold their own against the global giant Wal-Mart. The South African retail sector has received a significant shakeup since the announcement of Wal-Mart’s imminent entry into the field. LeronVarsha, CEO of Fore Good, leading brand builder and distributor in the FMCG sector, maintains that with South Africa’s level of expertise, retailers will hold their own against the global giant. “Wal-Mart’s entry has driven some South African retailers to act defensively. There’s talk of cutting down on the use of local suppliers, so that they will be able to match the newcomer’s extremely competitive pricing, giving rise to the question: what’s going to happen to local suppliers? Will they continue to receive support? Of course, certain retailers have implemented measures to ensure that they’re able to match the changing landscape. For example, a leading retailer has fast-tracked plans to improve systems and establish a new distribution centre” says Leron Varsha. There are certainly lessons that can be learnt from a global retailer – but perhaps in the sense that continual improvement is always positive. As a global retailer, WalMart has developed expertise in the area of negotiating with international suppliers, whilst South African retailers do not operate on the same global scale. South African retailers are on a par with international players, especially when it comes to addressing different consumer segments. South African retailers have, of late, implemented a greater focus on shopper marketing and category planning, all of which have helped to enhance systems and improve products displayed on shelf. Retailers also have solid technologies in place, producing sound information which is often put to good use. If our retailers’ supply chains are so lean and mean, why isn’t this reflected in prices? According to Varsha the answer lies in a fact outside of the retailers’ control: South Africa is a vast country with expensive labour and increasing energy costs. “Indeed, our land spans a territory of more than one million square kilometres – and although the density of retailers is steadily increasing, Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 11 of 11
we have yet to reach the same level of density in, say, Europe. The reality is simple: ours is a costly market. The country’s vastness is also the reason why online retail – which has had a major boost on international industries – has made little impact locally. The cost of distribution makes this exercise very difficult. Nor does the well documented lack of available broadband help, while the fact that more South Africans access the Internet on their cell phones, rather than their PCs, also has implications for the industry. Hopefully, many of these issues will be addressed when more broadband is made available during the forthcoming years, which may in turn result in lower costs. So what role does the distributor have to play in this scenario? “This is an issue that is steadily gaining prominence, especially with retailers threatening to cut out the ‘middle man’ in an effort to enhance the supply chain and cut costs,” says Varsha.
Fore Good Group. 2012. [Online] Available at: http://www.moneyweb.co.za/mw/view/mw/en/page558165?oid=560316&sn=2009+D etail&pid=558165. [Accessed 30 March 2012]
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
ASSIGNMENT 2ND SEMESTER :
STRATEGIC MANAGEMENT (STRM) BUSINESS MANAGEMENT 3 (BM303)
CHAPTERS COVERED
:
CHAPTERS 2 - 9
DUE DATE
:
3:00 p.m. 21 AUGUST 2012
TOTAL MARKS
:
100
MATERIAL REQUIRED
:
Case Study 1 Case Study 2
INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete ‘Instructions to Students for Completing and Submitting Assignments’ must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1. You are required to submit ONE assignment per subject. 2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be contributed by the examination, however, the examination papers will count out of 100%. 3. Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam. 4. Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page. 5. The IMM GSM requires assignments to be presented in a typed format, on plain A4 paper. Unless otherwise specified, this assignment must be completed within a limit of 1500 words, excluding the bibliography. Students who exceed the word limit may find that only part of the submitted assignment will be marked. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front of each assignment. 7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM. 8. The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 21 August 2012. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 21 August 2012 and up to 5:00 p.m. the following day, after which no assignments will be accepted. 9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website, www.immgsm.ac.za, on Friday, 5 October 2012.
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 2 of 11
SPECIFIC INSTRUCTIONS Marks will be awarded for: Logical argument and sound reasoning Evidence of independent research (i.e. consulting and using relevant sources of information) Relevant application of knowledge Neat presentation and structure. Answer ALLthe questions below. Please note that the answers to the questions below need to be detailed and show that effort and thought has gone into the compilation of each answer. Prescribed textbook: Jones, G.R. & Hill, C.W.L., 2010. Theory of Strategic Management with Cases. 9th ed. USA: South Western, Cengage Learning.
Read the attached case studies on Walmart and answer the questions that follow. Please note ALL questions in this assignment must be answered in the context of the attached case studies (Walmart). QUESTION 1
[35]
Discuss the building blocks of competitive advantage as they might apply to Walmart in South Africa. What can Walmart do to ensure it develops a competitive advantage and thereby avoids failure? QUESTION 2
[35]
Discuss how Walmart may apply competitive positioning and the value creation frontier (as possible strategies at the business level) in the context of the South African retail industry. QUESTION 3
[20]
Walmart’s focus on global discount retailing is an example of horizontal integration in a single industry. Discuss the benefits of single industry horizontal integration.
PRESENTATION
[10] ASSIGNMENT TOTAL: 100
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 3 of 11
CASE STUDY 1: WALMART IN SOUTH AFRICA: THE GOOD, THE BAD AND THE UGLY Published: 20th Oct 2011 Article by: Consultancy Africa Intelligence CAI
In one of its historically largest purchase operations, American retail giant Walmart bought 51% of South African retailer Massmart in May 2011 by paying US$ 2.4 billion. Massmart sells in 14 African countries, but the majority of its operations are in South Africa (265 retail stores in South Africa versus 25 in the other 13 countries). The Massmart group is based in Johannesburg and includes Game, Dion Wired, Makro, Builder’s Warehouse and Masscash. Walmart’s revenues stand above the US$ 400 billion mark, over South Africa’s GDP of approximately US$ 350 billion. They operate in 14 countries apart from the US, have a procurement division that employs 1,400 individuals, and work with 6,000 factories all over the world but mainly from China. The transaction reflects Walmart’s clear intention of profiting from the opportunities of a country with a sharp increase in consumer spending power and where the supermarket buying experience reaches almost all socio-economic levels of the population. Local perceptions and reasons for concern Before being cleared by South Africa’s authorities, the operation suffered ample resistance from local groups, especially from South African Commercial, Catering and Allied Workers’ Union that feared the aforementioned purchase would represent important job losses and respective declines in local manufacturing and production. They opposed the transaction arguing that the unrestrictive entrance of Walmart into South Africa’s retail market would cause the closure of local businesses and consequently the loss of many jobs due to the expected increase of imports by Walmart and by its followers. Given the opposing views and relatively pacific protests of local unions and the high rate of unemployment (close to 25% according to official figures, but 40% unofficially , South Africa’s antitrust commission approved the takeover, imposing some general conditions to protect local jobs: no job cuts will be conducted for two years after the Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 4 of 11
takeover, existing labour agreements will be honoured for the next three years (the South African Commercial, Catering and Allied Workers’ Union will remain as the firm’s main bargaining partner) and US$ 14.6 million will be oriented towards creating a fund to develop local suppliers. Even after these conditions were established, some union leaders manifested their discontent, stating that there was no guarantee that Walmart was going to respect these contractual clauses. At the same time, the ruling African National Congress is being pressed by its radicalised youth wing to adopt a more protectionist stance. Three Government departments (the Economic Development Department, the Department of Trade and Industry and the Agriculture Department) and the shopworkers' union, Saccawu, have lodged an appeal with the South African competition tribunal asking it to review its initial decision. The unions estimate that as many as 4,000 jobs could be lost from industries such as general merchandise, and in food and beverage production if Massmart were to shift some of its procurement from local to imported sources. The unions are presenting the example on how Walmart has stoked controversy in the US with allegations of anti-union policies, overpriced health insurance, predatory pricing and poor relations with staff, some of whom, it is claimed, have been paid below the minimum wage. Walmart indirectly responded to these questionings by showing a clear interest in investing in Africa’s largest and most developed market and by explicitly communicating its intention of expanding to other economies. For example, they indicated they plan to buy most of its fresh food locally, leveraging from South Africa’s offering and from their global sustainable agricultural practices. They stated they will open 54 new stores (net) over the next three years and add 6,300 new hires to its 27,000 existing employees. Walmart has made clear they will respect local regulations and will exploit the opportunities the local market offers in a responsible way. Still, its detractors remain worried about the retail giant’s purchase power and the effects of massive and cheap imports over local suppliers and other retail players. The South African Government has already voiced its concern over the merge, mentioning that the sheer scale of Walmart’s international operations made Government’s intervention necessary. Walmart’s revenue is estimated to be US$408 billion – larger than South Africa’s GDP. In 2004, Walmart, if it was measured as a Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 5 of 11
country, would have been China’s 8th largest trade partner and would have a GDP larger than 75% of countries worldwide. Walmart’s procurement division employs more than 1500 employees sourcing from over 6000 factories across the world (though largely from China). Many still see Walmart as an enormous corporation that has been criticised in the past for its “easy hire-easy fire” approach and for not promoting enough the female workforce; things have changed, however, and Walmart has made important improvements in employment and in eco-friendly policies. For instance, over the last years, Walmart has significantly focused on climate change issues by implementing zero waste corporate initiatives, and has also launched relevant sustainable agriculture policies, including supporting farmers and their communities, producing food that consumes fewer resources and creates less waste, and helping develop eco-conscience. If implemented in South Africa, this type of programs could have a positive impact in the local market by encouraging a more efficient allocation of resources, by sending a positive signal to the investment community and clients, and by indirectly pushing other players to adhere to the industry’s best practices. Some local stores like Woolworths and Pick ‘n’ Pay have timidly started to show some sensibility towards green policies, but many of them still fly numerous products from different parts of the world, contributing to global warming and pollution problems. A brief comparative analysis of Walmart’s influence in other emerging markets If we consider conditions in emerging markets to be somewhat similar (in terms of a less structured government vision and strategy, a less unionised workforce, rapidly growing internal demand and also an over-reliant dependency on imports for many consumer goods) then we can try to use Mexico’s and Brazil’s example as what could possibly happen in South Africa. Walmart in Mexico (Walmex) provides access to a larger market, but it puts continuous pressure on its suppliers to improve their product's appeal, while forcing them to accept relatively low prices relative to product appeal. Simulations of various models (such as the one from the US-based National Bureau of Economic Research) show that the arrival of Walmex separates potential suppliers into two groups: those with relatively high-appeal products choose Walmex as their retailer, whereas those Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 6 of 11
with lower appeal products do not (and in effect, cannot, as lower appeal products have a low frequency of purchase). For the industry as a whole, the associated market share reallocations, adjustments in innovative effort, and exit patterns increase productivity and the rate of innovation. Another positive impact of Walmart’s presence in Mexico is that the retail sector modernised its warehousing, distribution, and inventory management. The profound changes in the retail sector, initiated by Walmex and partially diffused to other retailers, have resulted in a significant decline in distribution costs faced by Mexican suppliers while the spectacular expansion of Walmex’s retail network has allowed its suppliers to reach a larger segment of the Mexican market. Overall, the high-quality firms have sold more and become more productive in response to Walmex’ investment in Mexico, while low-quality firms have lost ground in both dimensions. Walmex had succeeded for two main reasons: one, because it started out being so big; by the mid-1990s Walmart had gradually acquired 62% of Cifra, the largest retailer in Mexico; second (and of critical importance), Cifra brought with it a thorough understanding of the Mexican consumer. Walmart entered Brazil in 1995, raring to replicate its success in Mexico. The country was still emerging from decades of hyper-inflation and economic mismanagement. However, a price war soon ensued between Walmart and Careffour, and Walmart saw its business waver; it also made the mistake of not making big acquisitions until 2004. However, even as it bought Bompreço in the country’s north-east, and Sonae in the south, its sales have suffered as it has tried to convert them to its trademark “everyday low prices.” Walmart’s unchanging cheap prices contrast with the more dynamic “high-low” strategy of discounts and mark-ups, and Brazilians have not got used to the American way. Columbia Business School Professor Nelson Fraiman argues that “Large firms like Walmart have gone to countries like Brazil and failed — the same way they’ve gone to countries like Korea and failed, the same way they’ve gone to countries like Germany and failed — mainly because of not understanding the local culture. The U.S. can become better at learning about the people and working together as equals, rather than imposing a series of systems and procedures that work here, but don’t
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
Page 7 of 11
necessarily work there. Little details are what usually kills American companies that forget to pay attention.” If Walmart is able to leverage on its experience in other developing nations like Brazil and Mexico and adapt is good governance and operational practices to South Africa’s market, it could solidify its position in the global retail market, but most importantly in emerging Africa. This won’t come without its challenges though. Walmart will need to be clever in managing and training a comparatively less educated workforce when compared to the US and even to some developing countries, and in ensuring optimal productivity levels. It will have to comply with the particularities of local laws (including the Black Economic Empowerment Act), adapt to the local culture and to successfully replicate its model on African soil in order to extract the most out of its operation in this continent. Moving towards a coherent regional strategy The incursion of Walmart in Africa, initially through South Africa but with expansion plans to other countries of the region, not only denotes the importance of the emerging middle-class consumer market for global corporations and its expected growth, but also sends a positive signal to the investment community regarding the openness and possibilities of doing business in the continent. Walmart also plans to open two stores in Nigeria, according to Nigeria’s Ambassador to the United States, Prof. Ade Adefuye, who mentioned in June 2011 that representatives from the famous retail store had visited him at the Nigerian Embassy in Washington DC as regards the plan to open the retail store in Nigeria. “It is an indication of the growing confidence in Nigeria’s economy,” Adefuye stated, adding that he was currently engaging with the leading US store on the conditions and requirements that would have to be met to do business in Nigeria. Walmart is also planning to enter Senegal, Angola and the Democratic Republic of Congo. A win-win move? The somewhat measured and appropriate intervention of the local antitrust authorities when local opposition was high helped dissolve any doubts regarding
Assignment: 2nd Semester 2012
© IMM Graduate School of Marketing STRM/BM303
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potential government intervention or inadequate popular measures that could end up affecting the entire deal and perspectives for future operations. Libertarian Ludwig von Mises Institute is also optimistic about Walmart: “Walmart is one of the great shining examples of what a market economy can achieve. If I were to give a tour of the United States to visitors from a socialist country, who are used to experiencing chronic shortages of almost everything, Walmart would be one of the first places I would take them. It is a perfect symbol of one of the most remarkable things that we have — an enormous variety of high quality, low cost products that are available to virtually everyone throughout the United States.” While increases in productivity will cause a net gain to the economic system, they also cause a shift in the points of the economic system where human labor is most valuable, changing the landscape of the job market. Some jobs disappear, while some jobs come into existence for the first time. Also, Walmart could help boost the local SME growth; by allowing small producers to deliver their products locally (using Walmart’s modern distribution systems) and have them distributed nationwide, Walmart can help small producers to become viable competitors of the larger players. Producers will weigh the larger market size versus the lower quality-adjusted price they receive when deciding whether to use Walmart as a retailer. Additionally, the entrance of a global player like Walmart in South Africa, although criticised by local unions and other players, could help “raise the bar” in terms of productivity, service delivery, transparency and price-efficiency (prices are expected to go down) within the industry, forcing local players and manufacturers to become more competitive and creative in order to survive in an open and free market. The presence of Walmart will also give producers incentives to engage in process or product innovation. Making product improvements allows suppliers to escape the mandatory price cuts from one year to the next that kick in when producers do not upgrade their product. Similarly, suppliers can obtain higher prices by introducing new product varieties. If that is the case, the most benefited will the local consumer.
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Flores-Arraoz, M. & Musca, V., 2010. Walmart in South Africa: the Good, the Bad and the Ugly. [Online] Available at: http://www.polity.org.za/article/walmart-in-southafrica-the-good-the-bad-and-the-ugly-2011-10-20. [Accessed 30 March 2012]
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CASE STUDY 2: International vs. Local Retailers: The real impact Retailers will hold their own against the global giant Wal-Mart. The South African retail sector has received a significant shakeup since the announcement of Wal-Mart’s imminent entry into the field. LeronVarsha, CEO of Fore Good, leading brand builder and distributor in the FMCG sector, maintains that with South Africa’s level of expertise, retailers will hold their own against the global giant. “Wal-Mart’s entry has driven some South African retailers to act defensively. There’s talk of cutting down on the use of local suppliers, so that they will be able to match the newcomer’s extremely competitive pricing, giving rise to the question: what’s going to happen to local suppliers? Will they continue to receive support? Of course, certain retailers have implemented measures to ensure that they’re able to match the changing landscape. For example, a leading retailer has fast-tracked plans to improve systems and establish a new distribution centre” says Leron Varsha. There are certainly lessons that can be learnt from a global retailer – but perhaps in the sense that continual improvement is always positive. As a global retailer, WalMart has developed expertise in the area of negotiating with international suppliers, whilst South African retailers do not operate on the same global scale. South African retailers are on a par with international players, especially when it comes to addressing different consumer segments. South African retailers have, of late, implemented a greater focus on shopper marketing and category planning, all of which have helped to enhance systems and improve products displayed on shelf. Retailers also have solid technologies in place, producing sound information which is often put to good use. If our retailers’ supply chains are so lean and mean, why isn’t this reflected in prices? According to Varsha the answer lies in a fact outside of the retailers’ control: South Africa is a vast country with expensive labour and increasing energy costs. “Indeed, our land spans a territory of more than one million square kilometres – and although the density of retailers is steadily increasing, Assignment: 2nd Semester 2012
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we have yet to reach the same level of density in, say, Europe. The reality is simple: ours is a costly market. The country’s vastness is also the reason why online retail – which has had a major boost on international industries – has made little impact locally. The cost of distribution makes this exercise very difficult. Nor does the well documented lack of available broadband help, while the fact that more South Africans access the Internet on their cell phones, rather than their PCs, also has implications for the industry. Hopefully, many of these issues will be addressed when more broadband is made available during the forthcoming years, which may in turn result in lower costs. So what role does the distributor have to play in this scenario? “This is an issue that is steadily gaining prominence, especially with retailers threatening to cut out the ‘middle man’ in an effort to enhance the supply chain and cut costs,” says Varsha.
Fore Good Group. 2012. [Online] Available at: http://www.moneyweb.co.za/mw/view/mw/en/page558165?oid=560316&sn=2009+D etail&pid=558165. [Accessed 30 March 2012]
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