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?
1. A first class management team. Wal-Mart has a first-class management team that helps the company to pursue a number of innovative operating strategies. This excellent team also leads the company to deliver a large selection of high value merchandise at a low cost to consumers.
2. Small primary competitors. When Wal-mart entered to markets, most of primary competitors were small like “mom-and-pop” stores. These stores had much higher cost structure than Wal-mart. With this opportunity, Wal-mart could gain share in these towns dramatically with no competitors.
3. The development of a hub-and-spoke-based distribution system. Wal-Mart developed the concept of central distribution warehouse (hub-and-spoke) to serve clusters of stores. With this system, it allowed Wal-mart various advantages:
• Rapidly replenish stock in its stores • Keep stores’ inventory to minimum • Higher sales per square foot and more rapid inventory turnover • Increase store sales
• Drive down inventory cost and logistics cost
4. One of the first to utilize computer based information system. Wal-mart used the information system to track in-store sales and transmit this information to suppliers. The benefit of information is the company can determine pricing and stocking strategy and better manage inventories. Moreover, with the combination of state-of-the-art information systems and the hub-and-spoke distribution system, Wal-mart could build the leanest supply chain in the industry. Wal-mart is considered as a leader in information systems.
5. Advance communication systems. With the use of information systems, all Wal-mart stores, distribution centers, and suppliers are linked via information systems and satellite-based communication systems. This allows for daily adjustments to orders, inventory, and prices.
6. A dynamic and egalitarian culture. The culture had delegated the major...