Walmart Company’s Growth: Mexico Entry and NAFTA Agreement

Summary

This case analyzes the growth of Wal-Mart. It is a synthesis of the exponential growth of Wal-Mart and its eventual entry into Mexico. It is eyeing the entire southern business. The case looks into the effects of NAFTA agreement on the growth of Wal-Mart. It also analyzes the competition in Mexico critically. This is in contrast with the main supermarket supply chain in Mexico, Commerci. The case looks at the possible extinction of this retail chain since the signing of the NAFTA agreement and the subsequent entry of Wal-Mart in Mexico.

In light of the above synthesis, the case looks into the competitive strategies of both Commerci and Wal-Mart. It also looks at the NAFTA agreement to find elements that may have contributed to the current situation. It also states the status quo during the time of Wal-Mart’s entry into the southern foray. So, what did other retail chains do wrong to enable Wal-Mart’s exponential growth to be the leading retailer in two decades? The case briefly looks at the Mexican market. It analyzes it to determine what may have been lacking to motivate shoppers’ shift of allegiance. Is it the market’s volatility or Wal-Mart’s market-research genius? (Daniels et al. 2009).

Effect of NAFTA Implementation

To some extent, the success of Wal-Mart in the south is attributable to the NAFTA agreement. The agreement was signed in 1994. It opened more trade between the south and the United States of America. It also reduced the tariffs charged on foreign companies in Mexico from 10% at the time to a standard 3%. Normally, Wal-Mart has a way of cutting costs (Daniels et al., 2009). Hence, with the reduced tariffs, Wal-Mart’s costs were notably lower than the other local competitors such as Commerci, Soriana, and Gigante were. Many pundits concede that Wal-Mart would not have entered Mexico were it not for the NAFTA agreement. The agreement went ahead and guaranteed Wal-Mart a permanent stay through the clause that allowed for a long transition before any possible nullification of the trade agreement (Daniels et al. 2009).

The NAFTA agreement also opened Mexico for wide foreign investment interests. Therefore, since 1994 when it was signed, Mexico has been abuzz with investment. This increased the purchasing power of the Mexicans. Hence, Wal-Mart entered into a stable market with great possibilities for growth. The increased investment interest meant that the costs of labor, raw materials, and other essential inputs for Wal-Mart would go down. Subsequently, it led to wider opportunities for growth and propelled Wal-Mart to its current pole position in the Mexican retail market. The agreement also reduced the risk of entry. This is because it created a sense of stability between the nations under the agreement hence creating some form of predictability of the political scene and legal department. This environment meant a better atmosphere for growth.

Wal-Mart’s Competitive Strategy

The above environment created by the implementation of NAFTA leads to the question; could another retail chain replicate the success of Wal-Mart? Is Wal-Mart special to have registered that growth? A look into Wal-Mart’s competitive strategy reveals that Wal-Mart is a special case to some extent. First, Wal-Mart was a successful brand in the United States before entering the Mexican market. Hence, there was a lot of fanfare, holding of breath and customer anxiety following the news of entry to Mexico. All these may have contributed to the initial success of Wal-Mart (Daniels et al. 2009).

As time went by, Wal-Mart became a leading retailer through other approaches. Following the aforementioned reduction of tariffs on foreign companies from 10% to 3% ensured that Wal-Mart continued its cost and price reduction strategy. This approach meant that other retailers in Mexico (Commerci, Soriana, and Gigante) employed the retaliatory approach. This secondary and imitator approach was working for Wal-Mart, and it reduced others to underdogs (Daniels et al. 2009).

Before entry Wal-Mart was an already existing chain with a wide network of suppliers and negotiation power, this ensured Wal-Mart got loans from institutions for expansion in whatever way it desired. Additionally, the retail chain had a high purchasing power. This ensured that the company got the best deals in the suppliers’ side of the market. They also purchased in bulk, further reducing its costs. Consequently, the prices of its goods were lower than other players who found it hard to get such bilk discounts and could not effectively negotiate to fund for expansion (Daniels et al. 2009). Wal-Mart’s management of the supply chain is excellent. Any competitor that wants to trounce Wal-Mart must beat this. It uses real-time inventory management that informs suppliers of the needed inventory in real-time. It also looks into the behaviors of shoppers to predict the inventory required for the different times of the year adequately. These technological and software advantages helped beat the competition (Wal-Mart 2012).

Wal-Mart’s initial strategy was not head-to-head competition. First, the company built massive and better infrastructure in both the technological and physical foray. Then, it used the infrastructure to beat rivals — for example, better demand forecasts, inventory management systems, supply chain management systems, and customer relationships. Meanwhile, competitors chose to emulate Wal-Mart. Wal-Mart also studied the market to ensure it understood the needs of each segment in terms of price, convenience, and goods criteria (Daniels et al. 2009).

Before locating a branch, Wal-Mart ensured a number of factors played to its advantage. For example, it located in less populated areas. This meant that there were ample parking space and convenience. However, instead of premium rating its prices because of the better ambiance is created, it actually reduced them. This eliminates direct competition and reduces operations costs significantly. In its urban centers, it ensures that it competes on the support of customers, prices, and the fact that they are a renowned supply chain.

In conclusion, I do not think the NAFTA agreement may have played a savior for other retail chains. It only played a role in the entry of Wal-Mart into the Mexican market. Thereafter, the competitive strategies it employed helped it to position itself highly in the market. Currently, it is the largest retail chain in Mexico, with over 120 branches (Wal-Mart, 2012).

Commerci Strategies

As mentioned earlier, Commerci decided to play the second fiddle. This way, it would only emulate strategies that Wal-Mart employed. However, it was disadvantaged from a number of points. First, it was not as large as Wal-Mart. This meant it could not get some advantages Wal-Mart was enjoying. This includes purchasing power and negotiation with suppliers. Subsequently, it lost a major stake in its market share, and currently, it faces extinction (Daniels et al. 2009).

To avoid a scenario where it closes shop, Commerci has joined hands with other retail chains to ensure Wal-Mart’s downfall. This includes initiating legal suits and lowering the prices of some selected commodities. Commerci has also joined hands with other retailers such as Gigante and Soriana to increase their purchasing power to reduce prices. The major competitive strategy adopted by Commerci is to differentiate itself. It has segmented the market and decided to focus on appealing the middle class. They are now providing a better atmosphere for shopping, products, and lower prices specifically targeted to the middle class (Daniels et al. 2009).

Sometimes the retail chain has resorted to bad practices such as price-fixing. This has led to lawsuits. However, it has also resorted to initiating a legal suit in which it accuses Wal-Mart of ensuring customers shop at their braches through selling store coupons. However, this is a competitive strategy that Wal-Mart says it will not stop using. A long-term strategy should ensure a careful study of Wal-Mart’s way of doing business and trying to outdo it by looking at loopholes. The company could decide to go public to have better public reception and loyalty (Daniels et al. 2009).

None of the above strategies is working for Commerci. A better strategy is to find an effective cost reduction strategy that beats Wal-Mart. It should also invest in technology, research, and software solutions to study major areas of its market. The only good strategy is the differentiation and merging where it ensures it reduces prices and remains competitive. Commerci has also resorted to purchasing only from local suppliers, which is not a working strategy. It limits its boundaries of possible and better deals outside the local foray. However, it helps to eliminate the high charge of importation that Mexico charges.

References

Daniels, J. et al. (2009). International Business: Environments & Operations. New York: Pearson.

Wal-Mart. (2012). Wal-Mart Official Website. Web.