Chapter 7 Homework Wal-Mart made a preliminary offer to buy South African

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Wal-Mart in Africa

TEACHING NOTE

SUMMARY

This case is about Wal–Mart’s entry into the African continent and the challenges it faced. The

case also highlights the challenges that Wal–Mart could encounter in establishing itself in the

African retail market. Wal–Mart started to put more emphasis on the international markets to fuel

its growth as the opportunities available in the domestic market dwindled since the financial crisis

Wal–Mart made a preliminary offer to buy South African retailer Massmart in September 2010.

Massmart was the second biggest retailer in South Africa and had operations spread across many

African countries. The offer was accepted by the shareholders of Massmart and South Africa’s

Competition Tribunal in June 2011. Later, Wal–Mart ran into trouble when some trade unions and

government departments alleged that its entry would lead to huge job losses and damage the

domestic manufacturing sector of South Africa. Wal–Mart countered the allegations by saying that

its entry would, in fact, create 15,000 new jobs within three years of the takeover. Wal–Mart’s past

record of being a low–wage, low–benefit employer and one that discouraged unionizing by its

TARGET AUDIENCE

This case is intended for use in undergraduate and post–graduate–level management programs as

part of the International Management, International Marketing and International Business courses.

It can also be used as part of the Business Strategy course as mentioned here:

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Program

Course

Section of the Syllabus

International Management;

International Marketing;

• Global Expansion Strategies

of a Firm

RESEARCH METHOD FOR PREPARATION OF THE CASE

This case was prepared through research on library sources. Thorough research was done on Wal–

Mart, using articles, reports, and corporate biographies published in various newspapers,

magazines, and websites. Several textbooks on international marketing, international business, and

business strategy were also consulted for writing the case.

TEACHING OBJECTIVES AND TARGET AUDIENCE

This case is designed to enable students to:

• Understand the issues and challenges faced by multinational companies like Wal–Mart when

entering new markets.

• Appreciate the importance of MNCs understanding the local market conditions when entering

new markets.

SUGGESTIONS FOR TEACHING THE CASE

The case should be distributed to the students a few days before it comes up for classroom

discussion. Students should be asked to prepare the key and basic issues of the case before coming

in for the discussion. They should form small groups and prepare a presentation on the case for the

class, preferably using presentation software. During the scheduled classroom discussion session,

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TEACHING PLAN

1. Introduction of the case (5 min)

2. Class discussion to identify the immediate and basic issues of the case (10 min)

7. Summary (10 min)

Note: Distribution of case and discussion questions 2–5 days before class.

LINKAGE OF THE CASE TO RELEVANT THEORIES

The basic issues in this case pertain to the following:

• International strategy.

Some of the issues are detailed here.

1. International Strategy

Many business organizations take their operations beyond their home markets in the course of

their expansion. They enter international markets due to several reasons. The most common

reason for entering foreign markets is to increase their revenues or to expand their business

operations when the domestic markets get saturated. But there are several other reasons for

organizations expanding into foreign markets.

• Businesses may start to expand in the global markets as globalization of the markets lead

to more competition in the domestic markets.

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2. Modes of Expanding into International Markets

A firm can expand into international markets through different modes, depending upon several

factors like the needs of the firm, its capabilities, and its past experience. Any organization that

wants to expand to other countries needs to decide on a number of issues that range from the

marketing mix for the overseas subsidiary to segmenting the market, selecting the target

firm in dealing with local governments and customizing its products and services to suit local

tastes and preferences. Bigger organizations with good experience and the resources to operate in

foreign markets can opt for direct investment and set up their own subsidiaries in the foreign

markets.

Figure I

Different Entry Modes

Wal–Mart decided to expand into the emerging markets like Africa because the developed

markets were becoming increasingly saturated. It has good experience operating in

international markets. Starting with Mexico in 1991, Wal–Mart has been successfully operating

3. Analyzing the Global Macro-Environment

Macro–environment refers to the conditions that exist in the whole economy rather than in a

particular region. Many factors in the macro–environment affect a business. Examples of the

factors that constitute the macro–environment include changes in inflation, gross domestic

product (GDP), cultural beliefs, fiscal and monetary policies, employment, technological

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Analyzing the macro–environmental factors is more important for multinational companies

because their operations are spread out across many countries. They need to monitor the

macro–environmental factors prevailing in different countries in which they operate because

they keep differing from one country to the other. Apart from monitoring the macro–

environmental factors of individual countries in which they operate or that they plan to enter,

into the African market for fear of losing jobs. Nevertheless, Wal–Mart made use of the strong

judicial system of South Africa to allay the fears of the opposing parties and gain entry into the

market. Similarly, it needs to properly understand the local cultural preferences of the

consumers in the African continent before it expands further in the continent. A proper

understanding of the cultural environment will help Wal–Mart avoid the mistakes it made in

SUGGESTED ASSIGNMENT QUESTIONS

1.What were reasons for Wal–Mart shifting its focus to Africa? Do you think Africa offers

good growth prospects for Wal–Mart in future?

2. Why did Wal-Mart face opposition from trade unions and other government departments

over its acquisition of Massmart? Do you think the opposition coalition had a valid point in

opposing the deal? Justify your answer.

ANALYSIS

Answer 1

As its home market got increasingly saturated, Wal–Mart started to focus more on international

markets. Growth opportunities in the domestic U.S. market had dwindled as Wal–Mart faced

heightened competition from the more upscale retailers such as Target and online retailers such as

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The growth opportunities in other developed countries where Wal–Mart had its presence too were

getting saturated and some of the countries were embroiled in financial crisis. This prompted Wal–

Mart to look for new international market to grow further. Since it already had a presence in big

markets like China, it was trying to enter the Indian retail market for some time, due to the

tremendous untapped retail market in that country. However, Wal–Mart had to limit its presence to

some wholesale operations in India because the retail sector still had some severe restrictions for

foreign players.

The unstable political environment and poor economic conditions used to be the main hindrances

for multinational companies entering Africa, but some African countries with elected governments

and rule of law offered good prospects for foreign companies. Many multinational companies had

started focusing on Africa. Some African countries also had big modern retailers that could be

acquired to gain an immediate foothold in the market. This led Wal–Mart to select Africa for its

future expansion.

Answer 2

Wal–Mart’s entry into the African market was opposed by some trade unions and government

departments. In the countries that it operates in, Wal–Mart follows the policy of offering cheaper

prices than its competitors to its consumers. It follows several strategies to keep its prices cheaper

than that of its competitors. One way to achieve lower prices is to source its goods from countries

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The opposition’s fears regarding the entry of Wal–Mart into the South African retail market are not

totally warranted. The terms of the deal make it difficult for Wal–Mart to make any major changes

in its relations with its employees for some years after the acquisition was completed. Wal–Mart

was barred from removing any employees for two years and required to honor labor bargaining

rights for three years after the acquisition. Wal–Mart promised to create 15,000 new jobs after the

acquisition was completed. Wal–Mart also agreed upon a supplier development program where it

would train its suppliers in supplying goods that meet the standards set by Wal–Mart and other big

organized retailers. The opposition coalition did not have a valid point regarding the low wages

being paid to employees as the wage levels are traditionally lower in Africa than in the developed

countries where Wal–Mart operates. To counter any further opposition to its entry into Africa,

Wal–Mart should make appropriate changes to its policies related to various issues like labor

relations and procurement of merchandise.

Answer 3:

From the case. we see that Wal–Mart’s purchasing scale, low–cost mentality, and low cost

overheads provide it with a huge competitive advantage in the United States. In addition to this,

the retail giant’s merchandising skills, IT and management skills, human resource policies and

practices, locations in rural settings, and logistics are other sources of its competitive advantage.

Merchandising skills Retail being a very local activity, it is not clear whether Wal–Mart would be

able to transfer this advantage to Africa. Many retailers have failed in international markets

because they were not able to reconcile this difference. Wal–Mart itself had bad experience in

some countries, but overall it had shown that it was able to adapt.

IT and management skills These are undoubtedly the most transferable skills. The retail giant can

leverage its skills in this area and have a significant advantage.

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Logistics This is the least transferable of all the advantages. Most of Africa had poor

infrastructure. Even the best of places in Africa will be found wanting when compared to the

infrastructure in North America. This is a major issue for Wal–Mart because the company gained

huge efficiency advantages in its home market in logistics.

Wal–Mart can succeed in Africa if it can make some changes in its business model to meet the

unique challenges that it may face in the African countries that have a high incidence of poverty

and low income levels. The unique business model of providing everyday low prices that is

followed by Wal-Mart will be very successful in the African market, but apart from just focusing

on low prices, Wal–Mart might also need to make some changes in other areas like packaging and

merchandising. The low income levels of consumers in Africa force them to make their purchases

in limited quantities. Giant supermarket chains like Wal–Mart generally sell their products in bulk

quantities at a discount. Wal–Mart can, however, reduce the size of the packaging for the goods

Wal–Mart also needs to invest in building a good supply chain for its products sold in Africa. Due

to the lack of proper infrastructure, a significant chunk of the farm produce in developing countries

spoils before it reaches the market, leading to supply bottlenecks and higher prices. Wal–Mart can

sell its produce at a cheaper price by building a proper supply chain for its operations in Africa.

People in countries with low income levels generally make their shopping trips on a weekly or

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