Case study Bharti & Walmart Essay

EXECUTIVE SUMMARY The case study is conducted to analyze the sustainability of the joint venture of Wal-Mart and Bharti in disregard of the fact that the two companies have split apart in late 2013. Therefore, the paper will be conducted by using the information given in the case material and course materials, with extra information related to statistics and government policies before the split up of the joint venture. Through the SWOT analysis and pros & cons analysis of the joint venture, it is crystallized that the joint venture was facing obstacles coming from intrinsic factors such as the challenge to maintain low cost leadership and the ability to adapt local market for Wal-Mart and extrinsic factors such as government policy, consumer behavior and poor infrastructure. The challenges Wal-Mart was facing couldn’t all be solved with the partnership. For instance, the market share and overall profitability were low due to the unsolved problems with Wal-Mart’s strategic orientation and the localization to the market, leaving uncertainty to the joint venture. Hence, among three alternatives of 1) Change strategic Orientation and re-positioning; 2) Improve corporate image and social responsibility and 3) Call off joint venture, it’s recommended for Wal-Mart and Bharti to maintain their partnership but to re-position the joint venture and localize themselves to the market. The recommendation would be further explained in the last section of this paper. PROBLEM STATEMENT Given the circumstance, the joint venture was facing challenges on the sustainability for different reasons. Wal-Mart has planned ambitiously for the joint venture, however it failed to achieve the goals of opening sufficient amount of stores in order to gain the market share and improve the margins due to the competence or willingness in localization, the government policies etc. Measures are needed for the two entities to take in  order to achieve profit growth whether to change the positioning/strategic orientation, improve the corporate image to achieve long term benefits or even to call off the joint venture since it’s no longer mandate for Wal-Mart to access the market through a partnership. ANALYSIS In order to tackle the most fundamental issues in Wal-Mart business journey in India, I’d like to first conduct a SWOT analysis of Wal-Mart’s retail business in India as following. Strength: 1. Scale of operations. Wal-Mart is the largest retailer in the world that no other retailer can match. Due to such large scale of operations, the corporate could exercise strong bargaining power on suppliers to reduce the prices. 2. Competence in information systems. The success of Wal-Mart in 21st century is largely due to its competence in information systems and supply chain management. However Wal-Mart’s advantage in supply chain management was shattered when it entered India. 3. Varity of products. Wal-Mart could offer wider range of products than local competitors. It has also been proven that Indian consumer would embrace affordable products with an upper standard of quality. 4. Low-cost leadership strategy. This strategy has helped Wal-Mart to become the low cost leader in the retail market. Weakness: 1. Inexperience in localization. Even though Wal-Mart was expanding its global appearance, it lacked experience in adapting its products and services to the specific demand of local market due to the domestic strategy. 2. Different shopping mentality. The Indian consumer mentality of â€Å"save and buy† was totally different from the American’s and Indian businesses were focusing more on B2B model, therefore the success of Wal-Mart’s B2C model was questionable. 3. Dependency of logistic system. Wal-Mart and its low cost leadership strategy are largely depended on an effective and efficient warehouse system which was not fully developed in India. 4. Lack of skilled employees. Wal-Mart would have to face the issues with unskilled employees while doing business in India and would potentially increase the training cost of employees. Opportunities: 1. Emerging retail market. Indian retail market grew by 5% in 2006, opening huge opportunities for Wal-Mart’s revenue growth, and the market was opened to Wal-Mart through joint venture. There was also existed an emerging demand of organized retailer. 2. Rising acceptance of foreign products. The increasing acceptance of high quality and low price foreign products opened the opportunities for Wal-Mart as well. In addition, the consumer disposable income and purchasing power was increasing. Threats: 1. Increasing resistance from local communities and retailers. Wal-Mart had a negative impact on local retailers therefore it faced considerably the political pressures from local communities due to the protection of local retailers. On the other hand, Wal-Mart faced the direct challenges from organized local retailers such as Pantaloon, RPG group etc. 2. Challenges from other MNCs. Other multinational corporations, such as Spencer’s Retail were also threatening Wal-Mart’s business in India. Given that some traditional advantages such as the efficient warehouse system were weakened in India, Wal-Mart’s domination in India would be shaken. Wal-Mart’s Challenges in India The opening of an emerging market with a rapidly growing middle class should create a promising future for Wal-Mart. However along with the opportunity are also challenges. After analyzing the SWOT of Wal-Mart, it’s very clear that Wal-Mart was facing challenge from extrinsic environment and intrinsic core competitiveness. Traditionally, foreign investors fail mainly because of the incompetence of maintaining their core competitiveness. But in India, Wal-Mart might be facing more of the external environment challenges. To begin with, retail industry was one of the few sectors where FDI was not allowed due to the protection of small and medium sized local retailers before 2012, forcing multinational corporations to seek a joint venture with a local partner rather than wholly-owned model as in other countries. Local communities worried that Wal-Mart would eliminate small retailers and intermediates who played important roles in supporting local economy. In addition, Wal-Mart cou ldn’t cover the job loss since the main strategy of the company was low-cost leadership which suggested that Wal-Mart would hire just-enough employees to maintain its operations and would cut the  middle-man in the process of procurement in its supply chain. The Indian government requires foreign retailer to source 30 per cent of its goods from small supplier with objectives to discourage imports by foreign retailers from their few large dedicated suppliers and to weaken Wal-Mart’s bargaining power and make economic growth becomes sustainable1. Moreover, with an aggregate score of 2.5, India ranks 64th in market openness and is largely due to the fast real import growth, according to International Chamber of Commerce (2013). India has its weakest score in trade policy (2.0) which is also the second to last score among G20 nations (see table1). From a cultural aspect, the Indian consumers have a different mentality of â€Å"save and buy† thus traditionally Indi an businesses were focusing more on B2B model. Dealing with foreign authorities requires finesse and charm, and given that lobbying was forbidden in India, Wal-Mart might not be able to influence the government policies in an official way and Wal-Mart should avoid seeking inappropriate channel to reach the local authority such as bride. As for intrinsic competitiveness, Wal-Mart was facing problem with losing its traditional advantages. To begin with, the national differences would continually question Wal-Mart’s ability to adapt itself to the market since Wal-Mart had less experience in foreign market. Given that the road infrastructure and the modern supply chain system were not fully developed in India (see table 2), Wal-Mart would face the inefficient transportation in its supply chain. In addition, Wal-Mart would need to associate with local partners in order to solve the warehouse shortage and poor infrastructure. As a result of the lack of skilled labor, labor producti vity in Indian retail market should be lower and Wal-Mart would have to increase its spending on employees’ training and therefore it would be challenging for Wal-Mart to maintain its advantages in low-cost leadership in India. Finally, Wal-Mart stores were competing with entrenched local general merchandise and food merchants, potentially leading to unprofitable for the company. Joint venture with Bharti Given the circumstances, it’s logically for Wal-Mart and Bharti to form a joint venture. In the rapidly growing organized retail market in India, Wal-Mart and Bharti were able to leverage the needs and assets of each other’s (see table 3). For Bharti, one advantage of this joint venture is  that since the management of Wal-Mart promised to lead the liberation of retail market, it would be beneficial for both two parties and India as well. From the same perspective, Wal-Mart was a particularly attractive partner to Bharti for the strength of Wal-Mart in information technology and supply chain management knowledge that could turn around the infrastructure, supply-chain and IT through a strategic alliance (Bose, 2012). As for Wal-Mart, through the 50/50 venture for backend supply chain management and wholesale cash-and-carry operations, (Bose , 2012) Wal-Mart was able to utilize Bharti’s domestic facilities as a jump board to the emerging market and it was able to bypass some restrictions that were harmful to its business. With Bharti’s deep knowledge of India’s fast-growing market and its prior foreign experience of cooperate with other foreign firms (Bose, 2012), Wal-Mart would have a smooth start in the early stages of the joint venture (Luo, 1998). By increasing its purchase from local suppliers and associating with prestige local firm, Wal-Mart could also possibly change positively the consumer perception on itself. However, there were also many disadvantages brought by the joint venture. First, it took time and efforts for both parties to form the joint venture, meaning Wal-Mart might take longer time to expand compared with using wholly-own model. In this joint venture, Wal-Mart and Bharti would deliver a mixture of brand image which might confuse the consumers, and the local partner might take advantage from this mixed message and knowledge transfer as mentioned before. As a result, this joint venture had the possibilit y of creating a new competitor for Wal-Mart. As mentioned before, one of the biggest problems Wal-Mart had was from the government regulation which either of the two parties could lobby the government. In addition, the financial situation of Bharti Enterprises was not a positive factor in their joint venture, for its debt was at a high level and affected negatively the cash flows of the joint venture. Both companies had complementary strengths they were able to utilize to expand in India in a long term. By leveraging each other’s expertise, both entities were able to use and build upon best practices that had proven successful for both companies in their individual ventures, performing better than either company could do alone in the growing Indian retail market. However, since many disadvantages remained for Wal-Mart and Bharti and the fact that they haven’t acquired the expected market share, the future of this joint  venture was in vague. Hence, the two companies should focus on the sustainability of the joint venture. In this regard, both two parties should take measures to reassure the sustainability of their joint venture and improve its performance accordingly. According to Dr. M.N.H. Mazumder, there are three traits that MNC should consider when selecting local partner, strategic traits, organizational traits and financial traits. Therefore, the sustainability of the joint venture would also be dependent on the fits of these traits. For instance, in terms of strategic fits, by establishing a mutually satisfied, efficient, and productive trustful partnership with Bharti, Wal-Mart would be very likely to maintain a common goal so that the joint venture could avoid the risk of being sabotaged by the dysfunctional conflicts between the two partners. In the following section, we’ll be discussing the details of alternatives that could help in the sustainability. ALTERNATIVES: Alternative 1- Change the strategic orientation and re-positioning In 2007, Wal-Mart announced with ambitious that partner with Bharti, it planned to open hundreds of stores, it has quietly shelved its expansion plans after complex market conditions. In 2012, Wal-Mart opened just five wholesale stores in India last year while it planned to open 22 stores. In addition, while Bharti wished to open more small traditional stores or cash and carry business due to the fragmented market and consumer behavior, Wal-Mart was pushing its large retail stores which usually take 24 months to open. Therefore, since Wal-Mart struggled to gain market share, it should be carefully examine its expansion plan and consider Bharti’s perception on the market. Alternative 2- Improve corporate image and social responsibility As stated, Wal-Mart was facing obstacles brought by its corporate image and it has been criticized for eliminating local business and leading to higher unemployment. By operating a public relation campaign and fulfilling its social responsibility in education, agriculture (assisting local farms) etc, Wal-Mart should be able to change the stereotype perception of foreign investors and establish a good foundation for less challenges from the local society. However, this alternative wouldn’t enable Wal-Mart and the joint venture to expand its market share in a short term. Therefore it’ll require both two parties to have coherence on campaign cost and long term revenue. Alternative 3- Call off joint venture Bharti Enterprise has been struggling under a debt of USD 12 billion of its mobile business. Bharti’s liquidity would directly affect the joint venture’s ability to pay off short term financial obligations. Also considering that Wal-Mart is allowed to the 100% ownership in a retail company in India, it’d also be an alternative for two parties to split and do business alone. It’s possible that Wal-Mart will lose its market share in a very short future due to the losses of information and suppliers in this split up. RECOMMENDATIONS It’s recommended to maintain the joint venture, but changes are needed in the strategic orientation and the positioning. For the joint venture and mostly for Wal-Mart, building convenient stores and therefore establishing a larger presence in the Indian market are crucial to the sustainability and profitability. In order to solve extrinsic problems such as the consumer behavior of purchasing on a daily basis rather than buy a weekly portion, it’s more flexible for Wal-Mart if it could have smaller stores covering more locations and it would be positive to consumer loyalty with larger presence in different regions, though thorough research on the target consumer markets would be needed in order to offer Indian consumers the type of products they desire at the appropriate quantity and location. In addition, opening smaller stores would require two parties to work collectively and more productively on their supply chain management due to the complexity brought by more stor es. REFERENCES: Edwards, Ron; Adlina Ahmand and Simon Moss (2002): Subsidiary Autonomy: The Case of ICC (2014): Open Markets Index 2013 (05.03.2014) [URL: Klaus Schwab, World Economic Forum (2013): The Global Competitiveness Report 2012–2013 Indranil Bose (2013): Wal-Mart and Bharti: Transforming retail in India Yadong Luo (1998): Joint Venture Success in China: How Should We Select a Good Partner? APPENDIX: Table 1: Scores on the Open Markets Index 2013 G20 Rank Country Overall OMI 2013 Rank Aggregate Score Trade Openness Trade Policy FDI openness Trade Enabling Infrastructure 18th India 64th 2.5 2.9 2.0 2.5 2.8 Source: ICC 2013 Table 2: Ranking of India in infrastructure India Quality of overall infrastructure 86th Quality of roads 85th Quality of railroad infrastructure 24th Quality of port infrastructure 82th Quality of air transport infrastructure 67rd Available airline seat kilometers 12th Quality of electricity supply 112th Mobile telephone subscriptions 113th Fixed telephone lines 117th Source: World Economic Forum 2013 Table 3: Needs and capabilities of both parties before and after their joint venture Before joint venture Needs Capabilities Wal-Mart 1. Entry to the Indian Retail Market 2. Governmental lobbying Skills 3. Knowledge of local market 1. Largest retailer in the world with low cost leadership and a focus of â€Å"Always low price† 2. Known for its information management and supply chain management. Bharti 1. Need retailing experience 2. Need information technology and supply chain management skills 1. Known for its brand and execution capabilities 2. Known for its experience in collaboration with foreign companies 3. Strong Consumer Marketing and distribution capabilities due to other business 4. Bharti’s Agriculture programs with local farmers