Wal-Mart China Analysis

Since China was opened the market in earlier 1980s, a number of foreign supermarket corporation were entered, e. g. Carrefour, Tesco and Wal-mart. Now the Wal-mart has become one of the very important supermarkets in Chinese supermarket sector. This assignment is intends to offer the evaluation for the business and performance of Wal-mart in China in terms of PEST and SWOT models, with critical discussion on the choosing and using of those two analytical models, so that provide the critical analysis and related recommendation to Wal-mart’s strategy in China.

Critical evaluation of PEST and SWOT models Since the corporate strategy has been commonly described as a matrix that provided proper business direction and extent for company to achieve competitive advantage in the business environment (Johnson et. al. , 2008), it is fundamental for companies to understand both of the external and internal environment of their business before any strategic development or decision making. In fact, for company which intends to understand the external environment, there are three levels of circumstance existed.

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The highest one is macro-environment. It is an outer and broadest layer around the business; refers to the overall states, activities and structures in human societies; and superior to the industrial and competitive layers (Thompson, 2001). Scholars such as Porter (1980) has argued that the evaluation on the state or issue of macro-environment is essential as they can impose opportunities, limitations and uncertainties to all the business already existed in or likely to enter a market, and then determine their states of play.

In that reason, PEST is a specific tool to deal with the analysis of macro-environment. It is delivering a suit of taxonomic classification for company to explore external situation, which involved four factors: politics, economy, social-demography and technology in a market or global society (Burt et. al. , 2006). By using PEST model, it is enables the firms to expediently and particularly explore and assess the contents of wide range of aspects in the macro-environment and any significance on business.

Hence, unlike Porter’s five forces only place attention on political factor for potential market entry and some models with no attention on macro-environment e. g. Ansoff Matrix, PEST model is offers a particular means for company to explore the general state of macro-environment. However, on the other hand, PEST model is not designed to analyze the rest of layers of external environment, as well as the internal environment of a business.

Moreover, PEST model has been criticized since it analyzes the macro-environment one factor by one factor and incompetent to explore and assess the interrelationship among those factors (Burt et. al. , 2006). In that case, compare to PEST model, SWOT model is an improved and more integrated tool, which able to utilize the analysis of PEST but also offer the capability analysis involved both of the internal and external environments. The ‘SWOT’ is refers to company’s strengths, weaknesses, opportunities and threats.

It’s pointless for them to exist alone but SWOT model has offered the connections for them to relate with various aspects of internal and external circumstances. In order to implement SWOT model, scholars such as Hussey (2002) and Piercy & Giles (1989) have outlined that the company need to know the shared vision of business, products or service inside the organization; consumer demands and behaviours, competitors’ activities and movements in external environment, and integrated them to the sections of company’s strengths, weaknesses, opportunities and threats.

Thus, by undertaking a SWOT analysis, the companies are able to analyze, realize and summarize the overall capacities to sustain or develop certain business or strategy in terms of integrated states of play in both internal and external environment. Compare to other tools such as BCG matrix, Ansoff Matrix and Porter’s five forces, SWOT model is seems easier to be adopted and particularly good at offering comprehensive capabilities analysis of a company which can cooperate with PEST analysis together.

The evaluation of Wal-mart in China in terms of PEST and SWOT models Political factor. It’s a trend that the Chinese government increasingly open market to foreign investors by reducing the barriers of entry. Recently, the State Council of China has altered the foreign investment policies, encouraged and supported the foreign investment on the service sector, especially the labour intensive but environmental friendly business in low developed central or western China (Chen & Liang, 2010). The government has also permitted the foreign investors to set up partnership business with local firms (Cao & Tai, 2009) rather than formerly approved options of joint venture and wholly owned.

On the other hand, the current government and communist party are working to ease the social inequality. The minimum wage and annual income protection have been approved and increased in China at present (Wang et. al. , 2009). Also, they have promoted the establishment of government-led labour union in major foreign business and expect to require all of them to set up in later (Kahn, 2006), which aim to create official-approved labour protection chapter and collective bargaining in foreign firms. Economic factor At present, the Chinese economy has partly recovered from previous strike of global economic crisis.

With sizable fiscal stimulus in public sector and release of massive lending in recent years, the growth of Gross Domestic Product recovered notably and now back to pre-crisis level, which is nearly 10%; the available household deposits have been increased accordingly that the rate of growth is 10% between 2008 and 2009 (OECD, 2009). However, as great deal of finance flowed to the real estate not residential sector, the growth rate of industrial production is much lower than former years, and the price level for foods and producers rose largely over the expectations (Farley, 2010; Halligan, 2010).

The total values of export which occupied key shares in the GDP, is still staying in downturn that less than over $180 billion compare to the high peak in 2008 (OECD, 2009). They are imposing the inflation pressure to citizens. Social-demographic factor Now China has large number of internet users, 384 million, as a quarter of total local population and expected to grow constantly (Internet World Stats, 2010). The amount of online buyers is also in great level and fast raising that a third of Chinese internet users purchased online and they are mainly in young age group (Buhalis & Li, 2006; Mummalaneni, 2009).

China also has largest population in the world; most of local people, particularly the middle or higher class, are concentrated in the urban areas of coastal and central parts of China, where relative developed and welfare and income level out there is higher than the rest of China (Cai, 2007). So, in near future people will continually immigrate to those areas for better life. On the other hand, in entire China, local citizens are become more educated and confident presently, which have realized the importance of enterprise’s ocial responsibility and paid greater attention on it (AmCham-China, 2010). Technological factor The information technology has been developed and popularized greatly in nowadays China. Via the wide adoption of Digital Subscriber Line, leased cable line and local 3G standard, TD-SCDMA in recent years, now China has over 360 million broadband users, and expected to grow continually follow the further laying and improvement of local 3G network (CNNIC, 2010).

Also, the integration of local credit cards’ payment systems and electronic security authentications centres have been performed in China since late 1990s, and at present there are a number of electronic trading and payment platforms have been built (Bai, 2010), they are offering online shopping services with relative online/offline payments toward the internet orders, which recognized by and connected with the payment or money transfer system of post offices and important local banks in China.

Strengths Currently, Wal-mart is obtaining the strengths of localized sourcing and local supplier networking. Since late 1990s, Wal-mart has transferred most of its products supply contracts to local suppliers progressively (Adams, 2002) and many of them are the privately-owned workshops in southern China, where had less legal stress (Hemphill, 2005). So, they have offered great level of product transaction cost advantage to Wal-mart in terms of lower labour cost in production and lower transport cost.

Meanwhile, Wal-mart has largely improved the connection with local suppliers. Many specialized supply contracts and business partnerships have been set up with the local giants of commodity supply for product sourcing of Wal-mart’s own brands (Talley & Keeffe, 2010); and a online sourcing platform, Retail Link, has been developed by Wal-mart that connected all the registered local suppliers in entire China together and allow them to trace Wal-mart’s up-to-date stocks and demands of products and then place biddings and supplies (Hu, 2010).

Compare with many local or foreign competitors in China, Wal-mart is the leading supermarket to use online sourcing platform for networking suppliers in nationwide area, so it is able to reduce the biding prices of local product supply and increase the possibility for Wal-mart to get access to lowest biding prices. Moreover, the enhanced connections with those major local suppliers should provide excluded and preferential treatments of sourcing to Wal-mart.

Eventually, they are helping to build and maintain the advantage of low product transaction cost for Wal-mart. Weaknesses Although Wal-mart has developed its business in China 15 years, it has only opened 189 stores, and most of them are located in major cities of Chinese coastal provinces such as Guang Dong, Fu Jian, Zhe Jiang, Jiang Su and Shang Hai (see Appendix 1). It is relative small amount of units and somewhat over-concentrated distribution in the Chinese supermarket sector.

For instance, each of two major local supermarkets in China, Hua Lian and Shi Ji Lian Hua, have invested, franchised and owned over a thousand of branches across the whole country. On the other hand, when compare to the foreign competitors such as Carrefour which has entered China slightly later than Wal-mart, it has developed a little more amount of branches than Wal-mart now; and Tesco has already set up more than 50 branches since 2004 (Moreau, 2008).

So, Wal-mart is seems going into a predicament currently. The scattered distributions and small amount of stores in inland provinces will not able to contribute great level of economies of scale to compete local competitors in one hand; on the other hand, it always need to compete with large amounts of competitors and their branches in well-developed area, such as those coastal provinces, but the amount of store for Wal-mart is relative too small to attract more customers or shopping.

Opportunities. Since the Chinese government has continued the open policy to foreign investors and welcomed the overseas investment on the service, labour-intensive and environmental friendly business in low-developed central or western China, it is a good opportunity for Wal-mart to obtain the support and favour from government and penetrate those markets or rise the market shares. The permission on foreign-Chinese partnership by government and the case of huge and still increasing market of coastal provinces are also giving a chance for Wal-mart to continually compete and develop in those well-developed market in a new but even lower cost operating mode.

Furthermore, in the case that the amount of internet user raised largely and continually in China and most of them belong to younger generation; it’s profitable and timely for Wal-mart to launch the internet shopping service in order to realize the great level of potentiality of online purchases and exploit the curiosity and demand of expediency of young people, when most of competitor haven’t realize that.

The gradually-developed infrastructures of information technology and integrated online shopping and payment platform in nowadays China will offer fundamental support for Wal-mart to establish the leading and also unique platform and experience of internet shopping. At last, although the Chinese economy has progressively recovered from the strike of global economic crisis, the citizens are encountering the stress and danger of inflation, especially in the aspect of foods. Thus, the lower prices, discounts and promotions on food items are expected for Wal-mart to perform and sustain.

Challenges. The determinations and actions of current Chinese authorities on reducing the social inequalities are likely to impose or raise the managerial difficulty and labour costs on Wal-mart. It is because the build up of trade union inside the company will change the power and managerial structure, labour chapter, and boost the labour costs especially when come with the enforcement of minimal wages and annual income protection. Moreover, the circumstances for export and industrial production stay in depression in China have reflected the challenge that many local manufactories and suppliers are on the brink of collapse or suspension.

So, Wal-mart is getting more difficult to neither obtain the access to wide choice of low-price supplies as before nor lower down the product transaction costs. At last, because currently Chinese citizens are paying more attention on the enterprise social responsibility, the way for Wal-mart to control the product transaction costs in China which outsources the production to some privately-owned workshops in lower legal pressure and labour wage, have been publicized and criticized by the public now (Mufson, 2010) as it sacrificed the benefits of local suppliers and workers.

Now Wal-mart is encountering the challenge of improving its approaches of products sourcing and cost control. Conclusion and recommendations Through the using of PEST analytical model, this article has offered a comprehensive exploration of macro-environment of Wal-mart in China in the first place, and then performed a SWOT analysis on both of internal and external environment of Chinese Wal-mart by integrating the analysis results of PEST model.

In general, the Chinese government is encourages the foreign investment on the low-developed areas such as central and western part of China, and the business of service sector, labour intensive and environmental friendly; Chinese citizens are currently live in the pressure of food price inflation; and Wal-mart has competitive strengths on the localized sourcing and networking of local suppliers.

So, Wal-mart is recommended to enter the market of central or western part of China or increase the market shares out there with the business strategy that offered the lower price, discount and special promotion on food items, in order to attract current customer and reduce competitors’ competitive power by exploiting government support and its strength of transaction cost control.

Also, as Chinese government permitted the foreign-Chinese partnership and the coastal areas of China is becoming a large, still increasing but also highly concentrated market, Wal-mart is also advised to perform partnership with existing supermarkets in those coastal areas in order to boost the market shares and volume of business quickly in the low cost way.

Furthermore, Wal-mart should think about the launching of internet shopping service for unique online shopping experience, in order to react to great potentiality of online purchases from the large and increasing amount of internet users in young age group and utilize the well-developed infrastructures of information technology and integrated online shopping and payment system in China.

At last, because many manufactories and suppliers are still stay in the depression, and Chinese government and citizens are more critical about the labour protections and enterprise social responsibilities; therefore, Wal-mart is recommended to actively set up the labour chapter before the build up and suggestion of labour union; and abandon the zero-sum-game-like approach in product sourcing, which it needs to set up a fair and regular system to guarantee the benefit of local suppliers and labours in one hand, and also ensure they can supply the products in agreed qualities and quantities.