Strategic Analysis of Expansion of Wal-Mart in Africa

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Economic: The opposition to the deal claimed that there would be huge job losses due to the entry of Wal-Mart as it might import a large part of its merchandise from cheaper markets like China. They claimed that 4000 jobs would be lost immediately even if Wal-Mart imported one percent of its merchandise. The manufacturing and agricultural sectors in South Africa had been declining just before Wal-Mart decided to enter South Africa. Importing cheaper merchandise from China would hit the manufacturing sector of South Africa directly

Social: Wal-Mart hoped to create at least 15,000 new jobs within the three years of the merger. According to the deal they accepted, Wal-Mart would be restrained from cutting any jobs in Massmart for two years after the merger. Wal-Mart was also to give preference to the 503 Massmart employees who had been retrenched in June 2010 in its future recruitments. In a move to develop the local manufacturing sector, Wal-Mart agreed to implement a program to improve the local suppliers within three years of the merger. It earmarked 100 million rand (US $13.37 million) for a supply chain training program.

Technology: Wal-Mart started using a new technology called RFID to track its merchandise better. It used the technology to gain good control over its supply chain. Wal-Mart developed the world’ largest commercial satellite system to collect and give information to the vendors. Through this practices, Wal-Mart could stock the latest merchandise in its stores and replenish it faster. This facilitated in recruiting employees who didn’t need to be trained heavily to handle store operations.

Environmental: In order to make its prices lower than its competitors, Walmart had to sacrifice quality, meaning that the products fall apart much more quickly. As a result, more consumer goods would wind up in landfills faster and more resources would be needed to create items to replace those that were discarded.

Legal: Wal-Mart offered to buy a controlling stake of 51 percent stake in Massmart. The offer was accepted with some conditions but opposed government departments and trade unions. On March 9, 2012, the Competition Appeal Court of South Africa ruled that the US-based Wal-Mart stores, Inc. (Wal-Mart), could go ahead with its US$2.4 billion purchase of stake in the South African retailer Massmart Holdings Limited (Massmart). By ruling in favor of the deal, the Competition Appeal Court upheld the 2011 ruling of South Africa’s Competition Tribunal.

Porter’s 5 Forces

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Using the five forces model to determine the nature and strength of competitive pressures in a given industry

- Bargaining Power of Buyers: HIGH

In the South African industry the buyer power is relatively high as customers can easily go elsewhere to purchase the same products that Wal-Mart offers with the exception of the generic Wal-Mart branded products. Wal-Mart however creates a competitive advantage by making it more attractive for customers to buy from them rather than their competitors; they do this by selling at a cheaper price and offering coupons to current and potential customers. But there are already multiple companies competing on price. In fact Shoprite already has 36% market share, Pick n Play 28 % and Woolworth 8%.

- Bargaining Power of Suppliers: LOW

- There is low supplier power since there are myriads of suppliers to buy the same generic used products from.

- Wal-Mart keeps this low supplier power even lower by having its suppliers compete via bidding for their business.

- They also purchase in bulk giving them more leverage over the suppliers. But with other buyers in the market, such as Shoprite, it becomes easy for the supplier to bargain.

- Does not allow retailers control over merchandise

- Limited percentage of merchandise sourced from single supplier to not give them too much power and have greater bargaining power

- Threat of substitute products or services: HIGH

The main threat is online grocery shopping in which the products are delivered to the customers households mostly by Shoprite. There are other discount shops in South Africa as well so they could provide substitutes to the generic products that Wal-Mart has to offer.

- Threats of new entrants: HIGH

Wal-Mart’s threats are somewhat high as the grocer’s/ supermarket’s market is relatively easy to enter. An example of this is different MNCs are targeting South Africa as a primary stage of expanding into the African market where there is very high potential to explore and very less saturation.

- Rivalry among existing competitors: HIGH

There is high rivalry among the competitors as they have a lot of competition from other well established companies such as Pathmark, Food town, or Stop and Shop as well as little neighborhood stores. All of these companies are in the retail industry and are rivals for Wal-Mart. To reduce this Wal-Mart tries to distinguish itself from its competition by emphasizing low prices than competitors which might be of an advantage in a poverty ridden country like Africa

Porter’s Generic Strategy Framework of Wal-Mart

Porter's generic strategies describe how a company pursues competitive advantage across its chosen market scope. There are three/four generic strategies, either lower cost, differentiated, or focus. A company chooses to pursue one of two types of competitive advantage, either via lower costs than its competition or by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope, either focus (offering its products to selected segments of the market) or industry-wide, offering its product across many market segments. The generic strategy reflects the choices made regarding both the type of competitive advantage and the scope.

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In case of Wal-Mart we can see that is follows the broad low cost leadership strategy. It had a record of being a low-wage, low-benefit employer which discouraged its employees from forming labor unions. Apart from this strategy of selling product at a lower cost, Wal-Mart also ensured that its retailers did not have any control over its merchandize. It limited the percentage

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