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Business Model

In: Business and Management

Submitted By sly2002ng
Words 2155
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Executive Summary
The propensity for businesses to move beyond domestic markets into international markets is known as globalization. The ability to trade and operate in international markets has increased the profits and overall net income of these multinational corporations. McDonalds, Exxon and Wal-Mart are among many global companies that have been able to increase their revenues by operating in international markets. Wal-Mart’s international ventures accounts for 20.1% of their total revenue which is estimated at $60 billion annually.
The purpose of this paper is to select a company and discuss their business model. The company we will be looking at through out this paper is Wal-Mart. Wal-Mart’s slogan “Saving people money so they can live a better life” is what Wal-Mart’s business model is all about. Selling thousands of quality merchandise to low-income consumers at extremely low prices has been responsible for their success in the United States. Achieving success domestically is quite different from succeeding internationally. Doing business globally requires different business models. For a successful transition into the global environment, each business model must be designed to adhere to the preference or norms of each individual country. Both Wal-Mart and Ikea realized that success in the global market goes beyond offering low priced items when they moved into the global market. Its failure in Germany and South Korea made them realize that culture is a factor that must be considered when operating in international
In this paper I will also look at some the factors affecting Wal-Mart and based on my opinion offer recommendations. Some of the factors that will be discussed are limited to governmental, economic, social and cultural factors.
Introduction
Globalization has been the corner stone of most large businesses around the world. Today many organizations engage in one or more form of business activities with foreign companies and countries. According to Hill (2005) almost everything we see or use today is driven by globalization. The car we drive to work may be designed in Germany, assembled in Mexico from components made in the United States and Japan that were fabricated from Korean steel and Malaysian rubber (Hill, 2005). The desire for cost efficiency have led most US companies to employment outsourcing and building manufacturing plants in China and India. These types of business activities can be referred to as globalization. Hill (2005) defines Globalization as a shift toward a more integrated and interdependent world economy.
Wal-Mart among many other companies conducts business globally. Wal-mart has over 2,500 stores in 14 countries excluding the United States. My research contains a brief overview of Wal-Marts history, its business model and factors that may affect their ability to effectively conduct business globally. This paper will set out to prove that structuring a business model to the norms and preference of each individual country is critical to the success of multinational corporations.

History and International Markets
Founded by Sam Walton in 1962, Wal-mart is the world’s largest public corporation with $378 billion in revenue (msn money). Currently, there are 7,390 Wal-mart stores and Sam’s club location serving 14 markets with over 2 million employees. Wal-mart is estimated to serve more than 200 million customers per year (www.walmartstores.com). According to the founder, Wal-mart was founded with the aim to save people money so they can in turn live a better life. This ideology is evident in Wal-mart’s success today. As a matter of fact low-income consumers are the backbone of Wal-Mart. It is estimated that eight in ten Americans shop at Wal-mart (Furman, 2005)
Wal-marts International Market consists of operation in China, Japan, India, Argentina, Brazil, Mexico, United Kingdom, Canada and Central America. Wal-mart’s international division accounts for 20.1% of revenues. Although Wal-mart is the largest public corporation in the world, it has not been as successful as Ikea globally. While Wal-mart operates in 14 countries, Ikea on the other hand operates in 33 countries serving 410 million customers per year (Hill, 2005). As stated earlier, this paper will discuss Wal-marts business model and how it relates to Ikea, but first we must understand the true meaning of business model.

Business Model
A Business model is made up of different facets. But most of all, a business model is the ability to convert new technology into economic value (http://quickmba.com/entre/business-model). Business model from my perspective is simply a method through which an organization generates revenues. It sets out the process and strategies a business must go through to earn profits. From my understanding, a business model is made consist of the following components:
1. How well a business differentiates its products,
2. How it gains and retains new customers,
3. How it promotes its products AND,
4. How it selects its target market.
Over the years business models has become more complex and is known to require extensive planning for a business to thrive in today’s competitive market. We have seen companies use price skimming and penetration to enter a new market. Wal-mart is an example of a company that used market penetration. Although the entered the market through price penetration, their prices remained low consistently.
Based on the case study presented in the Global business today (Hill 2005), Ikea and Wal-mart share similar business models. Ikea’s target market is the global middle class looking for low-priced but attractively designed furniture and household items. Wal-mart on the other hand is targeting low-income consumers looking for competitively (cheap) priced products.

How it differentiates its products and services
Wal-marts business model is based on selling a variety of general merchandise at very low prices. There business model is based on the premise that selling quality brand name items at very low prices will help save consumers money so they can live a better life. In fact, in 2006 Wal-mart changed its business slogan to “saving people money so they can live a better life” (www.walmartstores.com). Both Ikea and Wal-mart applied their business models to foreign markets. While both companies had very good business models in terms of generating revenue, they discovered that simply imposing the same business models globally isn’t a good idea. For example, we see companies like McDonalds offering products based on the preference of the individual countries they operate in. For instance, in India beef is forbidden, McDonalds realized that in order for them to succeed, they had to eliminate beef from their menu. They served veggie burger which is what the citizens preferred and are accustomed to.
Conversely, Wal-Mart’s failure to offer services or products similar to the preference of individual countries contributed to their failure to capture substantial market shares in Germany and South Korea, which ultimately led to their demise in these countries. Ikea faced similar problems when they moved into the US market. They had to make adjustments and offered products that fit the US market (Hill, 2005). This included offering more American style furniture’s as opposed to the European style they initially offered. Although Wal-Mart now offers services similar to the countries they operate in, Germany was a learning experience for them. Some of their international stores in have different names that the Wal-Mart brand name. For example, in Japan, the stores are known as Seiyu and Asda in Britain. According to Wal-mart, Asda is the second largest supermarket in Britain, collectively accounting for 20.1% of their total revenue.

How it retains and gains customers
Wal-Mart has been able to retain and gain new customers through its slogan “saving people money so they can live better lives”. Its ability to offer quality products at affordable prices has been at the forefront of their success. Research suggests that 8 in 10 Americans shop at Wal-mart. Wal-mart have also been able to retain new customers by adopting the culture and offering products and services that appeal to the market. Unlike Ikea, Wal-mart also has been able to gain new customers in the global market through acquisition of local supermarkets and retail chains.

How it promotes its products
As stated earlier, Wal-mart promotes its products by offering everyday low prices. Wal-marts prices are extremely low when compared to retailers such as Target, Kohl’s, and K-Mart. Wal-mart was able to achieve its everyday low pricing through bulk inventory purchasing from thousands of suppliers.

How it selects its target market
Both Wal-mart and Ikea have select customer base they serve. As stated earlier, Ikea’s customer base are the global middle class looking for attractive but low priced furniture and household items while Wal-mart’s customer base are low income consumers. An estimated 100 million customers, nearly one-third of the US population visit Wal-mart stores each week (www.walmartstores.com).

Forces Impacting Wal-Mart
When we explore forces that impact businesses globally, what comes to mind is cultural differences. The ability to develop strategies that will adapt to the culture/norms of individual countries will be critical to their success in the global market. An evidence of this would be Wal-marts failure in Germany and South Korea. Wal-mart’s failure to capture a substantial market share as a led to them selling 16 of their South Korean stores and pulling out of Germany as well (Landler & Barbaro, 2006). Although Wal-mart did fail in these markets they were able to bounce back in other countries such as China. They restructured their business model and started offering products similar to the cultural preference of the Chinese people. For instance, Wal-mart realized that Chinese citizens preferred to select their own live seafood and fish; then all the stores in China began displaying the meat uncovered and installed in tanks (Landler & Barbaro, 2006). Ikea also followed similar strategies after realizing that offering products in accordance to the preference of each individual country often leads to higher sales. For example, they followed this strategy when they entered the US market and is now doing the same in China were they expect to establish 10 stores by 2010 (Hill, 2005)
The other forces impacting Wal-mart would be economic forces. Many have argued that while Wal-mart has done a lot for the US economy it has also destroyed it and put several small retail outlets out of business. Monopoly is one of the major criticisms faced by Wal-mart today. Wal-marts growth has been fraught with certain communities refusing them entrance into their community because of its reputation of monopolizing any market it enters. Accordingly, 270 communities have been successful in preventing Wal-Mart and other big retailers from locating to their area (Curser, 2005). In the global market, Wal-mart has been successful in monopolizing markets through acquisition of already existing large retailers in the area.
Another economic factor currently affecting Wal-mart is the stand that its employees are costing the government more than what Wal-mart is paying them. As a result of its low hourly pay, Wal-mart workers find themselves relying on Medicaid, food stamps, and public housing assistance to make ends meet (Furman, 2005). A good recommendation for the company would be to increase minimum wages and give employees opportunity to care for themselves without relying heavily on public assistance.
Although low-income consumers are Wal-Mart’s backbone, excessive reliance on this target market may be catastrophic for the corporation in the event of a sour economy. While an economic recession can affect Wal-mart’s sales it can also help them gain middle class consumers. Economic recession or increase in the fuel prices that reduces disposable income of these low-income consumers will definitely affect Wal-marts bottom line. Many have argued that a poor economy will result in sales increase for Wal-mart. I disagree with this statement because while poor income may result in higher customer base it will decrease the amount and types of items people buy from Wal-mart. Such economic crises will result in people only buying items that are deemed necessary for everyday living such as food. Wal-mart will then experience a decline in sales from items such as clothing’s, and entertainment products.
In conclusion, when expanding domestically or globally, Wal-mart must consider attracting both low-income and high income consumers to remain viable during economic downturn. In terms of adapting to the individual’s countries norms, Wal-Mart must also ensure they have the support of the government they will be operating in such as joining labor unions. For instance, in China, Wal-Mart allows its members to be part of labor unions but is fighting it in the United States.

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