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Lecture 3OLI Paradigm
DR. VICTOR Z. CHEN
UNC CHARLOTTE
OLI paradigm by John H. Dunning Ownership advantages (O)
Knowledge advantage Management, marketing, financial skills Vertical integration
Control of resources Control of markets
* Note: O advantages should be non-location-bound and are always relative to your target peers (firstly home-country peers and then target host-country peers).
Location advantages (L) of the host countries/regions National production functions Government controls and regulations Political risk Cultural values * Note: such advantages should support O advantages
above and may change as a result of the MNE’s entry.
Internalization benefits (I) To enforce property rights and overcome other transaction costs To reduce buyer uncertainty To overcome government regulations * Note: some I benefits are a response to some L disadvantages
Case study 1:Wal-MartSource: HBS Cases
Founded by Sam Walton in 1962 in Bentonville, Arkansas, Wal-Mart stores offered customers a broad range of goods, including lawn and garden, jewelry, shoes, electronics, family apparel, and toys. In the first year, Wal-Mart garnered $700,000 in sales, which increased to $5.4 million in 1974. In 1980, Wal-Mart became the youngest U.S. retail company, and the only regional retailer, to exceed $1 billion in net sales.
During 1980s, Wal-Mart transformed itself into a national discount retailer, saturating regional markets and forcing the closure of other domestic retailers.
Wal-Mart
In 1991, with net sales of $43.9 billion, Wal-Mart became the world’s largest retailer, and maintained this status since then.
Between 1977-1992, Wal-Mart Stores experienced a 35% compound annual growth of both revenue and net profit.
Between 1992-2003, revenue and net profit grew at 9% annually.
In 2002, Wal-Mart’s revenue equalled 2.3% of US GDP.
Total Wal-Mart sales on ‘Black Friday’ in 2002 equalled $14.2 billion, larger than the GDP of 36 countries.
Wal-Mart
The largest company in the world
It has more employees in uniform than the U.S. military
It has the world’s largest private database, behind only the Sloan Digital Sky Survey
If it were a nation, it would be China’s eighth-largest trading partner
A successful business model
Competitive advantages: Everyday Low Prices (EDLP), through aggressive
bargaining with suppliers (and non-unionized employees)
Acc. 2002 UBS, 14% lower than its rivals Zoning: efficient distribution system and inventory
control 3% saving per item in purchasing costs due to
logistics Retail Link satellite/computer system, a $4 billion
investment Each store is within a day’s drive of a distribution
center, which supplies 85% of inventory (compared to 50%-60% for competitors)
Super-large market construction in suburban areas. Unique culture
Sam Walton’s three key principles: To respect the individual To provide superior customer service (e.g.,
24-hour service; helping bag purchases) To strive for excellence
Sundown Rule: all concerns be addressed on the day of occurrence
Critics: Low salaries of its employees:
$18,000 per year in 2002 (<Porto Rico; <1/2 USA GDP per capita).
Highly publicized legal suits concerning its hiring practices
Charges of failing to pay overtime
Underpaying hourly workers Sexual discrimination
(women make up 70% of store workers but 10% of management)
Non-compliance with the Americans with Disabilities Act.
‘Locking in’ overnight workers
Conspiring with cleaning contractors to underpay immigrant workers
Retail globalization
US retail chains had a long history of globalization
Woolworth in Canada in 1897; in UK in 1909; in Germany in 1926;
Sears Roebuck & Co in Cuba in 1942; in Mexico in 1947.
European retailers, notably German ones, led a second wave of globalization
By 2003, Germany’s Metro Group made 47% of sales through its affiliates in 27 foreign countries, inc. China, India, Japan, Morocco, Russia, Turkey, Ukraine, and Vietnam.
Dutch food retailer Royal Ahold in US in 1977 (BI-LO, Finast, Tops, Stops & Stops, Giant Food Inc., and Peapot); in 2003, US operations accounted for nearly 75%.
Wal-Mart globalization
A late-comer, driven by flagging domestic growth.
Intl division formed in 1993, after two joint ventures (JVs) in Mexico in 1991.
By 1997, 41 stores in Mexico and 89 retail outlets (under various names) within its control.
Into Puerto Rico in 1992.
Into Canada in 1994.
Next stop?
Wal-Mart in Germany: OLI Analysis
Next stop: Germany
The largest consumer market in Europe
15% of the continent’s $2 trillion annual retail market in 2001
In 1997, Wal-Mart acquired Wertkauf chain (24 stores) from the Mann Family and the unprofitable Interspar chain (74 stores) in 1998 for a combined $1.6 billion.
Both equalled <3% of the market.
Interspar stores were in poor repair and in poor locations.
The leading German retailer was Metro Group, followed by Rewe Group.
Immediate actions
Wal-Mart started by refurbishment of stores to improve their appearance and the maintenance of price leadership through cost efficiency.
Overhaul of the supply chain systems
Implementation of new scanning systems
Centralized distribution
High quality customer service (e.g., helping bag purchases)
The fiercest price war in Germany’s recent history
German rules
Unexpected regulatory obstacles Price regulations
Price regulations
Stringent zoning requirements
Limited store hours
A successful business model?
Competitive advantages? Everyday Low Prices (EDLP), through aggressive
bargaining with suppliers (and non-unionized employees) (with critics)
Zoning: efficient distribution system and inventory control
3% saving per item in purchasing costs due to logistics Retail Link satellite/computer system, a $4 billion
investment Each store is within a day’s drive of a distribution
center, which supplies 85% of inventory (compared to 50%-60% for competitors)
Super-large market construction in suburban areas. Unique culture
Sam Walton’s three key principles: To respect the individual To provide superior customer service (e.g.,
24-hour service; helping bag purchases) To strive for excellence
Sundown Rule: all concerns be addressed on the day of occurrence
Stringent zoning requirements
Labor relations
Price
regu
latio
ns
Limite
d store
hours;
cultural
differences,
etc.
Pricing
Conflict with Germany’s Federal Cartel Office, e.g., German Rebate Law
Wal-Mart’s price guarantee, which offered to refund the price diff between WM price and any competitor advertising a lower price.
The Law prohibited any retailer from selling a product more than 5% below its posted price.
1998 amendment: “selling below cost is forbidden except for good justification” in order to protect existing business.
In June of 2000, the Cartel Office fined Wal-Mart $308,000 for violating the 1998 amendment.
Without a sizable scale of customers, Wal-Mart did not enjoy a high bargaining power with local suppliers and logistics.
In 2001, WM price were 11-25% higher than its German rivals.
Labor Relations
In late May 2002, Germany’s service sector union Ver.di, the largest union in the world, filed a lawsuit against the company, citing Wal-Mart Germany’s violation of HGB for not releasing year-end figures for 1999 and 2000.
Public figures for employees to negotiate wages and ensure job security
Wal-Mart’s response: Ver.di was not a legitimate plaintiff.
In April 2003, an appeal by Wal-Mart was dismissed and a fine of 330,000 euro assessed.
In July 2002, Ver.di organized 2,000 WM employees for a two-day strike to get WM into HDE, Germany’s retail sector employers’ association.
zoning
In 1997, Germany had app. 2,000 large-surface-area “green field” retail sites, inc. hypermarkets, furniture stores, and home goods suppliers, all of which had been built before 1977.
In 1977, Germany had enacted strict planning and zoning regulations (“building use plan”) designed to protect traditional retailers.
The legislation prohibited the construction of stores with more than 800m2 (8,610 ft2) sales area in locations not designated for retailing.
Indeed, by 2001, Wal-Mart had only managed to open two new stores, and enlargement of existing stores.
Zoning (cont’d)
Opening a new large-surface-area store outside of an urban center was technically possible, but it required clearing several difficult hurdles.
A neighboring city/town was required to create a “building use plan”
Environmental and conservation concerns, & potential private legal conflicts
No potential direct competition with stores in nearby towns
The reality: almost no new extra-urban hypermarkets were opened in Germany since 1977
zoning (cont’d)
“What Germany fears is the experience of cities like Bordeaux, which had lost retail business to green field sites outside of town. All that is left is old buildings and monuments in the city center … We don’t want cities that look like the United States.” -- Holger Wenzel, Head of German Retail Federation.
Store hours
1956, 6:30pm weeknights; 2pm Saturdays; closed on Sundays.
1989, 8pm on Thursdays (legislation); 6:30pm (labor union).
1996, 8pm for weeknights. 2003, 8pm for Saturdays.
Cultural Differences
Local customer loyalty is high Metro, Aldi, and Rewe
Uncomfortable with the “friendly” service
Credit card payment
Free bags
Cashiers helping bagging purchases
A successful business model
Competitive advantages? Everyday Low Prices (EDLP), through aggressive
bargaining with suppliers (and non-unionized employees) (with critics)
Zoning: efficient distribution system and inventory control
3% saving per item in purchasing costs due to logistics Retail Link satellite/computer system, a $4 billion
investment Each store is within a day’s drive of a distribution
center, which supplies 85% of inventory (compared to 50%-60% for competitors)
Super-large market construction in suburban areas. Unique culture
Sam Walton’s three key principles: To respect the individual To provide superior customer service (e.g.,
24-hour service; helping bag purchases) To strive for excellence
Sundown Rule: all concerns be addressed on the day of occurrence
Stringent zoning requirements
Labor relations
Price
regu
latio
ns
Limite
d store
hours;
cultural
differences,
etc.
Economic situation
The proportion of household income that Germans spend on retail purchases continues to decline.
Profit margins in German retailing are the lowest in Europe.
Ending story
In 2006, Wal-Mart sold all 85 German
stores to The Metro, incurring a loss of $1 billion.
ContactVictor Z. ChenBelk College of BusinessUNC Charlotte
+1 (704) 687-7645
www.ChenZitian.com
