A Comparative Study of Strategies Adopted by

Wal-Mart and Carrefour in China:

A Resource-Based Perspective

By
Yue, LIU

September 2007
 Acknowledgements

I appreciate my dissertation supervisor Dr Wang, for his continuous patience, support,

guidance and constructive comment throughout the period of my dissertation. I would

like to thank the professors and lectures from whom I learned a lot throughout my

master year. I also would like to show my gratitude to Nottingham University

Business School that provided this value chance for my postgraduate studies as well

as the chance to conduct this research.

I wish to acknowledge all those who helped me with the information and data, and

those who showed their support and care during this period. Last, but by no means

least, thanks to all members of my family.

 Abstract

This research aims to provide an overview of links between a firm’s strategies and the

firm possessed resources and capabilities. Two cases—Wal-Mart and Carrefour in

China are chosen. By using resources-based theory, their development strategies in

China are compared and analyzed. This research adopted documentary research

method, particularly firms’ historical documentary review and analysis, for this

qualitative research to study each case.

In China’s retail market, the competition is intensive and market conditions are

evolving. To capture greater market share in this market, Wal-Mart and Carrefour

adapted their strategies to cater local customers as well as economic and political

conditions. Although Wal-Mart and Carrefour in the same market environment, there

are still differences between the strategies adopted by each giant retailer. Therefore, it

is probably safe to argue that the differences between strategies adopted by the two

retailers, to certain extent, are due to their distinct firm-specific resources and

capabilities.
 Contents
Page No.

Chapter 1 Introduction (5)

1.1 Background (5)

1.2 Research Questions (6)
1.3 Aims and Objectives (7)
1.4 Structure of the Research (8)

Chapter 2 Literature Reviews (11)

2.1 Entry Modes (11)

2.1.1 The Timing and Scale of Entry (11)
2.1.2 Entry Modes (14)
2.2 Operating Strategies (17)
2.3 Positioning Strategies (18)
2.3.1 Cost Leadership (19)
2.3.2 Differentiation (20)
2.3.3 Focus Strategy (23)
2.4 Human Resource Management (24)
2.4.1 HRM Adaptation to Local Context (26)
2.5 Resource-Based Theory and Management Strategies (31)
2.5.1 The Resource-Based Theory (31)
2.5.2 Entry Modes Selection and Resource-Based Theory (33)
2.5.3 Positioning Strategies and Resource-Based Theory (35)
2.5.4 Human Resource Management and Resource-Based Theory (36)

Chapter 3 Research Methodology (39)

 3.1 Research Design (39)
3.2 Research Methods (41)
3.3 Case Design (42)
3.4 Data Collection (43)
3.5 Summary (46)

Chapter 4 Industry Analysis of Chinese Retail Market (47)

4.1 Industry Facts (47)

4.2 Market Definition (49)
4.3 Internal Rivalry (49)
4.4 Entry (51)
4.5 Substitutes and Complements (53)
4.6 Supplier Power (55)
4.7 Buyer Power (57)

Chapter 5 Foreign Retailers in China—Wal-Mart and Carrefour (59)

5.1 Wal-Mart (59)

5.1.1 About Wal-Mart (59)
5.1.2 Wal-Mart’s Entry into China (61)
5.1.3 Wal-Mart’s Development in China (62)
5.1.4 Wal-Mart’s Positioning in China (64)
5.1.5 Wal-Mart’s Local Adaptation in China (65)
5.1.6 Wal-Mart’s Sourcing in China (67)
5.1.7 Human Resource Management and Public Relations (69)
5.2 Carrefour (70)
5.2.1 About Carrefour (70)
5.2.2 Carrefour’s Entry into China (71)
5.2.3 Carrefour’s Development into China (73)
 5.2.4 Carrefour’s Positioning in China (75)
5.2.5 Carrefour’s Local Adaptation in China (77)
5.2.6 Carrefour’s Sourcing in China (79)
5.2.7 Human Resource Management and Public Relations (80)

Chapter 6 Analysis of Wal-Mart and Carrefour’s Strategies (82)

6.1 Assessment of Two Giants’ Strategies (82)

6.1.1 Entry Strategies (82)
6.1.2 Expansion Strategies (84)
6.1.3 Positioning Strategies (86)
6.1.4 Local Adaptation (88)
6.1.5 Sourcing Strategies (90)
6.1.6 Human Resource Management and Public Relations (91)
6.2 Resource-Based Theory and Their Strategies (92)
6.2.1 Entry Strategies (93)
6.2.2 Expansion Strategies (94)
6.2.3 Positioning Strategies (95)
6.2.4 Local Adaptation (96)
6.2.5 Sourcing Strategies (97)
6.3 Summary (98)

Chapter 7 Conclusions and Recommendations (100)

7.1 Findings of the Research (100)

7.2 Conclusions (102)
7.3 Recommendations for Wal-Mart and Carrefour (103)
7.3.1 Recommendations for Wal-Mart China (103)
7.3.2 Recommendations for Carrefour China (105)
7.4 Limitations of the Research (106)
References (108)
 Chapter 1 Introduction

1.1 Background

China has been developing rapidly in the last two decades, especially after

market-oriented economic reformation and entry into World Trade Organization

(WTO). Coupled with the trend of business globalization, many multinational firms

view China as a favored market with great potential of opportunities.

The development of Chinese retail market started since the 1980s when China started

to move from a planned to a market-oriented economy. This transition of economy

system has stimulated the development of Chinese tertiary industry, as evidenced by

the profound revolution in the retail industry since 1990s. In 1992, foreign capital was

allowed to enter Chinese retail sector. Although there were still strict regulations in

place to restrict the operation of foreign retailers at that time, the implementation

of these regulations was rather flexible and local authorities bypassed many of these

restrictions to support these foreign retailers (Levy, 1996). A large number of famous

international supermarket retailers such as Carrefour, Wal-Mart, Makro, Ito-Yokado

appeared in China. Wal-Mart and Carrefour are the world number one and two

retailers in terms of turnover and employment (Colla and Dupuis, 2002), and they

entered into China in 1996 and in 1995, respectively. Wal-Mart has so far opened 68

stores in China and Carrefour 98.

However, the two giants in China exhibited different performances in terms of market

shares. It is reported that Wal-Mart ranked as the largest retailer in the world, and

Carrefour as the second largest (asia.proquestreference.info). While in China, Carrefour

performs as the market leader compared with Wal-Mart in terms market share

(euromonitor.com). What interested most is that although both Wal-Mart and Carrefour

are in the same industry and the same Chinese retail market, their entry and expansion

strategies are quite different. It is possible that the different performances of the

foreign retailers can be partly explained by their different entry and expansion

strategies.

1.2 Research Questions

Wal-Mart and Carrefour pursue different strategies when entering and operating in

China. This is possibly because both Wal-Mart and Carrefour have their own

distinctive resources and capabilities which enable them to follow distinctive sets of

strategies even when they are in the same environmental setting—Chinese retail

market.

However, it may not be reasonable to say which particular strategy is better than the

other, because the strategies adopted are related and interact with the firm-specific

resources, and with the specific market conditions. The resource-based theory views
firms are heterogeneous and possess heterogeneity resources. According to Wernerfelt

(1984), the resource-based approach views the firm as a historically determined

collection of assets or resources which are tied semipermanently to the firm’s

management. Lockett and Thompson (2001) state that “resource-based view

emphasizes firm heterogeneity and path dependency, as each firm’s resource bundle is

unique, and the consequence of its past managerial decisions and subsequent

experiences, it follows that so is each firm’s opportunity set”. In short, the

resource-based view provides a framework for management strategy development. So

could it explain why different firms adopted different strategies even in the same

environmental context.

There have been many studies on strategies of Wal-Mart and Carrefour (Colla and

Dupuis, 2002), and development of supermarkets in China (Lo et al, 2001). This study,

however, applies the resource-based theory to compare the two giants’ strategies in

China. Thus, the first research question is that how the strategies of Wal-Mart and

Carrefour are different from each other; and the second research question is that why

they differ in the perspective of resource-based theory.

1.3 Aims and Objectives

More specifically, the research objectives of this study are as follows:

(1). To provide a comprehensive overview of the Chinese retail market, in terms of

Porter’s Five Forces.

(2). To analyze the strategies of Wal-Mart and how these strategies interact with

Chinese government policies and local market conditions

(3). To analyze the strategies of Carrefour and how these strategies interact with

Chinese government policies and local market conditions

(4). To implement a comparative study of the strategies of the two retailing giants.

(5). To make recommendations of strategies for the two retailers in the context of

Chinese entry into the WTO and further opening of the retail sector.

The possible differences of strategies of the two retailers are mainly analyzed in terms

of entry strategies, positioning strategies, and expansion strategies, sourcing strategies,

local adaptation strategies, human resource management and social relationship. The

final objective is to link the resource-based view to these resources and present how

the resource-based theory could explain these resources.

Therefore, the overall aim of this research is, by using the resource-based theory as

the basic principle and using the two cases—Wal-Mart and Carrefour, to provide an

overview of the relationship between the firm strategies and its possessed resources

and capabilities.

1.4 Structure of the Research

Following this introduction, Chapter 2 reviewed the literatures concerning with the

strategies of a firm in a foreign market as well as the resource-based theory. The

strategies reviewed in this chapter include the entering strategies, operating and

competing strategies, and human resource management strategies. The resource-based

theory is reviewed and also linked with the previous part in Chapter2, providing an

analysis of why a firm prefers one strategy to another. The third chapter introduces the

methodology of doing this research. It includes the analysis of why the case study

research approach and documentary method are selected, why Wal-Mart and

Carrefour are chosen as the cases to study, and how the information and data

collected.

Chapter 4 provides a detailed analysis of Chinese retail market by applying Porter’s

framework of five forces—internal rivalry, entry, substitute and complementary

products, supplier power, and buyer power. It will not only identify the factors

affecting firms’ performances in terms of both vertical trading and horizontal

competitive relationships, but also identify the opportunities and threats in this

industry (Besanko et al, 2003).

Chapter 5 provides the studies of the strategies adopted by the two retailing

giants—Wal-Mart and Carrefour, including entry, positioning, expansion strategies,

local adaptation strategies, and human resource management and public relations.

Chapter 6 compares and contrasts the similarities and differences between strategies
adopted by Wal-Mart and Carrefour in terms of the above six aspects. Then is the

analysis of the comparisons using the resource-based theory and explanations why

there are similarities and differences.

Finally, Chapter 7 includes the findings and conclusions of this research, and

recommendations will be provided to both Wal-Mart and Carrefour for their future

development. This chapter also contains a brief analysis of the limitations of this

research.
 Chapter 2 Literature Reviews

Each country has different economic, political and legal systems. When a firm has

made decision to enter a particular market, these different systems determine the

opportunity costs of how to enter and develop in that country. This chapter reviews

the entry, expansion and development strategies available for foreign investors.

2.1 Entry Modes

When firms have decided to enter a foreign market, how to enter becomes another

important issue. Generally, at this stage, companies need to consider the timing, scale,

and mode of entry.

2.1.1 Timing and Scale of Entry

Ghemawat (1991) argue that when thinking of the entry timing and entry scale, firm

should consider market uncertainty and the potential irreversibility of investment. Any

investment, especially investment to a foreign country, involves great opportunity

costs and commitment. Indeed, no matter whether large scale entry or small scale

entry, and no matter early or late entry, there must advantages and disadvantages of

each option.
Timing of Entry. Usually, it is an early entry when an international business enters a

foreign market before other competitors, and a late entry when after them. Liberman

and Montgomery (1988) suggest that there are first-mover advantages if a firm

pursues an early entry. The idea of first-mover advantage is that “the initial occupant

of a strategic position or niche gains access to resources and capabilities that a

follower cannot match” (Grant, 2005, p236). According to Hill (2004), there are

several first-mover advantages for an international business. The first is that the first

mover could preempt rivals and capture demand by establishing strong brand

reputation with suppliers and customers. The second advantage is concerned with cost

advantages, which refers that, by enter the market earlier, the firm could produce at

lower cost by moving down the learning curve faster through building a larger

producing volume than competitors. A third advantage is that early entrants could

create switching costs so that customers are unlikely to switch to the products or

services provided by followers. However, there are still first-mover disadvantages

(Shaver, Witchell and Yeung, 1997). The most common one is known as pioneering

costs, which are costs that early entrants bear and later entrants could avoid (Hill,

2004). There are many causes of such pioneering costs as argued by Hill (2004). They

may arise in the form of time and effort spent on learning the rule of business systems

in a foreign country. Mistakes that are made as a result of that the early entrant fails to

understand the country he enters also brings pioneering costs. Pioneering costs also

include the costs of promoting a new product to customers in a foreign market

incurred to early entrants, such as educating customers. A special condition when

regulations change in a way that diminishes the value of an early entrant’s investment

would put the early entrant at a server disadvantageous position. In the conditions

mentioned above, the followers could learn from the early entrants’ experiences, avoid

the mistakes and costs, and ride on their investments. Shave, Mitchell and Yeung

(1997) have found that if international business could enter a foreign market after

several competitors, the probability of survival is greater than otherwise.

Scale of Entry. When an international business enters a foreign market, the size of

entry is another important issue. Hill (2004) argues that large scale entry requires

commitment of significant resources and implies rapid entry. The resulted strategic

commitment has great as well as long-term impact on following development of the

firm and difficult to reverse (Ghemawat, 1991). Ghemawat (1991) continues to argue

that such strategic commitment in the form of large-scale entry will influence the

nature of competition in the market in terms of attracting customers and distributors in

the long run and deterring entry of potential competitors, but also in terms of

restricting its own resources to further expansion. Indeed, on one hand, the large entry

size is a signal to customer and distributors that this foreign firm make significant

strategic commitment to its investment and thus gains customers and distributors trust

and loyalty, and makes the potential entrants to reconsider their entry decision; on the

other hand, as the firm have made significant commitment to its investment, most its

resources are inevitably been sunk into this foreign market, which may limit the

further expansion into new market in another industry or country. Therefore, a firm
should balance the risks and benefits of significant strategic commitment.

Nevertheless, a small entry scale also brings benefits as well as risks to a firm when

entering a foreign market (Hill, 2004). A small size with little strategic commitment

would allow the firm to learn about the foreign market with limited risk. By achieving

this, the firm could first collect information of the foreign market and then deciding

whether to expand, maintain or quit. However, this small scale entry may have

difficulties in capturing market share, achieving scale economies, and creating

switching costs.

2.1.2 Entry Modes

A firm’s entry mode is how to enter the foreign market, and how to make its goods or

services available to foreign customers (Bishop, 2006). Generally, there are six

different modes for an international firm to choose: exporting, turnkey projects,

licensing, franchising, joint ventures, wholly owned subsidiary (Hill, 2004). Each

entry mode has its distinct characteristics (see, e.g., Hill, 2004; Hill, et al, 1990; Hill

and Kim, 1988; Anderson and Gatignon, 1986; Madhok, 1997; Brouthers and

Brouthers, 2000; Bishop, 2006). They are summarized in Table 2.1.

Choosing an appropriate entry mode is a difficult decision for firms interested in

entering a foreign market (Agarwal and Ramaswami, 1992). Sometimes, an

international firm may use more than one entry modes simultaneously (Bishop, 2006).
According to Wei et al (2005) there are many factors affecting the entry modes, such

as host country factors, resource commitment and cultural distance.

Table 2.1 Advantages and Disadvantages of Each Entry Mode

Entry Mode Advantages Disadvantages

High transaction costs

Ability to realize location and experience
Exporting Trade barriers
curve economies
Problems with local marketing agents

Ability to earn returns from process

Turkey Creating efficient competitors
technology skills in countries where FDI
Contracts Lack of long-term market presence
is restricted

Lack of control over technology

Inability to realize location and experience
Licensing Low development costs and risks curve economies
Inability to engage in global strategic
coordination

Lack of control over quality

Franchising Low development costs and risks Inability to engage in global strategic
coordination

Lack of control over technology

Access to local partner’s knowledge Inability to engage in global strategic
Joint
Sharing development costs and risks coordination
Ventures
Political acceptable Inability to realize location and experience
economies
Protection of technology
Wholly Ability to engage in global strategic
Owned coordination High costs and risks
Subsidiaries Ability to realize location and experience
economies
Source: Hill (2004), p409.

Host country factors are important in affecting the entry mode choice. Khanna and
Palepu (1997) argue that in some countries, there are extensive government

intervention, lack of reliable information, and lack of effective enforcement of

contract law. These would inevitably create significant risks for foreign investors and

make business operations less efficient (Isobe et al, 2000). According to Tse et al

(1997), nonequity-based entry modes, such as joint ventures, would like to be adopted

by foreign investors rather than equity-based modes.

Cespedes (1988) argues that the resource availability and control determine the entry

mode choice for foreign investors. As any business decision is made based on

trade-offs between expected benefits and risks, when firms have made significant

investments into a foreign market, they should choose an entry mode with a high

degree of control such as wholly owned enterprises rather than one with high risks

and shared investment commitment such as joint ventures. Therefore, Larimo (1993)

and Hennart and Larimo (1998) argue that the larger the resource commitment to a

foreign market, the less likely that a firm will share the equity in a foreign market.

Hennart and Larimo (1998) argue that national culture is also widely believed to

affect the entry modes decisions. Countries vary in terms of psychological

characteristics (Hofstede, 1980), and an international firm’s decision on the entry

modes will reflect characteristics of the home countries (Shetty, 1979). As what

Taylor et al. (2000) have found, although resource commitment is widely considered

true, Japanese multinational firms are more likely to adopt an entry mode with a lower
control even when resource commitment is high. Erramilli (1996) concludes that

firms from countries that are characterized as high power distance and low uncertainty

avoidance may prefer an entry mode with full ownership control in a foreign market.

The entry strategies are very important for a firm when they have decided to enter a

foreign market. The entry strategies include the timing, scale and modes of entry. It is

obvious that an early entry may gain several advantages, but they must be balanced

against the pioneering costs and risks. Large scale entry into a foreign market implies

great strategic commitment that limit the flexibility of the firm, while potential huge

benefits are also associated with such a strategy. Concerned with the entry modes,

there are six modes for a firm to enter a foreign market, and each of them has its own

distinct advantages and disadvantages. Wei et al (2005) has concluded several

important factors that affecting the choice of modes. Firms that are going to enter a

foreign market need to balance the benefits, costs and risks associated with each

option, and choose the most appropriated entry strategy.

2.2 Operating Strategies

After the entry into a foreign market, how to organize and operate the business in the

foreign market is also significantly important. According to Grant (2005), every firm

has three sets of key characteristics—goals and values, resources and capabilities, and

organizational structure and system. In addition, he argues that strategy is viewed as

forming a link between the firm that embodied by the three characteristics and its

external environment, and is mainly concerned with planning how to achieve its

goals.

There are four basic strategies for international firms to compete in a global

environment: an international strategy, a Multidomestic strategy, a global strategy and

a transnational strategy (Bartlett and Ghoshal, 1989). Firms pursuing an international

strategy try to transfer valuable skills and products that competitors do not possess to

foreign markets, but undertake limited local customization. Firms that pursue a

multidomestic strategy try to customize their product offering, marketing and all other

business strategies to adapt the foreign national conditions to achieve maximum local

responsiveness. Firms pursuing a global strategy focus on increasing profitability

through experience curve effects and location economies to achieve a low cost

strategy. Firms that pursue a transnational strategy plan to exploit experience curve

effects and local economies, transfer core competencies and focus on local

responsiveness, which may enable firms simultaneously achieve both cost and

differentiation advantages. Each of the four strategies has both advantages and

disadvantages, and Hill (2004) argues that international firms should choose the

appropriate strategy based the pressures for cost reduction and for local

responsiveness.

2.3 Positioning Strategies

When an international company has been settled in a foreign market, it has to decide

how to compete in the particular industry. Besanko et al (2003) argue that a firm’s

position in the market is one of the most important factors in determining a firm’s

success, and a firm’s generic strategy describes how it positions itself to compete in

the market. There are three generic strategies that establish basic models for strategic

management: cost leadership, differentiation, and a focus or niche strategy (Porter,

1980).

2.3.1 Cost Leadership

Cost Leadership is the strategy that a firm succeed by achieving the lower cost per

unit of products than competitors’ without sacrificing a quality (Holt and Wigginton,

2002). By achieving cost leadership, the firm could gain significant market share.

Cullen and Parboteeah (2005) argues that the efficiency achieved by cost savings

could occur anywhere from the very beginning of the production, such as the design

or research of a product or raw material purchases, to the end of product final sale.

Grant (2005) suggests that every business can be viewed as a chain of activities that

creates value, and each activity along the value chain has different cost structure.

Therefore, to build cost advantages, a firm needs to analyze costs structure and cost

drivers of each activity along the value chain. Grant (2005) has concluded the

principal stages of value chain costs analysis as follows.

First, the firm needs to disaggregate its entire business into separate activities, which

requires full understanding of the processes from inputs to customer delivery. Usually,

the firm’s divisional structure is a useful guide, but firm should also consider the

importance of an activity, the dissimilarity of activities and how the competitors

perform a particular activity. Then the firm should establish the relative importance of

the activities that are the major source of cost in the total cost of the product. After

that, the firm should compare the costs of identified activities with those of

competitors, and hence could find out which activities the firm performs more

efficiently and which not. Identifying the cost drivers of each activity is very

important. Cost drives are the factors that determine the level of cost for each activity,

such as wages rates and defects rates are important cost drivers for labour intensive

activities. However, some business activities are interrelated, and hence the cost of

one activity may be determined by other activities. Therefore, it is crucial to identify

this kind of linkages in order to identify the right cost drivers. Through the stages

above, the firm therefore could identify the opportunities to reduce costs of each

possible activity along value chain. There are several ways for firms to achieve cost

advantages, and Figure 3 has summarized these drivers of cost advantage (Grant,

2005, p254).

2.3.2 Differentiation
Differentiation advantage is the strategy that firms provide superior value within the

industry to customers (Cullen and Parboteeah, 2005). Porter (1980) argues that the

perceived superior value as compared to industry competitors is the key for the firm to

differentiate itself against competitors. The basic reason is that, through differentiation,

firms could charge premium prices on the superior value of the product and thus enjoy

more profits than competitors in the industry. Usually, firms could provide the

superior value to customers through many ways such as unique product features,

higher quality, or all-round complementary services, etc.—every aspect of the way

that the firm relates to its customers (Grant, 2005).

Grant (2005) argues that, to achieve differentiation advantages successfully, firms

should match customers’ demand for differentiation with the firm’s capacity to supply

differentiation. Therefore, a successful differentiation depends on both the demand

side and supple side of a product.

As the demand side is concerned, the key is to fully understand customers in terms of

their requirement and preference of product features, and their willingness to pay for

superior value. Therefore, Grand (2005) has concluded several useful techniques that

can guide the firm’s positioning and pricing of their product, including

multidimensional scaling that analyzes customer’s perception of different attributes of

competing products (Schiffman, et al., 1981), conjoint analysis that analyzes the

customers’ preference among different attributes (Cattin and Wittink, 1982), hedonic
price analysis that calculates the market price for each valuable attribute (Gondal,

1994), and value curve analysis that identifies innovative combinations of product

characteristics that can create new market space for a firm (Kim and Mauborgne,

1999). However, Grant (2005) argues that the above statistical market research

techniques would not lead to an effective differentiation. He continues to argue that

what really matters is an understanding of customers on what and how they behave,

because most customers choose a product that reflects their social goals and values to

realize community with others or one’s own identity. These social and psychological

factors may not be captured by the statistical techniques.

On the other side, the firm’s ability to offer differentiation is also important to achieve

differentiation advantage. Many well-differentiated firms usually spend more on from

product research and development, technology, hiring higher skilled people, to

marketing, distribution, and customer services ((Holt and wigginton, 2002). Grant

(2005) concludes several principal stages that use the value chain to identify

opportunities for differentiation advantages for firm. The first stage is that the firm

should construct a value chain for the firm as well as customers. Then along the value

chain, the firm can identify the drivers of uniqueness in each activity in order to assess

the firm’s potential for differentiating its product. Among the drives of uniqueness

identified, firms should select the most promising differentiation variables for the firm.

Firm then locate linkages between the value chain of the firm and that of the

customers so that a firm can identify the means by which it can create value for
customers and can evaluate the potential profitability of differentiation.

2.3.3 Focus Strategy

Focus strategy, compared with the above two basic generic strategies, can also be

used to achieve competitive advantages by focusing on one segment of a market or

concentrating on one good or services (Holt and Wigginton, 2002). The key issue is

competitive scope, which represents how broadly a firm targets its products or

services (Cullen and Parboteeach, 2005). Cullen and Parboteeach (2005) argue that

focus strategy offers several strategic advantages for firms relative to broad-based

competitors. It enables the firm to react more quickly and behave more flexible than

rivals to customer needs, and also helps a firm to attract and retain customers. There

are three common focus strategies: customer specialization, product specialization,

and geographic specialization (Besanko, et al, 2003). Customer specialization means

that the firm offers their products to cater the needs of particular class of customers,

and the example of customer specialization is that clothes of Top Shop are designed

for young and fashion people while those of Burberry are designed for classic and rich

people. As a result, the firm would not underserve or overserve customers who

especially value certain attributes of a product or who do not. Product specialization

means that the firm produces a limited set of products for a wide set of customers so

that the firm could serve these group of customers especially well. The focus on a

limited set of products enables the firm to enjoy benefits of economies of scale and
learning economies. The geographic specialization means that the firm offers their

products within a narrowly defined geographic market, which would enable the firm

to enjoy economies of scale such as in local marketing, and to better serve local

markets. In addition, Besanko, et al (2003) conclude that these three basic focus

strategies, compared with broad-based strategies, insulate the firm from competition,

as limited customer demand in some segment of market could more benefit the only

one focusing firm in this market in terms of little competition and substantial returns.

Cost leadership, differentiation, and focus are three generic strategies for firms to

create their competitive advantages in order to compete in the market they are serving.

Each of them can help a firm to realize success in the market with keen competition.

Therefore, firms need to recognize their internal strengths and weakness as well as

external environment, and hence formulate a suitable strategy and then implement it

2.4 Human Resource Management

Human resource management is gradually from being viewed as a support function of

strategy implementation to one of strategic importance (Pucik, 1992; Scullion and

Starkey, 2000). Indeed, people are the most valuable assets in a firm. Without people,

the firm would not exist; plans, decisions and strategies would not be carried out; and

the competitive advantages would not be achieved. Human resource management is

the activities a firm carries out to use its human resources effectively, and the basic
functions include staffing, training, motivation and labour relations (Hill, 2004).

When human resource management is applied to the international setting, it becomes

international human resource management (Cullen and Parboteeah, 2005). Bartlett

and Ghoshal (1989) argue that an effective human resource management is vital for

the successful implementation of international strategies for multinational firms.

International human resource management concerns with meeting the needs of

multinational configurations with little similarity to traditional organizations (Holt

and Wigginton, 2002). Therefore, when a firm enters into a foreign market and hence

an international context, this firm faces more complexity in human resource

management.

Researches on international human resource management can be categorized into

three broad strands (Keating and Thompson, 2004). The first concerns human

resource management in multinational firms, which focuses on the management of

human resource in international firms to effectively achieve its strategic objectives

(Schuler et al, 1993; Sparrow et al, 1994; Scullion, 1995; Taylor et al, 1996; De Cieri

and Dowling, 1999). These studies particularly argue that the nature of both

home-country and host-country affect the extent to which multinational firms

implement their human resource management in the local subsidiaries (Ferner, 1997),

and Adler and Ghadar (1990) indicate that international human resource management

should be linked to external environment as well as internal business strategies. The

second strand mainly focuses on culture differences relating to human resource

management, which suggests that culture will influence the development and

operation of human resource management policies (Hofstede, 1980; Laurent, 1986;

Schneider and Barsoux, 1997; Adler, 2003). They argue that cultures, values and

norms affect employees’ behaviours and attitudes as well as management practices,

and therefore, there is no universal model of management and management theories

and practices are not transferable from one culture to another. The third is

comparative human resource management, which compare the human resource

management systems and practices across different nations (Pieper, 1990; Brewster et

al, 2000; Clark, 1996). They describe and explain differences of human resource

management systems between different countries, and argue that these differences are

attributed to different national cultural, legal, economic, and social environments. The

three strands of international human resource management studies have the similar

objectives—understanding and explaining human resource management, and the

difference is that each of them has its distinct focusing explained point.

2.4.1 HRM Adaptation to Local Context

Staffing. Schein (1985) refers staffing policy as the selection of employees for

particular jobs and it does not only involve selecting individuals who have the

required skills, but also a tool for developing and promoting corporate culture.

Geringer et al (2002) also found that technical skills as well as a person’s potential to

do to good job are important selection criteria for managers in 13 countries. Therefore,
the main objective for selection is to enable the firm to achieve and attain higher

performance. According to Hill (2004), there are three types of staffing policy: the

ethnocentric approach—all key positions in management are filled by home-country

nationals, the polycentric approach—host-country nationals are recruited to manage

subsidiaries and home-country nationals occupy key position at headquarters, and the

geocentric approach—the best people regardless of nationality are recruited for key

jobs. Each of the three approaches has advantages and disadvantages. By hiring

home-country nationals, the firm can easily maintain unified corporate culture,

transfer core competencies to foreign subsidiaries; On the other hand, this will limit

advancement opportunities that lead to resentment, lower productivity and higher

turnover rate, and will fail to understand host-country cultures that lead to “cultural

myopia” (Hill, 2004). Recruiting host-country nationals will enable the firm to avoid

the problems of “cultural myopia” and enjoy the benefits that the local managers

bring to the firm such as political, social and business connections; however, it also

has disadvantages such as gap between host-country and home-country managers due

to languages, cultures and other differences, and lack of integration between

headquarters and foreign subsidiaries (Holt and Wigginton, 2002; Hill, 2004). The

geocentric staffing policy enables the firm to build and make the best use of a cadre of

international executives, but the often time-consuming and expensive creation of a

cadre of makes this policy difficult to implement (Hill, 2004).

Training. No matter whether the home-country nationals or host-country nationals

are recruited, they should be trained when they enter into a new international

environment in order to perform better. It is found and estimated that there are high

failure rate and costs of expatriation all over the world (Harvey, 1983; Black and

Gregersen, 1999; Caudron, 1991). Therefore, Dowling and Schuler (1990) found that

cultural training, language training and practical training are useful ways to reduce

expatriate failure for international firms. Culture training is to prompt the

home-country managers to understand the host-country culture, so as to effectively

deal with host-country subordinates and business affairs. Although English is

prevalent all over the world, communications in the language of the host-country will

build rapport with host-country subordinates and improve the management

effectiveness. Practical training refers to that firms often devote considerable effort to

build expatriate community alike with good sources of support and information, and

therefore the expatriate manager and the family will be more easy and smooth to

adapt to a foreign life and culture. Unlike expatriate managers, managers from

host-country lack training at parent company as well as cross-cultural exposure, and

only learn through their own experience (Cannon, 1995), and hence although they

have the potential to do a good job, they lack international knowledge and experiences.

Holt and Wigginton (2002) have identified several opportunities for local managers to

gain knowledge and experiences. First, there have been many distance learning as

well as education alliances formed between local and western schools that create new

and more learning opportunities for people all over the world. In addition, many

international firms send local promising managers back to school and hence many
leading American universities take this opportunity to offer resident, exchange as well

as modular development courses to attract them. Some employers also make

substantial investment in training potential management such as mentoring programs

adopted by Ford to match candidates to work alongside foreign managers on joint

projects, and the creation of Motorola University in China to provide long-term

education to aspiring young managers. In a word, management training is an

important but also expensive investment for international firms, because they often

hire people with management potential, and then help them to develop and give full

play to their potential.

Motivating Employees. Even if an international firm has the best strategy and human

resources, it will not be successful if the management does not well motivate and lead

employees in the host-country. Mitchell (1997) defined motivation as the process that

account for an individual’s intensity, direction, and persistence of effort toward

attaining a goal; thus, motivation is the stimulus that drives behaviors. However, in

the context with diversified cultures, motivation becomes more complicated as the

cultural characteristics are not universal. Hofstede (1980) argues that human values

and needs such as perceived importance of monetary rewards and achievement vary

among cultures, so it is dangerous to motivate people from different cultures in the

same way by the same phenomena. Hofstede (1983) found that even within the same

culture in one country, people’s perceptions may also vary among different social

classes and occupational groups. Inglehart (2000) conducted a study of people’s

attitudes toward work in 50 countries, and their work the World Values Surveys and

European Values Surveys suggest that people from different nations place different

magnitude of importance to their work functions. Indeed, people from some countries

may place self-achievement at a higher priority while others may place monetary

income at a higher priority. Therefore, management of the international firm should

understand the working reasons of foreign employees. In addition, work centrality is

also an important dimension of employees’ values to work. England (1986) refers

work centrality as the degree of general importance of work relative to other interests

for an individual. Parboteeah and Cullen (2003) examined work centrality differences

in 26 countries and found that national cultures do have significant impact on people’s

work centrality. They found that uncertainty avoidance and masculinity negatively

affect work centrality, and individualism positively affects work centrality. Usually,

people with greater work centrality usually work more and are dedicated, and hence

lead to more effective organization (Collen and Parboteeah, 2005). Moreover, the

value of rewards may differ among different nations and cultures. Holt and Wigginton

(2002) argue that motivation is inextricably linked with employees’ perceived value of

rewards that reflects the meaning of their efforts. They continue to argue that

perceptions of rewards vary according to values of different cultures, such as people

in a high individualism nation valuing more on individual achievement or personal

recognition than those in collective nation, and people in masculinity culture more

valuing motivation in terms of job toughness and competition.

Thus, it is serious error for international managers to generalize human values and

motives across cultures. Alder (1997) argues that most motivation theories, such as

Maslow’s hierarchy of needs, ERG, expectancy theory, etc., were developed in the

context of American. As cultures are not universal, neither are these theories.

However, the logic of these theories is important, such as Maslow’s hierarchy of

needs in which the hierarchy can be adapted according to foreign national cultures.

Therefore, managers should understand the host-country’s value about work, jobs and

rewards, and make suitable motivation strategies in order to motivate employees

effectively.

2.5 Resource—Based Theory and Management Strategies

2.5.1 The Resource—Based Theory

Every firm plans and implements various strategies in order to create competitive

advantages so that they could outperform their competitors and earn a higher rate of

profits in their industry. To achieve superior competitive advantage, Besanko et al

(2003) argue that a firm must create more values, which depends on its stock of

resources and distinctive capabilities of using those resources. For long-term

profitability, a firm must ensure its successful strategies and the created competitive

strategies are sustainable (Cullen and Parboteeah, 2005). Sustainable is critical and it

means that strategies are not easily neutralized or attacked by competitors (Aaker,
1989), and its competitive advantage persists despite efforts by competitors or

potential entrants to duplicate or neutralize (Barney, 1991).

Therefore, during 1990s, the resource-based theory of firm was developed, and it

argues that any firm is essentially a pool of resources and capabilities which

determine the strategy and performance of the firm; and if all firms in the market have

the same pool of resources and capabilities, all firms will create the same value and

thus no competitive advantage is available in the industry (Barney, 1991; Peteraf,

1993; Dierickx and Cool, 1989; Grant, 1991; Wernerfelt, 1984; Mahoney and Pandian,

1992). Lockett and Thompson (2001) state that “resource-based view emphasizes firm

heterogeneity and path dependency, as each firm’s resource bundle is unique, and the

consequence of its past managerial decisions and subsequent experiences, it follows

that so is each firm’s opportunity set”. Resource-based theory also argues that, to

sustain competitive, a firm should possess resources and capabilities that are

imperfectly mobile, valuable, nonsubstitutable and difficult to imitate. These four

characteristics can lead to the asymmetries in the resources and capabilities of firms in

the industry and serve as the basis of sustainability. Besanko et al (2003) suggest that

these four characteristics can be induced or reinforced through isolating mechanisms

that are defined by Rumelt (1984) as the forces that limit the extent to which a

competitive advantage can be duplicated or neutralized through the resource-creation

activities of other firms. There are two groups of isolating mechanisms: impediments

to imitation that impede existing firms and potential entrants from duplicating
resources and capabilities, such as legal restrictions, superior access to inputs or

customers, scale-based barriers and intangible barriers (e.g. causal ambiguity,

dependence on historical circumstances and social complexity; and early-mover

advantages that increase the economic power of a competitive advantage over time,

such as learning curve, reputation and buyer uncertainty, buyer switching costs and

network effects.

The resource-based theory has been diffused and accepted widely. Peng (2001)

suggested several reasons for this. The first is that resource-based theory has greater

perceived advantage due to its focus on firm-level determinants of company strategy

and performance. Second, resource-based view is compatible with both behavioral

and economic schools of thought in strategy (Mahoney and Pandian, 1992). The third

reason is that the logic of resource-based theory is simple and easy to understand. In

addition, the resource-based theory has a high level of trailability—“the degree to

which an innovation may be experimented with on a limited basis” (Rogers, 1983,

p15). The final reason is that various high visibility forums and events have supported

the resource-based theory, and thus the role of credible is instrumental. With the

above attributes above, the resource-based theory is adopted by most firms all over

the world.

2.5.2 Entry Mode Selection and Resource-Based Theory

It has been suggested that there are several entry modes available for firms to consider

after they have made an entry decision to a foreign country, and each of these entry

modes can bring both advantages and disadvantages to these firms. Therefore, the

selection of the most appropriate entry mode involves significant tradeoffs and it is

very important for the firm’s future development. Hill et al (1990) argue that a

particular entry decision is closely related to the overall strategic resources and

capabilities owned by the firm.

Hill (2004) has made some generalization for international firms about how to select

an entry mode based on the resources they owned. He suggests a distinction between

firm’s resources and capabilities of the international firm in deploying its

technological know-how and in management know-how. If a firm can create

competitive advantages by deploying its technological know-how, licensing and joint

venture arrangements should be avoided, and a wholly owned subsidiary is preferred.

Based on resource-based theory, technological know-how is one of the resources

those are easy and rapid for competitors to imitate if not protected well, so a wholly

owned subsidiary is the most rationale entry mode to protect technological know-how.

However, licensing and joint-venture are often selected when the firm owning the

technological know-how would like to reduce the risk of the technology being

expropriated or when the firm expects imitation by competitors to avoid transitory. On

the other hand, some firms create competitive advantages by deploying management

how-how, and they possess value brand name and reputation. Usually, brand names
are protected by laws and regulations, as a result many firms would choose a

combination of franchising and subsidiaries to control the franchises in a foreign

country, and the subsidiaries may be in forms of wholly owned or joint ventures.

2.5.3 Positioning Strategies and Resource-Based Theory

Whether to purse a cost leadership or differentiation strategy also depends on the

resources and capabilities that both the parent firm and subsidiary own. In the early

part of this research, several drivers of cost advantages have been identified, such as

economies of scale, economies of learning, production techniques, etc. These costs

advantages can be achieved if the firms have superior advantages of purchasing,

advertising and research and development. Usually larger and more reputed firms may

enjoy benefits of bulk purchases at a lower unit price, large coverage of advertisement

at a lower advertising cost per consumer, and R&D spillovers when ideas developed

in one project are of help in another project (Besanko et al, 2003). Therefore, for firms

with resources and capabilities that enable the drivers of cost advantages, a cost

leadership strategy is favored to create competitive advantages. As differentiation

strategy is concerned, Grant (2005) argues that firms need to consider their internal

strengths in terms of resources and capabilities to determine whether they have

potential and advantages for differentiation compared with their competitors. Usually,

differentiation requires high levels of technologies and services, which, in turn,

requires significant superior information system supporting fast response capabilities,

training to support customer service excellence, and fast new product development. In

addition, each activity along the value chain is also very important, such as quality of

components and materials, wide variety of product, fast delivery, efficient order

processing, strong brand reputation, and customer after-sale services (Grant, 2005).

These resources and capabilities provide favorable conditions for firms to pursue a

differentiation strategy. For international firms, Peng and Wang (2000) argue that it is

not necessary that the resources and capabilities needed are a one-way process

originating form headquarters, but rather, subsidiaries can develop their own. As

Birkinshaw (1996) reported, some subsidiary growth is driven by its own distinctive

capabilities developed through efforts by subsidiary management rather than parent

management. Therefore, the choice of strategies does not depend on the resources and

capabilities owned by parent firm, but also local subsidiaries.

2.5.4 Human Resource Management and Resource-Based Theory

In this paper, it has been argued that human resources are critical for the success of an

international firm. Human resources offer skills, knowledge, and reasoning and

decision-making abilities (Grant, 2005). Grant (2005) also suggests a few kinds of

resources and capabilities that human resources bring to the firm. The first is that the

education, training and experiences of employees determine the skills available to the

firm. In addition, the adaptability of employees contributes to the strategic flexibility

of the firm. Moreover, the social and collaborative skills of employees bring the
capacity of the firm to transform human resources into organizational capabilities.

Finally, the commitment and loyalty of employees determine the capacity of the firm

to attain and maintain competitive advantages. Therefore, these characteristics of

human resources play significant role on the performance of the firm. If these

characteristics are inimitable and immobile, then resource-based theory suggests that

the firm is able to create and maintain its competitive advantages compared with its

competitors.

Taylor et al (1996) have studied three levels of human resources—the parent firm, the

subsidiary and the employees. They suggest that top managers at the parent firm level

present some of the most valuable, unique, and hard to imitate resources. Top

managers of an international firm have significant international experience and

specific tacit knowledge, and thus Carpenter et al (2001) argue that this kind of

experience and knowledge are difficult to access and imitate for other international

firms those do not possess. At the subsidiary level, staffing subsidiaries with

entrepreneurial managers (Birkinshaw et al, 1998), providing sufficient incentive to

subsidiary (Gupta & Govindarajan, 2000), and seeking a fit between its human

resources practices and local culture (Schuler & Rogovsky, 1998), are all suggested to

be able to facilitate subsidiary capability development and knowledge sharing. Finally,

at the employee level, Bae & Lawler (2000) and Lee & Miller (1999) found that it is

more likely to attain higher performance if firms value people as a source of

competitive advantages.
Human resources possess complex social relationships, and Barney (1991) argues that

social relationships may be one of the most difficult to imitate resources. Therefore,

from the resource-based view of point, human resources are vital to propel the further

progress in creating and sustaining competitive advantages in the industry.

 Chapter 3 Research Methodology

The previous chapter has reviewed the strategies for international firms to enter,

expand and develop in a foreign country, and how the resource-based theory

contributes to the selection of an appropriate strategy. This chapter will introduce the

research methods used in this research.

A methodology is “the analysis of, and rational for, the particular method or methods

used in a given study, and in that type of study in general” (Jankowicz, 1994).

Therefore, it is generally a research approach for studied topics. Blaikie (2000)

suggests that it also includes a critical evaluation of alternative research methods.

3.1 Research Design

This dissertation will find out the extent to which the strategies of Wal-Mart and

Carrefour in China are different from each other and the reasons why they are

different in a resource-based perspective. There are two broad categories of researches:

quantitative and qualitative research. Qualitative research has always been in an

important place in the studies of international business (Marschan-Piekkari and Welch,

2004). This dissertation will apply the qualitative method to conduct the comparative

study of the two retailing giants’ strategies. According to Van Maanen (1983, p9),

qualitative methods is defined as procedures for “coming to terms with the meaning
not the frequency of a phenomenon by studying it in its social context”.

Cresswell (1998) listed five research approaches that each has a distinguished history

in one of the social science disciplines and then explores their application in research

design. The five research approaches include:

1. Biographical research, concerned with an individual and their experiences, and

maybe in the form of a self-report or autobiography or a biography prepared by

another person based on oral reports and or written materials.

2. Phenomenological, concerned with experiences of more than one person in

relation to a concept or phenomenon.

3. Grounded theory, concerned with generating or “grounding” theory in their

observations rather than applying or using an extant theory.

4. Ethnography, concerned with a variety of different schools of thought (e.g.

structural functionalism, feminism, critical theory, etc.), that emphasizing the

first-hand collection of data based on the observation of people.

5. Case studies, concerned with a detailed and in-depth description and analysis of a

“case” or “bounded system” using multiple sources of information.

Considering the research questions, I choose the case study to conduct this research.

According to Hartley(2004, pp.323), “case study research consists of a detailed

investigation, often with data collected over a period of time, of phenomena, within
their context, and the aim is to provide an analysis of the context and processes which

illuminate the theoretical issues being studied”. Hartley also argues that case study is

particularly suited to research questions which require detailed understanding of

social or organizational processes. In addition, Yin (1994) suggests that case studies

are preferred when “how” and “why” questions are to be answered, and when the

researcher has little control over events and when the focus is on a current

phenomenon in a real-life context.

As this research is concerned, it is an investigation of strategies adopted by Wal-Mart

and Carrefour in the Chinese retail industry, and an analysis of the differences

between the two in a resource-based theory perspective. Therefore, designing this

paper in the form of case studies is the most appropriate.

3.2 Research Methods

After designing the research, the research methods that are going to be used are also

important. Fisher et al (2004) suggest several commonly used research methods:

interviews, such as an open interview, pre-coded interview, and semi-structured

interview; panels, that gather a group of people to have a free flowing, but focused,

discussion on a particular topic; questionnaires, including both pre-coded and open

questionnaires; observational research, either open or pre-coding observation; and

documentary research by using documentary materials to take either an open or

pre-coded form. The use of methods mainly depends on the nature and scope of data

collected.

In this research, documentary research method, particularly firms’ historical

documentary review and analysis is adopted for this specific case study. History is

regarded as a repository of facts and can be used to illuminate the present and future

especially in the resource-based view. De Geer et al (2004) argue that historical

documents can be used in two different capacities. The first is that they are remnants

of earlier processes in the organization and thus bear witness to activities in the past.

They tell the activities and events happened at that period of time, but researchers

need to identify and verify the authentic document required. On the other than, these

sources may tell numerous information about some hidden situations, processes and

attitudes within the organization. These requires critical scrutiny because they involve

complicated relationship that researchers cannot easily assess.

3.3 Case Design

Two cases—Wal-Mart and Carrefour are selected to be studied in this research. This

design of case studies is decided for several reasons.

First, due to the aim of this research—to provide an overview of the relationship

between the firm strategies and its possessed resources and capabilities, a comparative
studies of more than one firm in the same market context would be more convincing

than one case studies. By contrasting the different strategies adopted by different

firms in the same context, the determinant factors—resources and capabilities are

stressed as the main points. However, the number of cases chosen cannot be too much.

Studying a great number of cases would result in verbose and repeated data

interpretation and analysis. It is also a work burden. Two or three cases should be the

better choice for a comparative study. Due to time and words limitation of this

research, two cases are preferred in this research.

In addition, Wal-Mart and Carrefour are chosen as representatives depending on

several factors. First, Wal-Mart and Carrefour are the largest two retailers worldwide.

They have similar business scales and strength, and hence they are comparable in

terms of their resources and capabilities. In addition, Wal-Mart and Carrefour entered

China in the same period of time, and then expand and develop together experiencing

different periods of policy changing. This enables a successive analysis of the two

retailers’ strategies from their entry until today. Furthermore, although Wal-Mart

ranked head Carrefour in the world, but it becomes following Carrefour in Chinese

retail market. These three factors all enable a comprehensively comparative study of

their strategies.

3.4 Data Collection

Orbell (1987) suggests that most sufficient information for historical documentary

method can often be collected, without having to contact companies, in public sources

available to most of people. The main sources of these historical information that

could be used are through companies’ websites, annual reports, documents or

websites published by government, trade associations, and research organizations and

professional bodies, newspapers and magazines, textbooks, academic journals, or

online database and so on. The available sources of information are listed in Table 3.1,

and the ticked ones are the sources available to use for this research.

Table 3.1 Sources of Information

Data generated by individuals and organizations

• Government bodies; √
• Trade associations; √
• Private companies;
• Local employer networks;
• Trade unions;
• Patent offices;
• Research organizations and professional bodies; √
• Consumer organizations

Data recorded in primary sources

• Monographs (books on a single topic);

• Academic journal articles; √
• Conference papers;
• Unpublished research reports (available from author);
• Newspapers and magazines (some features and news items) √
• Company annual reports; √
• Company price lists;
• Company internal ‘house magazines’; √

Data organized, collated and indexed in secondary sources

• Books of readings 9collations of journal articles);
 • Textbooks; √
• Encyclopedias;
• Bibliographies;
• Dictionaries; √
• Academic journal review articles; √
• Academic journal annual index pages;
• Annual review books (of topics in academic disciplines);

Those are summarized and signposted in tertiary sources

• Subject guides;
• Library catalogues and indexes; √
• On-line databases; √
• Information services; √
• Librarians;
• Your tutor; √

Source: Howard and Sharp (1983).

As this research is concerned, the websites of parent companies are good sources of

the overview of Wal-Mart and Carrefour, as well as their possessed resources and

capabilities. The websites of local companies provides their activities and strategies in

China. Both provide the information year by year, which provides convenience and

reliability for researchers. Some important figures and policy documents can be

obtained through governments’ official websites, such as Central People’s

Government P.R.C, and Ministry of Commerce China, which enable the collected

information’s reality and reliability. Online public published newspapers, magazines,

academic journals, textbooks and etc., especially with great reputation, will provides

reliable and just information and analysis of the activities and strategies of Wal-Mart

and Carrefour.
3.5 Summary

According to the research aims and objectives, this research chooses Wal-Mart and

Carrefour as two cases to conduct a qualitative cases study. Through documentary

research method, both Wal-Mart and Carrefour’s historical documentary are reviewed

and analyzed. All the information and data about Wal-Mart and Carrefour will be

gained through companies’ websites, governments’ official websites as well as other

public published newspapers, magazines, academic journal articles, textbooks and etc.

Due to the strict approval, edition and reputation, these sources of information and

data are believed to be just and reliable.

 Chapter 4 Industry Analysis of Chinese Retail Market

Industry analysis provides a framework for assessment of industry and firm

performance, identification of key factors affecting performance, determination of

how changes in the business environment may affect performance and identification

of opportunities and threats in a particular business context (Besanko, et al 2003).

This chapter conducts an industry analysis by applying Porter’s Five Forces

framework—internal rivalry, entry, substitutes and complementary products, supplier

power and buyer power.

4.1 Industry Facts

It is probably safe to argue that, since the Chinese economy reformation occurred in

1979, retail sector is one of the sectors with the most rapid changes, the most

fundamental transformation and most intensive competition. Since 1979 the free

market retailing became legal again, and Chinese retail sector grew exponentially

(Davies, 1994). Davies (1994) found that after free market retailing was permitted, the

number of retailing stores in China grew explosively from 1 million in 1979 to 10

million in 1992. By the end of 2001, the number of retail businesses reached around

20 million units (euromonitor.com, 2003). Meanwhile, the retail sector is growing

more mature and complete. Every retailer, from domestic to foreign ones, is

differentiating itself to realize its distinct position in this industry, and adopting
advanced management models and technologies.

The most important event in Chinese retail industry is the market openness policies

for foreign investment started in 1992. This openness policy brings both opportunities

and challenges to Chinese retail industry. On one hand, it leads to industry revolution,

and on the other hand, it brings intensive competition to domestic retailers. China

opened its retail market gradually to foreign retailers. In July, 1992, the central

government of China issued Commercial Retail Areas on the Issue of the Use of

Foreign Investment Approvals, which started to allow one or two foreign retailers to

open business as pilots in Beijing, Shanghai, Tianjin, Guangzhou, Dalian and Qingdao,

and five Special Economic Zones. However, there are four conditions for these

foreign investments: (1) the Chinese partner must have a stake more than 51%, (2)

they must form joint ventures or cooperation to enter the market, (3) they cannot

operate wholesale businesses, (4) the proportion of imported goods, shall not exceed

30% (Marketing Briefs). In June 1996, the central government of China expanded the

number of experimental cities to all provincial capital cities and several separated

planned cities, and also allowed foreign retailers to operate wholesale businesses. This

is believed to indicate that China, especially the retail industry, took an important step

in the opening policy. At the end of 2004, China removed all limits on business

location, amount and shares structure. Accompanied with the large market with great

profit potential, the foreign investments greatly accelerate the pace of entering China.
4.2 Market Definition

According to Besanko et al (2003), market definition requires identification of both

product market and geographic market. Retail can be defined as the function and

activities involved in the selling of commodities directly to consumers

(www.thefreedictionary.com). Therefore, the product market can be considered as

providing brick-and-mortar stores with a large range of commodities and services for

consumer shopping. Others, such as Chinese traditional wet markets and street market,

as well as online retailing and television retailing, are considered as substitutes in this

analysis. Consumers tend to shop locally, and consumers of a metropolitan area tend

to visit retailing stores in the same vicinity. It might be thought that each metropolitan

is a distinct geographic market. However, considering the aims of this research, we

will define the geographic market to be studies as the entire Chinese retail market.

Market definition is a cornerstone of industry analysis (Besanko, et al, 2003). Porter’s

five forces framework (illustrated in Figure *) will be performed to analyze the retail

industry in China.

4.3 Internal Rivalry

According to Besanko et al (2003), internal rivalry refers to the jockey for shares by

firms within a market. Due to the economy reformation in China, the number of
competitors in Chinese retail industry is increasing rapidly. Especially after China

officially became a member of WTO, the foreign retailers enter China market as well

as expand in China in a significant rapid pace. In addition, each competitor may have

different cost. There is also substantial excess capacity for each retailer. Furthermore,

in this retail market, customers often have low switching costs. According to Besanko

et al (2003), these characteristics of retail market tend to heat up price competition.

Therefore, the Chinese retail market meets the criteria for fierce internal rivalry.

According to China Internet Information Center News (2002), China has planned to

create its own large domestic retailers. There are a few domestic retailers engage in a

fast and large development. With a few number of international retail giants, the

competition in China retail industry is inevitably intensive and sharp. Table 4.1 shows

the a few top retailers in China consisting both domestic and foreign ones.

Table 4.1 The Rank of Retailers in China

Sales in 2006
Rank Retailer Name Number of Outlets
(Billion RMB)

1 Gome Electric Appliance, China 86.93 820

2 Bailian Group, China 77.09 6280

3 Suning Appliance Chain Store, China 60.95 520

4 China Resources Vanguard, China 37.85 2250

5 Dashang Group, China 36.14 182

 6 Carrefour, France 24.80 95

14 Wal-Mart, USA 15.03 71

17 Lotus, Thailand 13.50 75

23 Metro, Germany 9.37 33

24 Tesco, UK 9.30 47

Source: Each company’s website

From the table, it is easy to find that domestic retailers occupy the top five retailers in

terms of sales in 2006, and they own a significant market share in Chinese retail

market. Carrefour, the best performing foreign retailer took the sixth position and

Wal-Mart took the fourteenth. However, in recent years, the openness policies become

more relax and flexible, more and more foreign retailers landed China. Most of them

have completed their strategic layout of their stores over China perfectly. Therefore,

although some of the domestic retailers have occupied the leading position, they are

still face severe challenges. It is estimated that in the next few years, 60% of Chinese

retail market will be owned by 3-5 world-class retail giants, and 30% will be owned

by Chinese national retail giants, and the rest of 10% will be owned by regional retail

giants.

4.4 Entry

In an industry, argued by Besanko et al (2003), new entrants will erode current

players’ profit in two ways: (1) entrants will divide the market demand among more

sellers, and (2) entrants will decrease the market concentration which will in turn heat

up internal rivalry. Usually, there are many kinds of entry barriers in an industry.

In the early years after economy reformation, there was no foreign retailers allowed to

enter China, and Chinese central government encouraged and supported the

development of new retailers. Therefore, operating retail stores was considered as a

good way to make profit due to the small entry barriers. It does not entail significant

economies of scale or experience curve, because small retail stores still make profits

with lower cost. Retailers’ reputations are not significantly important, as the goods

they sell to customers are less different. Retailers can access to buyers easily and there

are no network externalities. As a result, the number of retailers increased rapidly.

Recently, China central government has introduced policies to regulate and promote

the development of retailing, which encourages competitive firms to realize scale

expansion, and to reorganize assets that are cross-sector, trans-region and

cross-ownership. This, meanwhile, leads these enterprises to become larger and

stronger. Especially when China central government completely removed the

limitations of foreign retailers to enter and develop in China, the barriers for both

domestic and foreign retailers to enter Chinese retail market became smaller. More

and more powerful domestic and foreign potential entrants will enter this market.
However, small entry barriers, on the other hand, discourage potential entry to this

industry. A report from A.T. Kearney found that the attractiveness of Chinese retail

market in 2006 showed a downward trend (www.chinabgao.com). As Besanko et al

(2003) suggested expectations about post entry competition are also important. As

more and more enter this market, the competition is inevitably considered as intensive,

and market is gradually saturated. However, from Chinese retail market’s overall

growth trend, many experts conclude that there is still huge potential for further

development and opportunities for investment. According to China State Information

Center, the retail market in China will maintain an annual growth rate of 8% to 10%.

In addition, the value of RenMinBi (RMB) will also influence the potential entrant to

the retail market. First, if there is RMB revaluation, the consumers’ real purchasing

power will increase and hence the retailers will benefit from this, which will

encourage more entries. Second, the RMB revaluation indicates the real prices of

imported goods decrease, which will benefit the retailers and encourage potential

entrants.

4.5 Substitutes and Complements

Substitutes and complements are two important factors influencing market demand.
Substitutes would divide the profits and intensify the competition in this market,

while complements would boost the demand and hence enhancing profit opportunities

in this market.

Chinese traditional markets—wet markets and street markets—are considered to be

substitutes of retailing stores in Chinese retail market. Wet markets are large and

enclosed, and space is divided among counter-service departments. Street markets, on

the other hand, sell fresh food in the open by private sellers with tiny stalls. The

environments of both are dirty, crowded and noisy. The competitive advantages of wet

markets and street markets lie in cheaper prices and fresher food. In the early days,

these wet markets and street markets are strong substitutes of retailing stores. With the

improvement of people’s living standers, a comfortable shopping environment, wide

variety of goods, and outstanding services provided by retailing stores attract more

and more customers.

In addition, nowadays, sales on Internet and television become more and more

popular. Advanced technology enables the online and television shopping transactions

to be gradually fast and safe. Furthermore, online and television shopping are

considered to be time and cost sufficient. Combined with the increasingly fast paced

lifestyle of society, the demand of online and television shopping is increasing. In

2001, the Internet retail sales had hit RMB 1200 billion that is more than one third of
the traditional retailing format with sales of RMB3230.6 billion (euromonitor.com).

There is no doubt that online and television retailing brings great challenges and

threat to traditional brick-and-mortar retailing stores.

Both Chinese traditional market and modern online and television retailing reap the

market demand in this retail industry. However, online shopping will complement and

can boost the demand for brick-and-mortar retailing stores. The presence online will

increase the exposure of the retailer, and give the potential customers a full

introduction of this retailer. In addition, other industries such as tourism, restaurants

and hotels, will also boost the sales of retail industry in one city.

4.6 Supplier Power

Besanko et al (2003) argue that the supplier power is the ability where industry’s

upstream input suppliers to negotiate prices that extract industry profits. Besides, they

also suggest that suppliers may have two kinds of power over a downstream industry.

If suppliers are in a competitive market, then they have “indirect power”. Suppliers

with indirect power charge the downstream industry according to the supply and

demand in the upstream industry, and also can sell their goods and services to the

highest bidder. Supplier have “direct power” if the industries of suppliers are

concentrate, or there is relationship-specific investments between suppliers and buyers.

Suppliers with direct power can raise prices of the goods and services they provide

without destroying that market. Both direct and indirect power will erode the profit of

downstream industry.

In China, especially after China’s entry to the WTO, relationships between retailers

and suppliers have become increasingly important (www1.chinadaily.com.cn). It is

possible that the retailing stores have become the most important distribution channels

with great development potential. Retailers are the most important customers for the

manufacturers. Especially in China, there are a lot of medium and small suppliers and

the intensive competition often makes the fittest to survive. Therefore, the suppliers

have weak power over retailers. On the other hand, with the further and fast

development of retail industry, many retailers are becoming larger in terms of their

operating scales and hence their purchasing scales. This will lead the retailers to a

position with strong bargaining power.

In addition, the revaluation of RMB leads to the decreased competitive advantages on

exporting prices. Before that, Chinese manufacturers have tremendous competitive

advantages in exporting. However, recently, manufacturers in such a difficult situation

have to seek domestic retailing channels to distribute their goods and services. As a

result, retailers would benefit in terms of their bargaining power as well as the prices

and quantities these suppliers provide.

Therefore, it is probably safe to argue that the suppliers of Chinese retail industry

have low bargaining power, and they impose little threat to the profit of retail industry.

4.7 Buyer Power

Buyer power refers to the ability of individual customers to negotiate purchase prices

that can extract profits from sellers, and analogous to supplier power, and buyers also

have direct and indirect power over retailers (Besanko, et al, 2003).

Due to the sustained growth of GDP in China, citizen’s personal incomes are rising,

and therefore this further stimulates citizen’s consumption level. With fast economic

growth, the Chinese consumption level is expected to grow continuously (Luo, 1998).

This enables Chinese retail industry to enter a good stage of development. In 2005,

China central government issued Central Government’s proposal on the Fifteenth Five

Year Plan Project of National Economy and Social Development. This policy was

mainly issued to further increase the income of residents, enhance consumers’

confidence, promote potential consumption, and hence to support the retail industry to

develop more healthy and continuously (www.gmw.cn). It is estimated that during the

period of the fifteenth Five Year Plan (2006-2010), the growth rate of consumption

sales will reach between 13% and 15%.

In retail market, buyers’ lifestyle and psychology play very important role. With the

increase of citizen’s income levels, more and more people are seeking a better

lifestyle. The increase of car ownership and improved transportation links enable

people to travel to and shop in farther retailing stores. In addition, it is reported that,

due to the lower import duties and tariffs after China’s accession to WTO, sales of

high quality consumption goods have started enlarging in small market because more

and more middle-class income residents are able to afford the spending on those high

quality goods (China Country Report, 2002).

Table 4.2 summarizes the five forces in the recent Chinese retail market. Generally,

each retailer faces intensive competition and challenges as well as great opportunities

in this market. The profitability of this industry depends on many factors, of which

government policies play a more important role in China than in other countries.

Table 4.2 Five Forces Analysis of Chinese Retail Market

Forces Threat to Profits

Internal Rivalry High

Entry Medium to High

Substitutes/Complements Medium

Supplier Power Low to Medium

Buyer Power Medium

 Chapter 5 Foreign Retailers in China
—Wal-Mart and Carrefour

In this chapter, Wal-Mart and Carrefour are chosen as two representatives of foreign

retailers in China. They are two of the largest foreign retailers in China and enter

China in an early time. Therefore, it is more convincing if these two foreign retailers

are used to provide an overview of how foreign retailers enter and develop their

business models in Chinese retail market. The objective of this chapter is to analyze

the two giants’ entry and development strategies, and especially how their strategies

interact with Chinese government policies and local market conditions.

5.1 Wal-Mart

5.1.1 About Wal-Mart

Wal-Mart was established by Mr. Sam Walton, who is believed to be the legend of the

retail industry worldwide, in 1962 in Arkansas, US. After 40 years of development,

Wal-Mart has become the largest chain retailer in the world. In 2005, Wal-Mart has

reached the sales of $312.4 billion. Currently, Wal-Mart has opened nearly 6,800

shopping stores globally, and employs more than 190 million peoples, located in 14

countries. It is estimated that there are about 176 million visits per week

(www.wal-martchina.com). With the same slogan “Low Prices Everyday” and

Table 5.1 Wal-Mart Histories

1962 Company founded with opening of first Wal-Mart store in Rogers, Arkansas.
1969 Company incorporated as Wal-Mart Stores, Inc. on Oct. 31.
1972 Wal-Mart approved and listed on the New York Stock Exchange.
1983 First SAM'S CLUB opened in April in MidWest City, Oklahoma.
1987 Wal-Mart Satellite Network (largest private satellite communication system in the
U.S.) was completed.
1988 First Supercenter opened in Washington, Missouri.
1990 Wal-Mart became nation's No. 1 retailer.
1991 International market entered for the first time with the opening of a unit in Mexico
city.
1992 President George Bush presented Sam Walton with the Medal of Freedom.
1996 Wal-Mart entered China through a joint-venture agreement with Shenzhen
International Fiduciary Investment Co. Ltd.
1997 Wal-Mart replaced Woolworth on the Dow Jones Industrial Average.
1998 Wal-Mart introduces the Neighbourhood Market concept with three stores in
Arkansas.
1999 Wal-Mart had 1,140,000 employees, making the company the largest private
employer in the world.
1999 Wal-Mart acquired the ASDA Group plc. in the United Kingdom (229 stores).
2000 H. Lee Scott named president and CEO of Wal-Mart Stores, Inc.
2001 Wal-Mart named by FORTUNE Magazine as the 3rd most admired company in
America.
2002 Wal-Mart signed JVs with Zhongxin Company for future stores in Shanghai and
nearby.
2002 Wal-Mart topped Fortune’s Global 500 and ranked first among the “Most Admired
Companies in America.

2002 China becomes Wal-Mart’s most important purchasing centre in the world.
2003 Wal-Mart opened its first outlet in Beijing in July. After then Wal-Mart has opened
27 outlets in China by August.
2004 Wal-Mart held its shareholder meeting on March 4 in Shenzhen, China.
2006 Wal-Mart makes its first foray into Central American retailing by buying a stake in the
region’s top retailer from Dutch retailer Royal Ahold, which has stores in Costa Rica,
Guatemala, EI Salvator, Hoduras, and Nicaragua.

Source: www. Wal-martchina.com

“Satisfactory Services” all over the world, Wal-Mart has won a large number of

customers. There is no doubt that Wal-Mart is always the industry leader in terms of
foreign market expansion as well as management models. Table 5.1 highlights some

of the important events during the 40 years’ development.

5.1.2 Wal-Mart’s Entry into China

Wal-Mart entered China in 1996, which is four years after the allowance by Chinese

central government. It is also the time when China central government increased the

number of experimental cities, where foreign retailers are allowed to operate their

businesses. Wal-Mart did not enter until the further openness policy in China, which

illustrates that Wal-Mart considered this as mature and great opportunities for its entry

into Chinese retail market.

As stated in the previous chapter, in 1996, foreign retailers must follow the

regulations from Chinese central government to start their businesses, and one of

regulations was that their businesses must be in form of joint ventures or cooperation

with one Chinese partner and the Chinese partner must own a stake more than 51%.

Therefore, before its formally entry, Wal-Mart and Shenzhen International Trust &

Investment Co., Ltd, China, signed Agreement on Joint Ventures, and established

“Shenzhen Wal-Mart & Pearl River Department Stores Ltd” in August 1995

(www.szitic.com). In the following year 1996, Wal-Mart opened its first super center

and Sam’s club store in Shenzhen (www.wal-martchina.com).

5.1.3 Wal-Mart’s Development in China

Stores Formats. After entering in Chinese retail market, Wal-Mart tried with different

store formats. Supercenter is always the principal format for Wal-Mart retailing since

its first supercenter opened in March 1988 in Washington. Today, Wal-Mart has over

1,000 supercenters all over the world and China has 81 supercenters. Wal-Mart’s

supercenters have become the customers’ favorite store formats, and they lead to the

positive development of Wal-Mart. Another format is Sam’s Clubs, which act as

procurement agents for their members, and provide the branded merchandises at

preferential prices to companies and individuals. The products in Sam’s Club are

packed in large packages, and the shopping environment is like warehouses. Hence,

these lead to lower margin costs and thus, enable members to experience lower prices.

Wal-Mart also began to test smaller neighborhood supermarkets in communities.

Although there are now two neighborhood supermarkets, they seem to fit better with

consumers’ buying behaviors in China.

Store Locations. At a news conference in Beijing, Joe Hatfield, CEO of Wal-Mart

Asia, said, ”Wal-Mart evolved by starting in smaller cities and moving into the larger

cities” (Meredith, 2004). Indeed, when Wal-Mart took Shenzhen as their first step of

entering China, the store distribution network implied its “second tier cities”

expansion direction. This can be easily proofed when Wal-Mart limited its store

locations in South of China such as Shenzhen, Dongwan, Xiamen and etc. between
1996 and 2001. Until 2001, Wal-Mart gradually moved to bigger cities, such as

Guiyang, Changchun and Nanjing. In the two largest cities—Beijing and Shanghai,

Wal-Mart only opened three stores in each city in a late stage. In addition, most of the

stores are located in communities and the junction of urban and rural areas that are far

from the prosperous areas.

Expansion. Although Wal-Mart ranks No.1 in the worldwide, its growth in China is

not aggressive. Table 5.2 shows the expansion list of Wal-Mart in China. It can be

found that, in the early years of Wal-Mart’s entry, the speed of expansion was slow.

Wal-Mart started to accelerate its expansion in 2004 when the central government of

China announced the removal of restrictions. to foreign retailers. In addition, before

Table 5.2 Wal-Mart China Histories

1996 Wal-Mart opened the first supercenter and Sam’s Club in Shenzhen, Guangdong
Province.
1997 The second Wal-Mart supercener was opened in Dongwan, Guangdong Province.
1999 Wal-Mart stepped out of Guangdong and opened its fifth supercenter in Kunming,
Yunnan Province.

2000 Wal-Mart opened it first supercenter in Dalian, Liaoning Province, which is the first
supercenter in the North of China.
2001 Wal-Mart entered Fujian Province; opend 7 stores totally this year in China.
2002 The first neighborhood market opened in Shenzhen, Guangdong Province; opened 7
stores totally this year in China.
2003 Wal-Mart opened Sam’s Club in Beijing, and opened 8 stores totally this year in China.
2004 Wal-Mart opened 11 stores totally in China, which is the year that opens the most stores.
2005 Wal-Mart entered Shanghai for the first time, and opened the first supercenter in
Shanghai
2006 Wal-Mart opened its Shanghai’s second store.
2007 Wal-Mart bought 35% of shares of Trust-Mart.

Source: Shanghai Business Daily, (www.shbiz.com.cn)

2006, the expansion of Wal-Mart in China took the form of opening new stores.
However, in 2007, Wal-Mart spent $1 billion acquiring Trust-Mart, which is also one

of the leading retailers in Chinese market. The main attraction of Trust-Mart to

Wal-Mart until Wal-Mart willing to invest such large amount of capital is that

Trust-Mart has large number of stores and its leading position in China. Undoubtedly,

this acquisition enables Wal-Mart to capture much more competitive advantages in

China.

5.1.4 Wal-Mart’s Positioning in China

“Everyday Low Price” is Wal-Mart’s promise to consumers. This is attractive to

Chinese consumers, since the average income of Chinese population remains low.

Therefore, Wal-Mart must enable its costs to be low enough so that its low price

competitive advantages can be realized. Therefore, Wal-Mart in 2002 announced that

they would not charge suppliers’ administration fees for the products entered their

store. The aim of this announcement is believed to lower the cost of suppliers and

hence enable the suppliers to lower the prices offered to Wal-Mart. This not only helps

Wal-Mart to achieve its lower costs position, but also promote the good relationship

with suppliers.

In addition, Wal-Mart’s modern information system enables the lower stock-holding

costs. Wal-Mart requests suppliers to adopt electronic data interchange system, which

can transfer information swiftly and can save stock-holding costs. Each store sends
information and orders to its suppliers via the Internet and has products replenished in

on-average two days versus five days of their rivals (Huey and Walton, 1992). Its

complete storage management system enables Wal-Mart to replenish goods twice a

week (once bi-weekly to their rivals) and reduce storage space and delivery time.

Consequently, Wal-Mart is able to reduce stock-carrying and transportation costs and

therefore increase profitability by 2.5% compared with their competitors (Stern and

Stalk, 1998).

However, in fact, Wal-Mart faces the embarrassment that their prices are not low

enough compared with the prices of Carrefour (Qin, 2004, www.gemag.com.cn).

Therefore, on the meanwhile of controlling costs, Wal-Mart makes efforts on assuring

the products quality. Wal-Mart has a strict control over the goods they are purchasing.

Usually, Wal-Mart orders and replenishes the stock of goods directly from the

manufacturers. They even purchase from overseas if suppliers provides a lower prices.

In addition, Wal-Mart appealed some purchasers who accepted bribes in court. Thus,

the goods purchased have a good quality and price assurance in Wal-Mart.

5.1.5 Wal-Mart’s Local Adaptation in China

Wal-Mart, as the No.1 international retailer, started to learn to do things the Chinese

way. They need change in order to adapt the special environment of retail market in
China.

Satisfying Customers’ Needs. The buying behaviors of Chinese consumers are

different from those of Americans, due to the differences in culture, income, and

many other factors. Taking the food purchase for example, Chinese shoppers prefer to

select their own fresh vegetables, fruits, live fish and seafood (Trunick, 2006), and

they insist on requesting foods to be freshly harvested, or even killed in front of them.

In the early days of Wal-Mart, Chinese shoppers were not satisfied because Wal-Mart

was trying to sell them dead fish as well as meat packaged in Styrofoam and

Cellophane (Naughton, 2006). As Wal-Mart discovered that food products are

critically important to create and maintain a strong customer base (Trunick, 2006), it

began to adapt to customers needs in the way of displaying uncovered meat, live

fishes and killing in front of costumers. In addition, Wal-Mart in China has put in

demonstration stations for cosmetics where customers can be shown how to apply

various cosmetics products (Trunick, 2006). According to Govindarajan and Gupta

(1999), Wal-Mart also accepted that most Chinese buy small quantities of goods, and

will tailored their marketing approaches according to language and culture

differences.

Relationships with Local Suppliers. In 2002, when Wal-Mart announced that it

would not charge suppliers any administration fee for the goods entering in its
supercenters, it won acclaim from its suppliers. This makes its competitors surprised

and embarrassed. This decision of Wal-Mart allows suppliers to yield more profits in

the market, and enables the continuous and good cooperation relationship. In 2003

and 2006, Ministry of Commerce China and China Chain Store & Franchise

Association, both awarded Wal-Mart as Chinese Retail Industry’s Top Employer.

Relationships with Governments. Wal-Mart is always keeping a good relationship

with both Chinese central and local governments. This is a good strategy for

Wal-Mart’s development in China. As Wal-Mart has a large scale of purchasing in

China, and in 1996 the purchasing reached $2 billion. Chinese government favored

this exporting scale, and for return, Wal-Mart gets the permit to opening its first store.

In addition, Wal-Mart is known as non-union policies in the US. However, China

forces foreign companies to allow trade unions under a proposed legal amendment

(Fong, 2006). Naughton (2006) suggests that after eight years’ hard line in China,

Wal-Mart soften and agreed to accept unions in 2004. Partly because Wal-Mart

realized organized labor as a cultural and political imperative in China; furthermore,

this is also good chance to maintain good relationship between Chinese governments.

5.1.6 Wal-Mart’s Sourcing in China

Wal-Mart always purchase merchandises from manufacturers and suppliers directly.

Thus Wal-Mart China has three options for its sourcing. The first is that products are
purchased from global suppliers and the products are not manufactured in China; the

second option is that Wal-Mart can purchase products from global suppliers and the

products are manufactured in China; and Wal-Mart can purchase goods from local

suppliers. According to Govindarajan and Gupta (1999), Wal-Mart China chooses to

purchase 85 percent of its merchandise from China, which is a combination of option

two and three. This does not only meet the needs of Chinese consumers for high

standards imported products, but also reduce the pressures from local government to

purchase domestic goods.

Wal-Mart establishes international procurement headquarters that provides sourcing

information of local retailers and centralized sourcing practices and then directly

distributes goods to each distribution centre (Lin and Liang, 2001). Wal-Mart

established three distribution centers supplying its supercenters in China, but it does

not sound like much of a logistics network to support its operations. It is widely

believed that the global success of Wal-Mart is mostly attributed to the excellent

logistics management that combines advanced information system and traditional

transportation. However, Chinese certain special conditions pose challenges for

Wal-Mart and its suppliers. Huffman (2003) argues that Chinese provincial autonomy

and self-sufficiency hinder interprovincial trade and pose difficulties for road

transportation, private and commercial trucking, and Customs clearance for imports.

In addition, due to the small number of stores, Wal-Mart is unable to establish

distribution and operation centers in large scales. Therefore, Wal-Mart in China often
establishes distribution centers first and then opens stores in cities nearby. This

inevitably limits the speed of expansion by opening new stores as well as increases

the costs of expansion.

5.1.7 Human Resource Management and Public relations.

“The undeniable cornerstone of Wal-Mart’s success can be traced back to our strong

belief in the dignity of each individual we view our associates as much more than a

pair of hands to do a job, but also as a wonderful source of new ideas. Our people

really do make a difference!”—Don Soderquist, Senior Vice Chairman of Wal-Mart

Store, Inc. (www.wal-martchina.com). Wal-Mart pays particular attention on

employees’ training programs. Joe Hatfield, president and CEO of Wal-Mart Asia

points out that training takes place every day in every store (Trunick, 2006). Wal-Mart

sends employees with good skills and potentials to US to attend Walton Institute,

whereas those who do not speak English fluently are provided with other trainings

such as computers and management programs. In addition, according to Trunick

(2006), Wal-Mart China has a 16% employee turnover rate which is the lowest among

any operation worldwide, especially in an area where skills are in short supply and job

poaching is common. In November 2005, as the first program in celebration of the

tenth anniversary of its entry into China, Wal-Mart invited more than 120 employees

whose tenure was 10 years and their families to come to Shenzhen headquarters to

attend “Wal-Mart 10th anniversary celebration for staff”, and share Wal-Mart’s ten
years of glorious achievements.

“We should not ask for benefits from life, but contribute to the community we live

and disseminate good things.”—Helen Walton (Sam Walton’s wife)

(www.wal-martchina.com). Wal-Mart China has donated funds and support worth

more than $3.4 million, to local charity and welfare organizations over the past ten

years. Wal-Mart China associates have also denoted more than 130,000 man hours to

these activities. Wal-Mart’s corporate social responsibility programs focus on five

areas: environmental protection, education, child welfare, community involvement

and disaster relief. Recently it was awarded as Most Generous MNC Donors in China

by Forbes China (www.wal-martchina.com).

5.2 Carrefour

5.2.1 About Carrefour

The Carrefour Company was created by the Fournier and Defforey families in 1959 in

France, with the meaning of its name— “crossroads” expressing convenience.

Carrefour opened its first supermarket in 1960 and then invested and opened its first

hypermarket in 1963. In 1969, Carrefour entered Belgium and opened its first store

outside France by forming alliance with local partners. Carrefour stepped outside
Europe in 1975 by opening a hypermarket in Brazil. Over the past 40 years, the

Carrefour group has become the world’s second largest retailer and the largest in

Europe. Today, Carrefour has reached 30 countries in Europe, Latin American and

Asia. Currently, Carrefour has opened over 12,500 stores all over the world, with

sales in 2006 of $114.9 billion and 456,000 employees. (www.carrefour.com). Table

5.3 listed the some important events during its development.

5.2.2 Carrefour’s Entry into China

Carrefour entered China in 1995, and large scale of operation was the main objective

since its first entry. It was still the period of tight control over foreign retailers by

Chinese central government. At that time, foreign retailers were only allowed to

operate in several particular cities, and only allowed to own less than 49% of shares in

their joint ventures or cooperative enterprises. Carrefour did form a joint venture with

a Chinese company called Zhongchuang Commercial Company, but exploit a

loophole of this regulation. Carrefour signed a joint venture agreement with

Zhongchuang Commercial Company, and established Jiachuang Commercial

Management Company. Then Zhongchuang registered another company called

Chuang Yijia Commercial City and Jiachuang took over the businesses and

management of Chuang Yijia. After Chuang Yijia opening the chain store at Beijing

International Exhibition, Carrefour as the main shareholder of Jiachuang controlled

the chain store and named it Carrefour in public. Therefore, Carrefour had absolute

control over the interests of its chain store and started to expand in China through

similar way (hn.rednet.com.cn).

Table 5.3 Carrefour Histories

1959 Carrefour Company was created by the Fournier and Defforey families.
1960 Carrefour opened its first supermarket in Annecy, Haute-Savoie.
1963 Carrefour invested a new store concept – hypermarket. The first hypermarkets were
found in France.
1969 Carrefour opened its first hypermarket outside France in Belgium.
1970 Carrefour shares listed on the Paris stock exchange.
1975 Carrefour opened its first hypermarket in Brazil.
1979 Development of hard discount: Carrefour created Ed chain in France and Dia banner in
Spain.

1985 Carrefour brand-name products were introduced.

1989 The first Carrefour hypermarket opens in Asia, in Taiwan.
1995 Carrefour opened its first store in China by a JV with Zhongchuang Company.
1996 Carrefour continues to grow in Asia, adding Thailand, Korea and Hong Kong to its
list.
1999 Carrefour and Promodes merged to create the largest European food retailing group
and second largest worldwide.
2000 After the two groups merge, all Continent hypermarkets become Carrefour stores
and supermarkets adopted the Champion name in France. Carrefour launched on-
line supermarket Ooshop and opened its first hypermarket in Japan.
2001 Carrefour inaugurated 17 Carrefour service stations on France’s motorway
networks and became the largest food retailer in Argentina.
2002 Carrefour sold its 35% shares of 27 stores in China to Chinese companies due to
disobeying the government regulations.
2003 Carrefour was under fire for imposing unfair charges on food suppliers in June.
2003 Carrefour operates 39 hypermarkets in China and set up ‘GoWest’ plan.
2004 Carrefour announces the sales of its share in Modelo and its purchase of 13
hypermarkets in Poland from Ahold.
2005 Carrefour acquired 6 hypermarkets in Taiwan and 2 other projects currently from Tesco.

Source: www.carrefour.com

Before coming to Mainland China, Carrefour entered in Taiwan and opened the first
Carrefour hypermarket in Asia in 1989. Lean-Luc Chereau, the head of Carrefour

China, in an interview by Child (2006) stated that entering Taiwan brought a fantastic

advantage when entering China in terms of learning how to adapt and deal business

with Chinese. It is obvious that, although the economic systems are different between

Taiwan and Mainland China, both the life and business cultures are fairly similar.

Therefore, experiences in Taiwan are more valuable for international business than

experiences in Europe or the United States.

5.2.3 Carrefour’s Development in China

Store Formats. Carrefour operates three store formats in China: Carrefour

hypermarkets, Champion supermarkets, and Dia discounted convenience stores

(www.carrefour.com.cn). Since Carrefour entered China in 1995, hypermarkets were

the principal format for Carrefour expansion. Yan (2003) argues that this hypermarket

format fits the countries like China who is developing fast due to low prices of

products. He also suggests that this hypermarket format poses challenges to both large

department stores by lower prices, and small chain stores by comprehensive goods. In

2004, Carrefour opened its first Champion supermarket in Beijing as asked by Beijing

government to do something to modernize the small retail business (Child, 2006).

However, Chereau found that Beijing consumers often use a hypermarket as a

supermarket and hence he saw a very difficult future for supermarkets (Child, 2006).
Carrefour opened 150 Dia discounted convenience stores in Shanghai and 100 in

Beijing in 2003 (www.carrefour.com.cn), but faces fierce competition from 7-Eleven

stores from Taiwan. Carrefour would more likely to learn from and follow 7-Eleven in

the convenience store niche (Child, 2006).

Store Location. China is still a country with a relative low income level and hence

the mainstream power of consumption remains in large and prosperous cities and city

centers. Therefore, Carrefour establishes their stores in first tier cities and also in

more prosperous and business areas (Li, 2004). Yan (2003) argues that Carrefour’s

strategy of store location enables its leading position among foreign retailers. He

continued to argue that the decision of selecting Shanghai as the headquarter location

enabled Carrefour’s rapid strategic expansion in China, due to a better sourcing

environment, transportation conditions and marketing expansion capabilities in

Shanghai compared to Shenzhen where Wal-Mart’s headquarter located. Today,

Carrefour has almost finished its strategic networking establishment in coastal cities

and prosperous cities.

Expansion. Carrefour, at the end of 2006, was ranked the 6th in Chinese retail market

in terms of sales with 95 stores. Table 5.4 shows the development histories of

Carrefour in China. The development of Carrefour is rapid, and this can be proofed by

the report from Ministry of Commerce, China that until June 2004, Carrefour was
ranked the first with sales of $0.97 billion and 50 stores among foreign retailers in

China (Li, 2004). However, in 1999 Carrefour was warned for its expansion by China

central government as the shares that Carrefour held was more than regulated in its

retail joint venture (Yan, 2003). In 2001, Carrefour stopped expansion and

development operations for 18 months due to the failure of getting approval from

central government but only local government (Child, 2006). After that, in the year

2001, Carrefour continued its fast expansion. From Table 5.4, it is clear that the

expansion form of Carrefour is only to open new stores. However, Chereau

announced that Carrefour may acquire at least ten Chinese retailers as part of its

expansion strategy (Wall Street Journal Asia, 2006).

Table 5.4 Carrefour China Histories

1995 Carrefour opened first hypermarket in Beijing.
1996 Carrefour entered Shanghai and Shenzhen.
1997 Carrefour opened stores in Tianjin.
1998 Carrefour entered Chongqing, Zhuhai, Wuhan, and Dongwan.
2000 Carrefour opened 5 hypermarkets to speed up its expansion.
2002 Carrefour opened 35 hypermarkets in 20 cities.
2003 Carrefour opened store in Hangzhou, and Dia Discounted convenience store
entered Shanghai and Beijing
2004 The first Champion supermarkets opened in Beijing
th
2005 Carrefour opened its 60 store in Chongqing.

Source: www.carrefour.com.cn

5.2.4 Carrefour’s Positioning in China

The slogan of Carrefour China is “Happy Shopping in Carrefour” and the mission is
to fulfill customers’ needs with full effort and provide the best prices to customers in

every country, in every retailing format, and in the range of the best goods

(www.carrefour.com.cn). Therefore, Carrefour positions itself as providing both good

shopping environment and low prices. In terms of low prices, Li (2004) suggests that

the prices of goods in Carrefour are lower than those in Wal-Mart, especially the

prices of living necessities such as rice, food, oil and so on. This lower prices strategy

provides Carrefour a competitive advantage in the retail market competition and leads

more and more competitors to imitate. The lower prices come from lower costs of

purchasing goods. It is suggested that Carrefour adopted various and rather flexible

sourcing methods, such as local stores can purchase their own goods as long as the

prices of purchased are low, and this leads to famous fake white wine affairs in

Carrefour China (Qin, 2004).

However, according to Qin (2004), the actual shopping environment contradicts with

its “Happy Shopping in Carrefour”. In Shanghai, there are many complaints on the

difference between the prices on shelf and actually paid. In addition, although there is

poster saying, “You found the cheaper prices elsewhere, you get twice the prices

differences payback”, there are various restrictions when customers request.

Furthermore, as most of Carrefour hypermarkets are in city centers, the limited car

parking spaces bring inconvenience to customers.

5.2.5 Carrefour’s Local Adaptation in China

It is probably safe to argue that the leading position among foreign retailers is

attributed to its local adaptation to some extent, and its experiences in Taiwan play an

important role.

Satisfying Customers’ Needs. Gaining valuable experiences in Taiwan has made

Carrefour understand the buying behavior and habits of customers in Mainland China.

Therefore, since their first entry in Chinese market, Carrefour decided to adopt

fresh-market style for vegetables, fishes and other seafood, and to display the above

products at lower prices in a better and cleaner environment (Child, 2006). This

undoubtedly provides a fresh market image that Chinese customers are accustomed to.

In addition, Carrefour also believes that customers group for each store are different

and unique, so Carrefour organize each store differently to adapt the needs of their

local customer group in terms of products varieties, and their places and orders on

shelves, and most of these adaptation decisions are made by local store management

flexibly (Qin, 2004). In addition, Chereau indicated that Carrefour is trying to be a

quarter-hour ahead of the customers, which means that the products will not be too

advances or too late (Child, 2006). For some new but not too advanced products,

Carrefour brings in and explains them to customers.

Relationships with Local Suppliers. The relationships between Carrefour and its

suppliers are believed to be strained (Li 2004; Yan, 2003). Li (2004) argues that

Carrefour often reaps profits by charging suppliers’ administration fees and asking

suppliers for financial support in festivals. Charging suppliers administration fees is

created by Carrefour in Chinese retail market, and if a supplier would like his

products enters Carrefour hypermarket, the supplier needs to pay six different kinds of

fees that may reach 36% of expected sales of his products (Li, 2004). In 2003,

Shanghai Seed and Nut Roasters Association proposed to stop supplying to Carrefour

in order to protect the benefits of more than 5000 members in the association due to

high administration fees (www.gzii.gov.cn). In addition, according to Yan (2003),

some of Carrefour stores transfer the loss of discounting, product wear and tear as

well as negative balance of proposed sales to suppliers. This inevitably leads to more

costs to suppliers.

Relationships with Government. Carrefour always has a good relationship with

local governments. Carrefour’s remarkable volume of goods purchase win favor and

support from local government, as it generates a large export profit margin for local

government (www.people.com.cn). However, Carrefour has a strained relationship

with Chinese central government. The main reason is believed to be that, in order to

realize its rapid strategic expansion, Carrefour disregards the regulations on foreign

retailers from central government, and exploit the loophole of the regulation

differences between local governments and central government (Yan, 2003). Chinese
central government was annoyed by this, and hence put Carrefour in the blacklist and

commanded Carrefour to stop to reorganize its share proportion and expansion

strategies in China. This was not resolved until Carrefour sold its illegal shares in its

joint ventures and announced the decision to establish 10 sourcing bases in China for

Carrefour’s global purchasing (Li, 2004).

5.2.6 Carrefour’s Sourcing in China

Similar to Wal-Mart, Carrefour also purchases most of its goods within China.

However, each store of Carrefour has around 85% of its stock procured locally and

has them distributed directly to each store. Carrefour believes that this flexibility of

purchasing strategy does not only cater the needs of local customers, but also can

lower the purchasing costs (www.supplychainer.com). Carrefour was reported already

established 11 sourcing bases in big cities in China since 1995 and plans its 12th

sourcing base in Yiwu, Zhejiang Province (yiwu.ipr.gov.cn). In addition, the

empowerment also reflects Carrefour’s flexibility in management. Carrefour

headquarters empowered purchasing rights to four local sourcing centers: Beijing,

Shanghai, Guangzhou and Wuhan; each store is also empowered purchasing rights for

its own stock (Cai and Zhang, 2003).

However, this lack of centralized sourcing and distribution systems is considered to be

problematic. Cui (2003) argues that this imperfect physical distribution systems and

delay of information system development in China brings higher costs and difficulties

to large retailers as most suppliers are still at the stage of workshop that are unable to

provide accurate and complete services on delivering. However, as the special

conditions of Chinese provincial autonomy and self-sufficiency, a centralized

procurement system is difficult and costly to operate. Therefore, by relying on the

distribution systems of suppliers, Carrefour’s flexible sourcing and logistic strategies

enable Carrefour to save costs on distribution as well as catering the different needs of

stores in each location.

5.2.7 Human Resource Management and Public Relations

Carrefour established its first Carrefour China Institute in Asia, and it aims to train

Chinese staff to take positions with more responsibility. Training covers staffs,

supervisors, department managers and mandarins, and provides both general and

specialized knowledge for their career development (www.carrefour.com.cn). In

addition, to retain trained and talent people, Carrefour needs them to sign a three- or

five-year contract: any staff who go to work with a competitor have to pay back the

money Carrefour spent on training, and that is a huge amount of money; but if staff

stay for five years and more, they are given a super bonus that is several times of

salary (Child, 2006). This significantly reduces employees’ turnover rate in Carrefour
China.

Carrefour China makes effort on being an enterprise citizen with full responsibilities

on society all over the world, such as actively sponsoring for public welfare events

and community building. In 2004, Carrefour China was awarded as Top Ten Foreign

Enterprises with Outstanding Contribution in China. In addition, Carrefour

established Carrefour (China) Food Safety Fund Foundation, whose aim is to promote

the food safety.

 Chapter 6 Analysis of Wal-Mart and Carrefour’s Strategies

The previous chapter provides analysis of strategies adopted by Wal-Mart and

Carrefour respectively. These strategies, as analyzed, are planed and implemented

highly interacting with Chinese government policies and market conditions. Some of

these strategies lead a competitive position for Wal-Mart or Carrefour, while some

need to be adjusted for further and better development. This chapter will firstly

compare and contrast the similarities and differences between strategies adopted by

Wal-Mart and Carrefour. The second part of this section will explain the link between

the resources and capabilities that they possess and the strategies they adopted by

using resource-based view as basic principle.

6.1 Assessment of Two Giants’ Strategies

Both Wal-Mart and Carrefour entered China in the mid-1990s, and there are both

similarities and differences of the strategies adopted by the two giants according to

the previous chapter. This section will provide an assessment of the two giants’

strategies in terms of entry strategies, expansion strategies, positioning strategies,

local adaptation, and human resource management and public relations.

6.1.1 Entry strategies

Wal-Mart and Carrefour both entered Chinese retail market in form of joint ventures

with local companies. Before 2004, when Chinese central government cancelled

limitations on foreign retailers’ entry mode, joint ventures were the only mode that

foreign retailers can choose. Although the entry modes are chosen according to the

government regulations, both Wal-Mart and Carrefour expressed that they would still

enter in form of joint ventures if there were no such regulations. As listed in Table 2.1,

foreign retailers can benefit form local partners’ knowledge of the host country on

cultures, languages, relationship networks, political systems and market conditions.

Therefore, it is probably safe to argue that joint ventures are the optimal entry modes

for the two retailing giants to enter China.

Although the entry modes that two giants adopted were the same, there are differences

in details. First, Wal-Mart formed a joint venture with Shenzhen International Trust &

Investment Co., Ltd, China, and followed government regulations strictly. However,

Carrefour exploited the loophole of regulation, and formed a nominal joint venture

with Zhongchuang Commercial Company, China, but controlled most of shares and

management in their business. This is consistent with Carrefour’s objective to build

large a large scale in a short period in China (Li, 2004). By controlling more shares

and business management, Carrefour is able to engage in its expansion strategies

more flexibly and without loss of knowledge from local partners.

In addition, Wal-Mart entered China in 1996, and Carrefour entered in 1995. Although
there is only one-year difference, the government policies on foreign retailers changed

significantly. As mentioned in the previous chapter, before 1996, foreign retailers

were only allowed to enter 11 cities throughout China. However, in 1996, Chinese

central government allowed foreign retailers to enter all provincial cities and some

other cities. This early entry also provides Carrefour first-mover advantages by earlier

establishing strong brand reputation and stable customer groups. Wal-Mart’s later

entry also provides competitive advantages in terms of more flexible choices of

location for its entry.

Indeed, before its entry into China, Wal-Mart had prepared for four years and made

great efforts. In 1992, Wal-Mart received a charter in Chinese retail industry, and set

up its agency in Hong Kong to conduct researches on Chinese retail market. The

researches mainly concerned on economic policies, government supports, city

economy, GDP, national income, and consumers’ habits (sying.com). This

undoubtedly helped Wal-Mart to select a better strategy to enter according to its

researches. Carrefour, on the other hand, entered Taiwan firstly where the cultures as

well as customers preferences and buying habits are closely similar with those of

Mainland China. After learning and gaining successful experiences in Taiwan, their

entry was easier and more confident, especially for future expansion.

6.1.2 Expansion Strategies

The speed of expansion for both Wal-Mart and Carrefour were not rapid enough.

Obviously, Wal-Mart and Carrefour are the largest two retailers in the world, and they

have strengths and powers to expand aggressively to become the market leader in

Chinese retail industry. However, during more than 10 years development in China, at

the end of 2006, Carrefour and Wal-Mart ranked only the 6th and 14th respectively,

with sales no more than one third of the market leader.

Before end of 2006, both two giants expanded through opening new stores. At the end

of 2006, Carrefour ranked the 6th by opening 95 new stores and Wal-Mart the 14th by

opening 71. This market structure changed when Wal-Mart acquired Trust-Mart which

have101 stores. This is the first acquisition for Wal-Mart in China, and did push

Wal-Mart’s position in the rank forward significantly. Carrefour is still keeping

expanding by opening new stores. However, according to Chéreau, Carrefour is

considering to do an acquisition as well (Child, 2006), and it is believed that

Wal-Mart’s acquisition encouraged Carrefour to seek acquisition for future expansion.

According to Hill (2004) there are advantages and disadvantages for both opening

new stores and acquisitions. By establishing a new store, on one hand, foreign firms

could have a greater control over the forms of its subsidiary stores such as cultures,

operating routines and so on; on the other hand, it is slow and risky to establish new

stores. Acquisitions are quick to execute, preempt competitors and less risky, but they

also fail because of clashes between cultures in two firms, difficulties in integrating

resources of two firms, and inadequate preacquision screening. On the early stages of
Wal-Mart and Carrefour’s entry in mid-1990s, the competition in Chinese retail

industry, especially in the supermarket niche, was not intensive, and hence it allows

Wal-Mart and Carrefour to spend time on expanding by opening new stores. This

provides advantages for two retailing giants to build its brand image and reputation in

Chinese retail market. Today, as the retail market in China opening further, the

competition is more and more intensive. Expanding by opening new stores is

considered to cost time and money, so acquisition becomes a competitive option for

Wal-Mart and Carrefour to expand further in China.

Store locations are important for retailers. Wal-Mart and Carrefour adopted different

strategies for locations. Wal-Mart prefers to locate stores in second tier cities, and

their strategy is to start in smaller cities and then move to larger ones. Carrefour,

however, particular emphasizes its stores to be located in big cities and city centers or

prosperous areas. China is still a developing country with a relative low level of

people’s income. Therefore, more developed cities and city centers are still the

mainstream of higher consumption levels that lead to higher sales for retailers.

6.1.3 Positioning Strategies

As Besanko et al (2003) argued a firm’s positioning strategy is one of the most

important criteria in determining a firm’s success. Wal-Mart and Carrefour adopted

different positioning strategies, which can be seen from their marketing slogans
respectively. Wal-Mart emphasizes “Low Prices Everyday”. It conveys to customers

that it is always the right choice to shop at Wal-Mart since the prices are cheap

everyday. Carrefour, on the other hand, with “Happy Shopping in Carrefour”, aims to

emphasizing its good shopping environment. The Chinese name of Carrefour is Jia Le

Fu, in which Jia means family, Le means joy, and Fu means happiness. It expresses

the shopping environment in Carrefour will bring joy and happiness to families shop

there. However, the facts contradict with positioning strategies for both of Wal-Mart

and Carrefour.

As prices are concerned, both retailing giants understand that prices are vital for

Chinese consumers. In the retail industry, the main sources of costs are procurement

and stock management. Wal-Mart takes its advantages of its advanced information

system that can reduce the costs of sending and receiving information and orders with

suppliers, as well as the costs of stocking. Wal-Mart also stops charging products

administration fees to suppliers so that pay less when purchasing from suppliers as

these suppliers bear less cost. Carrefour, however, lower the prices of people’s

necessities to attract customers. Flexible sourcing methods also enable Carrefour’s

competitive advantages, as local stores purchase products individually as long as the

prices are low. Although Wal-Mart emphasizes its low prices in its slogan, it is found

that prices in Wal-Mart are not lower enough or even higher than those from

Carrefour, and it is also widely agreed by customers (Qin, 2004). The slightly lower

prices of products enable Carrefour to gain more market shares than Wal-Mart.
For shopping environment, Wal-Mart wins Carrefour slightly. This is the

differentiation strategy that firms provide superior value within the industry to

customers (Cullen and Parboteeah, 2005). Wal-Mart always has tight control over the

products they sell. All products are purchased directly from suppliers, even some of

them from another country. Wal-Mart prohibits close and abnormal relationships

between purchasers and suppliers to avoid corruption that lead to unsatisfied product

qualities. However, there have been many scandals concern with Carrefour’s products

qualities. The main reason is that Carrefour pursues flexibility and low costs purchase

and not all products are purchased from suppliers, and hence the quality of products

cannot be assured for customers. In addition, as most of stores are located in city

centers, there are also complaints on the car parking problems. The unmatched actual

treatment to customers with promised by Carrefour also reduces the reliability of

Carrefour. This differentiation allows firms to charge premium prices on the superior

quality of products and comfortable shopping environment, so by keeping prices low

everyday, Wal-Mart is in a competitive position in its differentiation advantages.

6.1.4 Local Adaptation

Having a good relationship with customers, suppliers and, especially with government

of China is important for foreign enterprises in China. They are all determinant factors

for a foreign firm to develop, expand, and even survive.

Catering the needs and preferences of local customers is critically vital for foreign

retailers. Therefore, both Wal-Mart and Carrefour adjust their selling models

especially for foods, to cater the buying habits of Chinese customers. On its first day

of entry, Carrefour adopted fresh-market style for vegetables, fishes and seafood.

However, Wal-Mart took a tortuous way in understanding Chinese customers’ buying

habits, as at the early stage of development Wal-Mart still relied on the same form of

selling food in America or Europe, and sold vegetables, dead fish and seafood in

Styrofoam and Cellophane. Today, both Wal-Mart and Carrefour adopted the Chinese

traditional wet market selling models but provides a better shopping environment for

customers.

Wal-Mart and Carrefour adopted totally different strategies in dealing with suppliers.

Wal-Mart sets store by the relationship with suppliers. It stopped charging

administration fees to suppliers, and allows suppliers to yield more benefits. Carrefour,

however, is widely considered to reap profits from suppliers. Products administration

fees were created and promoted by Carrefour in Chinese retail industry and become

the main source of retailer’s profits in China. In addition, Carrefour also charges many

other various kinds of fees to suppliers, which leads to lots of complaints from

suppliers. It is obvious that Wal-Mart establishes a good relationship with suppliers,

while Carrefour does not. It is believed that harmony relationships with suppliers

would promote a healthy and continuous future development and expansion of

retailers.

As relationship with government is concerned, both have good relationships with both

local and central governments. As both are two retailing giants in the world, and

hence they make great contribution to local and national economy and receive great

favors from governments. The only difference lies in the attitudes towards

government regulations on foreign retailers’ development. Wal-Mart is always

following regulations from its first entry until its expansion and development, whereas

Carrefour often exploits the loopholes of these regulations to reap its benefits. In 2001

Carrefour was warned for its disregard of regulations and was forced to stop further

expansion. China is a highly central controlled country, and governments intervene

for both political and economic reasons. Therefore, when entering and developing in

China, foreign firms need to understand, respect and follow the government

regulations.

6.1.5 Sourcing Strategies

Sourcing and logistics are important for retailers. Huffman (2003) suggests that the

effective management of sourcing and logistics is always high on many retailers’ lists

of goals. Wal-Mart and Carrefour adopted totally different strategies for their sourcing

and logistics. Both of the two giant retailers have more than 80 percent of their

products purchased from within China. However, Wal-Mart emphasizes central

sourcing and distribution for all stores within China. It provides sourcing information

to local retailers and centralizes sourcing practices through the procurement

headquarters, and goods are then distributed to each distribution center. Wal-Mart has

three distribution centers in China for all of its stores. Carrefour, however,

established 12 sourcing bases in China, and each of them is empowered with

purchasing rights. Carrefour emphasizes flexibility of sourcing and distribution, and

therefore each store have their own rights and decisions on their goods purchasing and

stocking.

There are both advantages and disadvantages for the two strategies. Centralized

sourcing and distribution would be better in terms of products quality and delivery

control. However, China’s special conditions—provincial autonomy and

self-sufficiency, pose challenges for centralized strategies. Especially, the amount of

stores that Wal-Mart has in China is still small, and the costs of such strategies would

be more. For the empowered sourcing strategies adopted by Carrefour, it is argued

that the products quality and delivery cannot be assured. However, it is more suitable

to Chinese inter-provincial conditions, and the flexibility of these strategies enables

Carrefour to save a lot of costs and time in purchasing and delivery.

6.1.6 Human Resource Management and Public Relations

Both Wal-Mart and Carrefour attach great importance on its employees training and
retaining. As argued by Cannon (1995), although managers from host countries may

have good management knowledge, skills and potential, they lack cross-cultural

exposure and they only learn through their own experience. Therefore, both Wal-Mart

and Carrefour send good and potential management employees to their head offices in

parent countries to learn for their future career development. Employee motivation is

also important for firms’ human resource management. This would reduce the rate of

employees’ turnover and help talent retaining. Wal-Mart, for example, awarded

employees who worked for 10 years on its 10th anniversary celebration. Carrefour, use

competitive remuneration contracts to avoid trained employees to leave for

competitors and to retain the talent staying for longer time.

Corporate social responsibility is closely related to business ethics, and it refers to the

idea that businesses have a responsibility to society beyond making profits (Cullen

and Parboteeah, 2005). Both Wal-Mart and Carrefour devote much time, money and

effort to Chinese social welfare affairs. They exert themselves to promote

environment protection, sponsor education, and join community activities as well as

other public activities. These do not only lead to better environment and society in

China, but they are also ways to marketing themselves and build brand image in the

society.

6.2 Resource-Based Theory and Their Strategies

Firms plan and implement strategies in order to create competitive advantages to

outperform competitors. As each firm has a distinctive bundle of resources and

capabilities, the opportunity set for each firm is distinct from others. Therefore, the

strategies are planned depending on resources and capabilities a firm possesses. In the

last section of this chapter, strategies adopted by Wal-Mart and Carrefour are

compared and contrasted in terms of six aspects. This section will use resource-based

theory as basic principle to explain the relationship between resources and capabilities

possessed by Wal-Mart and Carrefour and the strategies they adopt.

6.2.1 Entry Strategies

Hill (2004) argues that the choice of entry modes depends on the type of know-how

that a firm possesses, whether technological know-how or management know-how.

Wal-Mart and Carrefour both adopted joint ventures as their entry modes and also will

continue with this method during their further development. Wal-Mart and Carrefour

both are successful and ranked the first two large retailers in the world. Their

successes depend largely on their management know-how on every aspect relating to

retailing businesses. As management know-how is accumulated through business

development process and gained by experience, it is path dependency resources and

difficult to imitate. On the other hand, by forming a joint venture with local partners,

the two retailing giants are able gain valuable knowledge on Chinese market,

economic and political conditions. Therefore, joint ventures are good options for their
entry. Through joint ventures, not only their valuable resources—management

know-how is applied while protected in Chinese market, but they also gained valuable

knowledge on Chinese conditions.

6.2.2 Expansion Strategies

During the expansion of Wal-Mart and Carrefour, they adopted different store location

strategies, and the speed of expansion of Carrefour is slightly more rapid than that of

Wal-Mart. These differences are generally due to different experiences in

internationalizations of the two retailing giants. Carrefour had more experiences in

internationalization as well as developing new market overseas. Carrefour opened its

first store outside France in Belgium in 1969, and now Carrefour has presented in 30

countries globally. Wal-Mart entered Mexico and opened its first oversea store in

1991, and now there are only 15 countries that Wal-Mart has entered. In addition, the

experiences gained from operation in Taiwan by Carrefour also provide great

competitive advantages for its development in China. Therefore, Carrefour

understands more on consumers’ needs, preferences, buying habits as well as the

location of mainstream of high-level consumptions. These experiences resources

provide Carrefour great capabilities in exploiting new market as well as developing in

China.

As the choice of stores location is concerned, Wal-Mart would more likely to choose
smaller and second tier cities in China, whereas Carrefour would more likely to

expand to larger and more developed cities. For Wal-Mart’s choice, this is also due to

the past experiences during its development processes. Wal-Mart started in a small

city in Arkansas, US and continues to develop new stores in smaller cities more than

in big cities to avoid intensive competitions. As Lin and Liang (2001) suggest,

Wal-Mart always adopted a “circumvent big cities” strategies to steadily cultivate

talents and accumulates experiences. This has been traditions for Wal-Mart to develop

internationally, and hence provides experiences to Wal-Mart for the same

development strategies.

6.2.3 Positioning Strategies

Both Wal-Mart and Carrefour adopt cost leadership strategy and offer low prices in

order to capture more market shares. As argued in previous chapters, cost advantages

can be achieved if firms have superior advantages in purchasing, advertising, and

research and development. Wal-Mart and Carrefour are both large retailers in China.

As most of their products sold worldwide are purchased in China, their buying powers

are relative high than other retailers. Therefore, this enables the two retailing giants to

purchase at lower prices. In addition, they also enjoy the benefits from advertising,

because their larger coverage of their advertisement enables lowers advertising costs

per consumers. Wal-Mart also possesses advanced information system that enables its

lower costs on stocking and information communicating.

Both Wal-Mart and Carrefour also aim to achieve differentiation strategies. However,

Wal-Mart outperforms Carrefour in terms of this aspect. According to Grant (2005),

differentiation requires high levels of technologies and services. As retail industry is

concerned, customer services are the key to achieve competitive advantages.

Carrefour and Wal-Mart both emphasize the creation of a friendly atmosphere at

every store where employees wander around to replenish goods and see if any

assistance is required (Lin and Liang, 2001). Wal-Mart also especially regulates its

staff to keep “ten-foot attitudes” and “eight-tooth smiles” for customers. Wal-Mart

insists on ordering and purchasing goods from suppliers directly to assure their

qualities. It also pays more attention on customers’ complaints and requests. With

gradually accumulated customers’ satisfaction, the company’s image will also

gradually built as good shopping environment, which are valuable resources to

achieve differentiation advantages.

6.2.4 Local Adaptation

During the development of Wal-Mart and Carrefour, both retailing giants make great

efforts on its local adaptation. Carrefour adapted on the first day of its entry, such as

food selling as well as exploiting the loophole of government regulations. These are

its distinct strategies for its expansion and development in China. Regardless of

whether Carrefour’s strategies are good or not, compared with Wal-Mart, Carrefour is
more adapted to Chinese market environment and hence expands and develops faster.

This may be attributed to Carrefour’s experiences in Taiwan. Through six years’

operation in Taiwan, Carrefour undoubtedly gained great knowledge on customers’

needs, preferences, and buying habits as well as Chinese social cultures,

communication cultures and business cultures. These experiences provide great

advantages for Carrefour’s local adaptation strategies. Although Wal-Mart took four

years in researching Chinese market, economic and political condition, these research

results are not unique, and they can be obtained or imitated by any competitors.

Therefore, Carrefour does possess competitive advantages in local adaptation

strategies.

6.2.5 Sourcing Strategies

The sourcing strategies adopted by Wal-Mart and Carrefour are totally different. This

is also due to the difference resources that each of the two retailing giants possesses.

Wal-Mart is famous for its logistics system and it is widely considered as one of the

most important factors that lead to global success of Wal-Mart. Take Wal-Mart in US

for example, a distribution center with satellite system is capable to distribute for 120

stores, and Wal-Mart use its own lorries to distribute goods to stores that are no far

than 24 hours’ driving distances. This advanced distribution system is argued to

depend heavily on locations and destinies of stores. Therefore, technologies and

management of centralized distribution system are valuable resources for Wal-Mart.

Although the distribution systems in China now are not as sufficient as those in the

US, it is believed that with the increase of the number of stores, Wal-Mart’s

centralized distribution systems in China will provides significant competitive

advantages (Li, 2004). Carrefour, however, adopted decentralized and empowered

sourcing strategies, and hence the distribution of goods relies on local sourcing base

and suppliers. This is due to Carrefour’s lack of technologies and management

know-how and also the lower costs of such a strategy. Therefore, although Wal-Mart

costs more money and time on its distribution system, it may benefit more than

Carrefour in the long-run.

6.3 Summary

This chapter conducts a comparative study of strategies adopted by Wal-Mart and

Carrefour respectively. There are both similarities and differences. Generally, the

strategy that Wal-Mart adopted is more smooth and steady, enforcing long-term

development and sustainability, while Carrefour’s strategy is more aggressive and

focusing on rapid short-term development.

These strategies adopted by each firm depend on various factors, such as government

regulations, market conditions and so on. However, they are mostly affected by the

resources and capabilities that each firm possesses. Since each firm has its unique
bundle of resources and capabilities that determine opportunity set for each firm,

strategies adopted by firms may different. Therefore, it is reasonable to find that

although Wal-Mart and Carrefour are in the same industry with the same context, the

strategies adopted are different and it is determined by the resources and capabilities

they possess respectively.

 Chapter 7 Conclusions and Recommendations

The previous chapters have analyzed and compared the strategies adopted by

Wal-Mart and Carrefour, and provided the explanations of links between the strategies

adopted and resources and capabilities possessed. Confronted with intensive

competition in Chinese retail market especially after China’s entry into WTO, foreign

retailers need to plan and implement their strategies tightly according to market

conditions and their firm-specific resources. This chapter will first conclude the

findings of aims and objectives of this research. A conclusion will be drawn in the

following part. There are also recommendations to both Wal-Mart and Carrefour for

their future development in China. At the end of this research is the limitations of this

research.

7.1 Findings of the Research

This research aims to provide a comparative study of strategies adopted by Wal-Mart

and Carrefour in a resource-based view, and the purpose is to provide an overview of

the relationship between firms’ strategies and its possessed resources. Through the

analysis of Chinese retail industry, studies of Wal-Mart and Carrefour’s strategies in

China, comparing and contrasting the similarities and differences of these strategies

adopted, and combining the resource-based theory with the comparative studies,

findings of objectives are as follows.

Since the transition of Chinese economy system occurred, the government policies on

retail market gradually become open to foreign retailers, especially after Chinese

entry into WTO. Therefore, the retail market in China also evolves with these changes.

Based on Porter’s Five Forces framework, in Chinese retail market today, the internal

rivalry is highly intensive, potential entry level is medium to high, the influence of

substitutes and complements are medium, suppliers of retailers have low to medium

level of power, and the power of customers are medium. Therefore, it can be

concluded that competition in Chinese retail market is fairly intensive.

Wal-Mart always adopts steady development strategies focusing on long-term and

adapts its strategies to the local market conditions and government policies. Carrefour

also adapts its strategies according to Chinese market condition. However, Carrefour

pursues aggressive development strategies and sometimes disregards and exploits the

loophole of government regulations.

Through a comparative study of the two retailing giants’ strategies, it is found that

there are both similarities and differences between their strategies. The choices of

their strategies are selected largely based on the resources and capabilities they

possess, such as management know-how, experiences, technology and etc.

7.2 Conclusions

In conclusion, China is always an attractive market for foreign investment especially

after China’s entry into the WTO. This research employs case studies research method

and uses Wal-Mart and Carrefour and Chinese retail industry as representatives to

illustrate foreign firms’ entry and development in China. It can be found that although

the retail market in China is of great potential, the competition is very fierce. In

addition, government policies play important role in foreign retailers’ strategies.

Although the importance of regulations decreases with gradually further openness of

Chinese market to foreign investment, establishing good relationships with

government and paying attention on government regulations are very important for

foreign investors. Therefore, foreign firms need to plan its entry and development

strategies based on economic, market and political conditions. However, the resources

and capabilities are the critical factors in determining strategies, as they provide

unique opportunity sets for each firm. Through the analysis of strategies of Wal-Mart

and Carrefour, it is found that both giant retailers plan strategies according to local

market, economy and government conditions and achieve great competitive

advantages on their local adaptations. In addition, their successes also rely on the

strategies exploited based on their resources and capabilities. However, there is also

space for further improvement of both Wal-Mart and Carrefour’s strategies.

Undoubtedly, after China’s entry into the WTO and policies are more open to foreign
investors, more and more foreign investment come into China, and they bring

advanced technologies and management knowledge, and some of these foreign

entrants are successful worldwide. However, business models and experiences proved

to be successful in other countries would not be successful in China. Internal

resources and external environment are both critically important for foreign investors.

7.3 Recommendation for Wal-Mart and Carrefour

From the previous analysis, there are both similarities and differences between the

strategies adopted by Wal-Mart and Carrefour. Some of the strategies may lead to

competitive advantages, while others are not. If the strategies that do not lead to

benefits, the firm needs to consider how to adjust it for its future positive development.

If it is the unique resources and capabilities that lead to competitors’ success, the firm

needs to consider how to create a substitute of or imitate the competitors’ distinct

resources. Therefore, as Wal-Mart and Carrefour’s strategies in China are concerned,

some recommendations are made for their further development in the context of

China’s entry into the WTO and further opening of the retail sectors.

7.3.1 Recommendations for Wal-Mart China

Wal-Mart’s strategies are considered to focus on long-term development and they are

based on regulations of every level of governments in China. They pursue harmony

relationships with customers, suppliers, governments and the whole society. However,

there are still some strategies to be adjusted or paid more attention to for its better

development in future.

First, to be more flexible. Wal-Mart keeps developing very steadily, and it can be

proved by its expansion and distribution strategies. Wal-Mart still focuses more on

opening new stores in second tier cities, and the number of stores in developed and

large cities is still low. However, although “circumvent big cities” strategies are used

to accumulate experiences, the mainstream of consumption power still lies in

developed cities and prosperous areas. In addition, it has been more than 10 years

since it entered China, it is time for Wal-Mart to invest more in large and prosperous

cities and areas. Distribution systems of Wal-Mart also need to be more flexible. Due

to the small number of stores in China, it is still difficult for Wal-Mart to realize

economies of scale in centralized distribution system. In addition, China’s provincial

autonomy and self-sufficiency pose difficulties in interprovincial transportation.

These inevitably increase the delivery time and costs. Therefore, Wal-Mart should

consider a more flexible logistic system to lower the costs of distribution currently.

In addition, Wal-Mart acquired Trust-Mart at the end of 2006, and thus Wal-Mart

needs to make effort on integrating resources of the two firms to achieve greater

competitive advantages. It may be a great opportunity for Wal-Mart to gain more

market shares as well as profits, but it still may be great challenges for Wal-Mart.
Learned from Wal-Mart’s acquisition experiences worldwide, if Wal-Mart acquired a

profitable firm, then the acquired firm will stay profitable, such as acquisitions in

Canada, Mexico and UK; if Wal-Mart acquired a failed firm, then the acquired firm

will continue to make loss. Trust-Mart that Wal-Mart acquired is a firm with

significant loss. Therefore, whether it is a good acquisition or not largely depends on

the integration of the resources and capabilities. Resources integration is important for

firms involved in acquisition, and therefore, Wal-Mart needs to contribute more on

integrating resources and avoid culture clashes.

7.3.2 Recommendations for Carrefour

Carrefour’s strategies are more aggressive since its first entry into China, and hence

the expansion and development of Carrefour are more rapid and fluent than those of

Wal-Mart. However, its rapid and aggressive expansion makes Carrefour neglect

some important issues.

The most important issue is that Carrefour needs to attach importance on the

relationship with customers and suppliers. Compared with Wal-Mart, Carrefour

received more complaints from customers and suppliers, and warning from

government. Although the prices of products in Carrefour are widely considered to be

cheaper than Wal-Mart, the customer services are also vital for survive of a retailer. In

addition, Carrefour always reaps great profits from suppliers, and hence suppliers can
obtain a small profit margin. Therefore, it is dangerous for Carrefour if these suppliers

leave and stop supplying in the future especially when Wal-Mart have a stronger

buying power.

In addition, Carrefour needs to focus on its long-term development and plan strategies

to create values resources in order to achieve competitive advantages. For example,

having an integrated supplier network for its sourcing and distribution centers should

be more important than opening more and more new stores. Empowered purchasing

and distribution rights and management hinder the delivery quality of goods, which is

critically important for retailers. In addition, Carrefour should develop advanced

information systems on communicating with suppliers and stocking, which will save

significant costs and benefit Carrefour’s stock management in the long-term,

7.4 Limitations of the Research

This research aims to provide an overview of the relationship between the firm

strategies and its possessed resources and capabilities. It uses Wal-Mart and Carrefour

as two cases representatives and studies their activities and strategies in Chinese retail

market. The research relies on qualitative research methods by collecting data and

information from government websites, company websites, textbooks, journal articles,

company reports and etc. These public published sources of information improve the

quality and reliabilities of data.

However, there are still limitations of this research. If a longer period is given, more

data and information would be collected and two cases would be studied better and

more completed. In addition, this research only chooses two cases to study their

strategies and possessed resources and capabilities, so if there were more cases such

as Tesco and Makro, the research would be more convincing. Furthermore, interviews

and surveys are important methods in case studies, and if there were interviews or

surveys conducted the research would be more inductive. Moreover, the data and

information may not be the latest, and some of the latest reports does now allow to

access. As a result, the analysis and recommendations are based on the strategies and

activities accessible, and therefore they may be preliminary and more detailed and

in-depth ones need to be developed. Further research should focus on a comparative

study on the resources possessed by domestic retailers and foreign respectively and

how theirs strategies differ form each other, and their future development responding

to the other’s evolution.

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