An Analysis of the Success of Wal-Mart
Wal-Mart has been extremely successful as a retailer and distributor; this can be seen when looking at its global sales. The determinants of this success are many fold and relate to its strategic decisions regarding the ways in which it competes. In analysing the company’s strategies the effects that suppliers, competition and consumers have on it, and the effect that Wal-Mart has on them, need to be taken into consideration. The primary economic concepts that are used to explain Wal-Mart’s growth and efficiency are economies of scale and scope, as well as factors related to entry and exit within the industry.
Basker (2007) argues that Wal-Mart’s success can be considered from two different perspectives. Firstly, by increasing its size Wal-Mart has been able to take advantage of economies of scale and therefore reduce costs. Secondly, by having lower costs Wal-Mart has been able to grow and take advantage of economies of scale. These two arguments are linked and enforce each other, since growth and efficiency are both a cause and a consequence of economies of scale. One initial reason for Wal-Mart’s lower cost is traced back to superior inventory and distribution technology that increase efficiency since the company’s stores operate within the retail chain rather than being individual stores. It can be argued that the cost structure of Wal-Mart determines it size, because its costs are reduced through growth; it is advantageous for Wal-Mart to continue doing so on the chain as well as the store level.
Wal-Mart benefits from economies of scale that enable it to spread its fixed costs. Basker (2007) outlines that Wal-Mart can engage in direct global sourcing, that allows for cheaper inputs, despite the high fixed costs involved because these can be spread over Wal-Mart’s large number of products. Also, since Wal-Mart accounts for a high percentage of sales for many well-known brands and buys such a large amount of products, it has a certain power over the suppliers of these inputs and this also allows the company to obtain the products at a low cost. In this way Wal-Mart can take advantage of purchasing economies. Buying in bulk can allow Wal-Mart to obtain discounts on products and thus lower its average costs. Selling to one buyer means lower fixed costs for suppliers and therefore they are more willing to do business in such a way. In addition to this, suppliers are more likely to give discounts in order to maintain its relationship with a large buyer that ensures continuous business. Being a bulk buyer, Wal-Mart has more to gain in obtaining a reduction and it can be argued that it is therefore more price sensitive.
High product turnover enforces the above mentioned purchasing economies. Wal-Mart’s ability to sell products quickly and to restock these is linked to the way that inventories are dealt with. Basker’s (2007) paper talks about the different technologies that enable Wal-Mart to improve its logistics and increase efficiency. The bar code technology for instance reduces inventory tracking costs and this provides an incentive to add product lines. Wal-Mart has used software to connect its stores to the distribution centres and suppliers; therefore information regarding levels of stock is passed on very fast and can be processed quickly. When stores are low on products this can be amended and thus stores don’t need to carry as many inventories as this drives up costs (Besanko, 2009).
In addition to reducing costs through better inventory management technologies, Wal- Mart can drive down fixed costs associated with its distribution system by delivering more products to fewer large stores. By opening stores close to one another, Wal-Mart benefits from economies of density, the infrastructure that enables distribution is already existent and can be made use of. Basker (2007) notes that when there are many Wal-Mart stores located close to distribution centres there are economies of scale since the stores can share the extra inventories held by the distribution centre in order to avoid running out of products (Besanko, 2009).
Wal-Mart’s growth is one of the factors that has led to its success; by establishing itself as the major retailer Wal-Mart has continuously been able to increase its power and control over the supply chain. Basker (2007) argues that Wal-Mart’s success can be traced back to the relationships that its buying power enables it to have with its suppliers and the impact that this has on their actions. Examples of advantages are suppliers adopting Wal-Mart’s technology (Radio Frequency Identification tags) and locating themselves close to Wal-Mart’s headquarters. Wal-Mart can ask for discount from its suppliers as these are dependent on the business with Wal-Mart. A concept underlying this phenomenon is the network effect that is created by Wal-Mart. It is advantageous for suppliers to adopt the technology that Wal-Mart introduces since other entities along the supply chain also use the technologies. This enables information sharing between the different entities and the greater the adoption rates, the more benefits all can get from the network since this allows the actors to make use of larger inputs of information.
Basker (2007) also mentions that another component of Wal-Mart’s success is linked to its stock consisting of many own brands with less branded products on its shelves, as well as less of a variety of individual products. By focusing on having a product range that is very broad rather than specialised, Wal-Mart is more convenient for customers as it enables one-stop shopping. By capitalising on the Wal-Mart brand, it is possible to sell less branded products since the company can use its own name in umbrella branding. Economies of scope can be benefited from because all the new stores that open don’t first have to establish themselves and their image since customers are already familiar with Wal-Mart.
One limitation of the paper by Basker (2007) is its short sightedness with respect to Wal-Mart’s interaction with other entities such as its suppliers. It is noted that part of the company’s success can be attributed to the power it has over its suppliers. By accounting for a high proportion of sales for various brands, reductions can be obtained from these manufacturers. However, this may lead the smaller suppliers to increase their own scale. An example of this is the acquisition of Gillette by Procter & Gamble in 2005, at this time P&G relied on Wal-Mart for about 18% of its global sales and in partnering with other companies P&G can for instance threaten to stop supplying one sought after product unless Wal-Mart consents to increasing the price paid for another less popular product (Besanko, 2009). In the short term Wal-Mart’s power as a buyer may lead to its success, however in the long term the other actors within the market react to Wal-Mart’s actions and the nature of the success is only temporary.
Basker (2007) does briefly mention Wal-Mart’s stance towards market entry and exit, however, the effect that this has on competition and reactions elicited within the industry is not made clear. The impact that Wal-Mart’s strategic decisions have on its competitors and vice-versa need to be elaborated on to offer a complete explanation of the retailer’s success and growth. Wal-Mart is already active in many geographic markets in which it continues to expand; most prominently these markets are the USA, UK, South America and China. Since the company is already established in these markets