Wal-Mart: the best thing since sliced bread.

8 11 2010

Is the world better-off or worse-off because of Wal-Mart?

Surprisingly, you will not find a Wal-Mart at every corner in Toronto but Wal-Mart’s presence is still around. For all our needs, most people turn to Wal-Mart to purchase it, expecting the lowest prices and a convenient one-stop shop. Though this business faces much criticism about being a category-killer, driving out local businesses and enabling poor labour conditions in foreign countries, the world has greatly benefited from the growth of Wal-Mart.

Taking criticism
There is no denying that Wal-Mart holds a large market share. In fact, it exists in an oligopoly along with Zellers and Target. Being the largest, Wal-Mart holds a lot of power in the marketplace, especially concerning pricing of their products. The company’s ability to offer low prices has driven local businesses away because they just could not compete. This has led to many negative views about Wal-Mart, giving the perception that it is a large corporation who does not care about social welfare. However, is it really Wal-Mart’s fault for trying to gain a competitive advantage through pricing strategies? In a free-market economy, businesses should have the freedom to produce and price items as they please, so why is there an exception for Wal-Mart?

Also, the company has been criticized for enabling low wages, not only in their stores, but at the factories of their suppliers. Many reports claim that Wal-Mart gives a low pay to their employees and do not offer any rewards or bonus packages. This means that a Wal-Mart salary is not sufficient to support a family. Let’s think about this for a moment: why would a Wal-Mart worker expect to be paid a high salary? There are no job requirements and most of the work is unskilled labour, meaning, even a high school student could work at Wal-Mart. Logically speaking, there are high volumes of people who would qualify for the position; therefore, when supply of labour is high and demand for the labour is low, wages will be low. The same could be said for the factories in foreign countries. Wal-Mart is China’s largest customer and there is reason to this. China has a large population and thus, large work force. It doesn’t take too much skill to work on an assembly line; therefore, wages are lower in factories. Wal-Mart wants to minimize costs and China can help them do that.

Leading the market
Wal-Mart is a prime example of a successful business model. They take advantage of business opportunities, are consumer-oriented, are continuously changing/adapting, and strive to maximize profits.

They are the leaders in outsourcing. Being one of the first businesses to export labour, Wal-Mart has built a strong foundation on their low fixed-cost business and has inspired other companies to follow their lead. This increases foreign investment in other countries and provides multiple new jobs in those countries that would have otherwise been non-existent.

Wal-Mart’s standards for competitive pricing puts pressure on suppliers to be more efficient. In the featured graph, Wal-Mart’s low prices decreases marginal revenue, therefore, the break-even quantity is higher and profit maximizing quantity is lower. However, if suppliers can find ways to be more efficient and produce under Wal-Mart’s price range, they gain shelf space in one of the largest retailers to exist. The mass volume of traffic alone would increase sales.

Wal-Mart pushes prices (and thus marginal revenue) down putting pressure on suppliers.

At the end of the day, it is a very basic principle: customers like low prices, therefore, businesses should satisfy customer wants and needs. Wal-Mart has done so with their pricing and by offering a wide range of goods and services in one location. They’ve gained such a large and unmatchable competitive advantage that most consumers are willing to overlook any of the company’s faults and suppliers are willing to restructure their organization in order to get their product in stores. Wal-Mart has created such a niche in the marketplace that it cannot be replaced or terminated.

In conclusion, the world is better off with the existence of Wal-Mart. They have increased globalization and trade, brought more inexpensive goods to consumers, created a source of competitive advantage for producers (in product placement), pushes competitors to improve their own operations, and show what it means to be a successful business. Without Wal-Mart, cities would be stuck in an economic plateau that protects local businesses so much that there is minimal room for growth and improvement.