Wal-Mart: Mystically Redefining Frontiers - Essay Example

The present Global economy has been evolving rapidly and with the on going dilution of market boundaries imposed by territorial and national government regulations its spread is gaining even faster dynamism by the day; and one of the major contributors to this phenomenon has been undoubtedly the United States of America. The present Dynamism of the American economy itself has been in turn greatly influenced and sometimes had its movements in certain directions at least indirectly directed by Wal-Mart, presently the biggest company on earth, ever (Fishman, 2006). Wal-Mart has undoubtedly reshaped the entire skeleton of the Global retailing industry, in America itself, but that becomes just a small and almost ignorable part of the entire story as soon as we start our journey of comprehending everything that Wal-Mart has done and continues to do for the American economy as well as across national borders taken together. The American economy is on the path of a radical transformation and to this, Wal-Mart, not only the world’s largest company but also the largest company in the history of the world contributes in an unprecedented manner. Not only do most Americans shop at Wal-Mart, a large number of them also depend on it for their livelihoods. Wal-Mart has been able to grow so large that it has created its own business ecosystem which allows it alone to set the tempo, the rules, and seemingly mock all existing bounds imposed upon its rivals by the laws of capitalist market economics. This ecosystem, literally allows Wal-Mart to supersede and often govern the very market forces the modulations and regulations of which embrace all other companies. The objective of the present endeavour is to briefly analyse this phenomenon from a theoretical perspective, i.e., we intend to figure out, given the small scope of the paper, how economic theory, regional or otherwise relates to the Wal-Mart story. That Wal-Mart has made its presence ubiquitous in the USA would be an extremely childish understatement. As Fishman (2006) points out, not only more than half of the Americans live within five miles of a Wal-Mart sore, it is also true that ninety percent of Americans live within fifteen miles of a Wal-Mart store. So available has Wal-Mart made itself. But not only is Wal-Mart so much available in terms of locations, it is very accessible to the commons in terms of prices. And it is the latter that has stood as the backbone to the unprecedented phenomenal success that Wal-Mart has been. Wal-Mart has been able to very strongly outcompete its nearest rivals (Kmart, Target to name a few) simply by charging significantly lower prices for goods people use everyday. A good example of how far ahead Wal-Mart can be read from the fact that Wal-Mart sells more by St. Patrick’s Day than Target sells in a year. Salmon fillets are available at $4.84 a pound at Wal-Mart Supercenter fish counters nationwide which is a good $2 to $3 less than what it was sold at other retail outlets or fish counters. Another good example Fishman (2006) provides is that of the GE 60 watt or 75 watt light bulbs. According to him four of these sold for $2.19 five years back. Wal-Mart is presently selling those four bulbs for 88 cents. In an economy even with mild inflationary tendencies, this appears as a clear violation of the regulation imposed by forces of economic laws. Wal-Mart in this manner not only has made necessary commodities easily accessible in terms of price, it has created new price floors that none other has dared to, or even if they have dared, none have been able to even come close. In the past decade or so, thirty seven supermarket chains have filed for bankruptcy of which twenty seven have cited competition from Wal-Mart as a contributing factor to their misery. It is thus the relentless pursuit of providing customers with the lowest price deals that has led to its present world leader and almost dictatorial status. The next question that arises from the theoretical perspective centres the premise of economic viability. What makes such pricing achievable and more importantly profitable for Wal-Mart? The basic answer is present in the question of profitability itself. Wal-Mart has been able to lower costs to the extent that these rock bottom prices become viable and also earn profits that have been able to finance the already massive and still spreading growth of Wal-Mart stores. Theoretically this is explained by economies of scale. To this we will return, but for now consider what other factors have allowed this huge reduction in production and retailing costs. Undoubtedly, Wal-Mart can boast of the most technologically advanced distribution chain in the world, a result of investing in computer technology in the early 1990’s. But that apart, it has cut down upon costs through a multi-pronged approach of paying lower wages as well as making its employees work harder and longer for each dollar they earn. The frugal attitude is evident in the absence of greatly decorated and polished offices. The company till date follows a policy of either calling vendors at toll free numbers if they are available or making these collect calls. Path breaking innovative ideas like removing the cardboard container that contained deodorant cans also have decreased costs considerably. Bulk purchases from cheaper foreign sources have allowed huge scale benefits. For example, the mystery of the cheap salmon is solved by taking note of the fact that the Salmon available in American Wal-Mart fish counters comes from Chilean fish farms and the bulk in which it is bought results in a heavy dependence of the fish farmers upon Wal-Mart and this in turn allows squeezing the suppliers to reduce prices considerably. Another factor contributing to Wal-Mart’s success was its’ locating patterns. (Source: Basker, 2007) Wal-Mart has followed the path of spatial diffusion1 (Holmes, 2006). The primal theoretical motive behind this is the idea of economies of density. The first Wal-Mart store was opened near, near Bentonville in 1962. As the diagram above shows, the diffusion of store openings branching out from the first Wal-Mart store was very gradual and never unidirectional. Rather the spreading out occurred with measured deliberation in all directions which has resulted in a dense clustering network of stores and this facilitates the logistics of deliveries as well as the ready transferability of experienced personnel to new outlets to take control. And these considerations explain why often Wal-Mart was observed locating its stores in apparently sub-optimal locations when superior alternatives where available. Often the motive of opening a store was to create a bridge that allowed efficient location in some desired location while reaping benefits of densities. Finally, it has to be noted that the role of the government in providing Wal-Mart with infrastructure as well as considerable subsidy benefits played and continues to play a crucial role. A study in what it calls to be a “conservative” estimate determines that over a billion dollars has been received by Wal-Mart in subsidies from sate and local governments combined in recent years. This study opines Wal-Mart received around $245 millions of dollars for 91 stores, $624 millions of dollars for 84 of its 91 distribution centres as well as $138 millions of dollars in industrial revenue bonds for 69 stores. These subsidies assumed forms of enterprise zone Subsidies, infrastructure assistance, free or reduced-price land, tax increment financing, job training and worker recruitment funds state corporate income tax credits, sales tax rebates, property tax breaks, tax-exempt bond financing, and general grants (Mattera & Purinton, 2004). To sum up then, we find the remarkable and groundbreaking and sometimes apparently non comprehendible growth of Wal-Mart to be attributable and explicable in terms of basic economic theory. The main pillars of the Wal-Mart ecosystem are grounded in premises of achieving unprecedented low prices which again is made possible through innovations, maximising worker productivity per unit of wage, able exploitation of the economies of scale and density and last but not the least through the important supporting role played by the government. So the secret of success of Wal-Mart lies not in creating something that defies all theoretical bounds but rather in creating a completely self-sustaining system that runs on its own set of very rational economic decision making through able practical application of very simple and basic business, managerial and regional economic theory. References: Basker, E., (2007) “The Causes and Consequences Of Wal-Mart’sGrowth,” Journal of Economic Perspectives, Volume21, Number 3, Summer 2007, Pages177–198 Fishman, C. (2006) “The Wal-Mart Effect,” Allen Lane, New York Holmes, T.J., (2006) “The Diffusion of Wal-Mart and Economies of Density”, Paper presented at applied microeconomics conference at the Minneapolis Fed, Preliminary draft available online at: www.econ.umn.edu/~holmes/papers/diffusion_walmart_april2006.pdf Mattera, P. & Purinton, A., (2004) “Shopping for Subsidies: How Wal-Mart Uses Taxpayer Money to Finance Its Never-Ending Growth,” Washington, D.C.: Good Jobs First, 2004. Read More