Wal-Mart’s Low Cost Strategy
Introduction
Wal-Mart has achieved almost legendary status for its low-priced goods. The company aggressively maintains efficient distribution systems, lower labor costs, and firm-level economies that give it leverage with suppliers. Combined with managerial innovations and the big-box format, which leads to in-store scale economies, these advantages help Wal-Mart cut costs and passes savings on to consumers (2004; 2003; 2002). Labor productivity was 44% higher in Wal-Mart stores than in other general merchandise retail stores in 1987. In 1999, Wal-Mart still maintained labor productivity 41% greater than competitors (2001).
The company's price advantage extends to groceries, particularly in the large footprint format. (2004) summarized the evidence on scale economies in grocery sales, arguing that larger stores enjoy cost economies, have more room for high-margin items, and may be more attractive to some consumers. A 2002 study by found that the price of a market basket of grocery items at Wal-Mart supercenters was between 17 and 29% lower than prices at major supermarket chains in the same urban area (2003). Moreover, grocery chains competing in the same market will normally be forced to lower their prices in response. The aggregate savings to consumers of such price differences across a metropolitan area, as we see in the San Francisco study below, can easily amount to hundreds of millions of dollars.
Strengths and Weaknesses of Wal-Mart’s Strategy
With Wal-Mart’s single purpose to bring the lowest prices to customers, Wal-Mart has turn to China. China's south was always famous for business savvy; that talent was enhanced almost from the day in 1980 when five "special economic zones" were formed, most famously Guangdong, which boasted the first "joint venture" firms.
China's relentless improvement of infrastructure, and endless cheap labor, explains why Wal-Mart has relied its goods on the country. It's a complex market and certainly the opportunities are overwhelming.
One of the strengths of the strategy of Wal-Mart in resorting to China in its goods is because with China, manufacturing of the goods are of low prices because of labor expenses are low in which in return would cause low prices of products. Reducing labor expense is the main cause of savings and in trimming the prices of the products. According to (2005), more than 10 percent of what China ships to the U.S. ends up on Wal-Mart's shelves. With Wal-Mart’ strategy of outsourcing in China, the company has saved money. Lowcost-country outsourcing is a strategy that enables innovation. However, China lifted its restrictions on where Wal-Mart and other foreign businesses to open stores. Wal-Mart's stores are "in their infancy in China.
China’s Effects to the US
China's influence and investments are expected to create U.S. jobs and opportunities that hearken to industries of old. China has also changed the business landscape through innovation, something upon which the U.S. once prided itself.
However, China is responsible for the "China price"--the end result of low wages, thin profit margins and the utmost efficiency, offering a mixed benefit for consumers. Unfortunately, a typical U.S. resident who needs this China price most is someone who's likely lost a job because his company cut costs to compete with the China price.
Another effect of China's growth is a spike in raw material costs. Copper, aluminum, zinc and oil prices have all increased due to China's demand. Recent gas price increases can also be attributed, in part, to a hefty demand from China's factories.
Moreover, China's influence on the U.S. is more than economic. A mass of smog known as the Asian Brown Cloud has traveled over the Pacific via the jet stream to the West Coast, a grimy reminder of China's proclivity for using unwashed coal in its factories. Fishman writes that the Brown Cloud may also be responsible for altering weather patterns--reducing rain in Washington, Oregon and sections of the Midwest.
Moreover, China's currency poses a pervasive problem for the U.S. The country is accused of undervaluing its currency, the yuan, to increase exports, as well as pegging the yuan to the U.S. dollar. U.S. legislators plan to respond with a proposal that threatens a 27-percent tariff on imports from China if the country does not revaluate its currency.
However, aside from possible World Trade Organization violations, this plan may be a mistake for more than one reason. The currencies of the U.S. and China are inextricably linked, and radical change in any direction could negatively affect the entire global community.
China accounts for only 10 percent of the total U.S. trade, and a 10-percent revaluation would reduce the dollar's "trade-weighted value" by only 1 percent, the article adds
China's influence has ultimately paved the way for low interest rates and lower- priced products in the U.S. marketplace--a scenario that should be taken advantage of because it will not last forever. This has the potential to open doors for new businesses to form and new jobs to be created if innovation and perseverance lead the way.
Wal-Mart’s Price Points, is it Ethical?
Wal-Mart’s strategy is unethical to the trade. The connection between Wal-Mart's everyday low prices and the outsourcing results to the loss thousands of American jobs and the transfer of whole industries from the United States to China and other countries.
According to the International Vice President of United Food and Commercial Workers International Union (UFCW), "Wal-Mart represents everything that's wrong with the WTO. Free trade doesn't come by making workers unfree. That's what Wal-Mart is doing/amassing great wealth by pitting workers against workers, driving down wages and lowering working conditions worldwide."
American manufacturers have been forced to cut jobs or close doors when Wal-Mart replaces their products with imports.
Wal-Mart trades in suppression of human rights. As the world's largest retailer with more than $130 billion in yearly sales, Wal-Mart is one of the largest outlets for imported goods in the U.S. Goods coming from China, Bangladesh, Vietnam, and other oppressive countries make Wal-Mart one of the world's largest traders in human misery.
For nearly a decade, news reports have documented Wal-Mart's manufacturing and trading links to countries where sweatshops and child labor are prevalent. Wal-Mart is profiting from the lack of WTO protection against child labor, forced labor and employment discrimination by trading heavily with Communist China.
Wal-Mart's price advantage in groceries stems in part from its employee compensation packages. Compared with supermarket pay and benefits in some of the larger metropolitan areas, Wal-Mart's are low. Wal-Mart is not unionized, while in many places the percentage of grocery workers belonging to unions is higher than the national average.
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