Economic Analysis

Introduction

Wal-Mart is the world’s biggest retail store which holds a greater market share than most of the retailers in the same industry. It employs over two million staff members which is a big part of the whole US population. The research question of this paper is how Wal-Mart is able to acquire competitive advantage and what impact does it have on its rivals.  

Over several last years the dominance of Wal-Mart in comparison to other retailers has been very evident. Its competitive advantage results from achieving economies of scale in its everyday operations as well as the application of latest technology, which makes all operations more efficient. In terms of technological advancements, Wal-Mart has installed a computer network equipped with the barcode-reading technology which is available for all Wal-Mart’s distributors and suppliers. It has additionally implemented Radio Frequency Identification system which significantly helps during the identification of products being delivered. 

In addition to the use of information technology, the company has also installed an inventory mechanism, which enabled Wal-Mart to extend the line of products it offers to its customers. Product line extension consisted of pharmaceutical and automobile products. This possibility of making purchases in one place benefits customers in a way that it saves their time and effort of searching for products elsewhere. Further, it allows Wal-Mart to enjoy economies of scale through efficient use of inventory space and selling floor.

Wal-Mart’s competitors are mostly local retailers, however, there is also a couple of large retail chains. Wal-Mart contributes to the creation of severe competitive environment which makes numerous small businesses go bankrupt. Emergence of big retail chains is considered to be motivated by big sales and profits especially in economically strong areas. Small businesses also attempt to enter the market encouraged by the successes of large enterprises. However, Jia (2005) argues that growth of Wal-Mart caused the elimination from business of small stores. According to Basker (2007), approximately one in four small competitors has shut down during the last 5 years. This trend continues as other stores continue to shut down with Wal-Mart’s entry into the new markets. Those competitors who remain in business keep complaining about declining levels of profits.

The competition between several large retail chains has been increasing, and so has the interrelationship and mutual influence between them. Some of the decisions made by Wal-Mart’s management have directly impacted the decisions made by other large competitors in retail sector. This contributes to the complications of relations between Wal-Mart and its local competitors. According to McKinsey of the Global Institute (2001), some retail stores have copied much of Wal-Mart’s strategies, and this became the illustration of how Wal-Mart impacts the competition in the market. Wal-Mart’s purchasing power has been a major factor that impacted its business relationship with other firms and stakeholders in the market. This also empowers the internal operations of the organization. This relationship is enhanced by information sharing which is facilitated by Retail Link Software. As it can be seen Wal-Mart has been very effective in latest technology adoption.  The latter  has had a remarkable impact on the profitability of its operations.

According to Chain (2003) Wal-Mart was aimed at increasing the level of manufacturing as well as cutting production costs. Further, Wal-Mart has been taking advantage of its bargaining strength to reduce wholesale prices. The company has also, in some instances, considered importing some of its merchandise as this reduces the buying price. Nevertheless, critics argue that Wal-Mart’s acquisition of goods from China and selling them at low prices makes other products sold in US seem too expensive.

At its present level of advancement, Wal-Mart has been able to efficiently support its operations even after the rapid growth of the consumer base. Wal-Mart has been able to reduce costs, which gave it an edge over other retailers. Additionally, the reduction of costs increases profits which in its turn allows purchasing advanced technology and further expanding of Wal-Mart’s retail chain. Such advancements enable the company to achieve economies of scale and enhance the viability of its operations. According to Basker and Van (2007) there is a close relationship between the size, efficiency, and incorporation of technology at Wal-Mart. Wal-Mart has installed technology that increases the efficiency of stores’ operations and enables it to repeatedly achieve economies of scale.

With regard to its supply chain, Wal-Mart has been able to improve its position in the market. Wal-Mart has the capacity to supply in bulk and, with the current crises in the market, it is through such strategies that any enterprise manages to lower the costs of its merchandise. In this way customer retention and loyalty becomes achievable. Basker and Van (2007) argue that even if such strategies secure the future of an enterprise, they do, however, reduce the marginal profit per unit of sale. With the help of data from Wal-Mart, it is possible to approximate and indicate elasticity of marginal cost as well as the size of sales. Wal-Mart tends to locate its stores in the places where it is likely to acquire revenues, taking into consideration the demand and cost factors as well as how competitive the environment is. According to Graff and Ashton (1994), the idea of locating stores close to one another has caused reduced sales of other competitors. On the other hand, Wal-Mart’s ability to exploit economies of scale has become even stronger.

Cournot model involves two firms that deal with similar products. The firms are, however, meant to select their output levels. Each of these firms’ profit margins is set on the basis of the other. They, hence, rely greatly on one another’s operations. This is what is commonly referred to as the reaction function for one firm on the basis of the other. With each firm having its own reaction function, the point at which they cross is termed as their Cournot Nash equilibrium. Wal-Mart has been known to have an advantage in the market as compared to other retail stores (Davies & Lam, n.d.). This is because of the retail production function, the respective inputs and outputs, as well as the relationship that exists between Wal-Mart and other retail stores.  Much of the growth and production at Wal-Mart has been greatly attributed to technology and economies of scale. Wal-Mart’s acquisition of computer and bar-code readers has helped it limit the labor overhead cost. Additionally, Wal-Mart has installed the Retail Link software, and this has made operations between suppliers and stores more efficient.

In the graph below, A and B are the two firms that are being compared. The graph explains the aforementioned scenario.

As explained earlier, Wal-Mart is an efficient enterprise. This is especially so since its size and the level of production are high as compared to the retailers. This is an indication that the use of technology is the most effective strategy for achieving the economies of scale. The economies of scale at Wal-Mart and the retail store levels of production have brought major advantages to Wal-Mart.

Though Bertrand model is composed of two firms dealing with similar products, it is based on the price levels. The prices are forced down to the marginal cost. Wal-Mart’s case has enhanced the level of market participation by chain stores. While the size of Wal-Mart indicates that its operations are beneficial, it prompts the reduction in the profit margin of the item being sold. The evaluation of data from Wal-Mart enables the approximation of elasticity in the marginal cost. This is related to the sales indicators recorded during a trading period.