Being the biggest company in the world in terms of sales volume, directly and indirectly employed personnel Wal-Mart is one of the most controversially seen companies on the planet.
Providing 15 countries with “Every Day Low Prices”, driving off labour unions, pressurizing suppliers and being responsible for massive outsourcing in the U. S. the media coverage on this company is enormous. With this essay it is intended to give an overview over the business practices of the global-player Wal-Mart. First it will be shown through an historical overview and how the company placed itself over the years in such a powerful, influential, money-generating and controversial position in the global economy.
With a special focus on the supply chain management practices and the company culture of Wal-Mart it will be analysed if the famous business slogan “Always at Low Prices” just stands for the actual prices of the products in the shelves, or if the whole society can profit from this apparent advantage. 2. A Short History of Wal-Mart In 1962 the first Wal-Mart Store opened its doors in Rogers, Arkansas founded by American entrepreneur Sam Walton. With his passion for direct customer contact he made a crucial difference in this era, which was by stores in which the customer had to ask for each item in order to see it.
The new and simple paradigm of Walton was the establishment of auto service in his stores which made it much easier and faster for customers to buy goods and also made it possible to run bigger stores with less employees which was the base Walton’s second crucial strategy: Selling products at very low prices and make high profits with large quantities rather than with high profit margins on each product. Thus, the first store already had a high variety of low-priced products leading to fast success and expansion.
In 1966 Sam Walton already owned around 20 stores and despite his big success made steps towards raising the efficiency in the supply chain process. The key step in reaching this objective was the closure of a contract with IBM which helped technologizing the supply-chain management. As a result he opened his first distribution center and the main office of Wal-Mart in Bentonville, Arkansas. The goal was to store the whole inventory of the Wal-Mart chain in one place and to supply the single stores with goods through the company owned truck-fleet.
Walton knew that it was crucial, in order to maintain prices low, to have rigid control over the inventory. Low quantity of products in the inventory often means high losses of sales for a company, whereas, too high quantity means excessive costs and financial inflexibility. The control of the inventory requires control of information. Thus, Wal-Mart converted itself to an icon in inventory control at that time, establishing sophisticated logistics and high efficiency supply management.
The company was one of the first ones to use the barcode system in such a way that each barcode that was registered by a cash register was sent directly to the central computer in Bentonville. The new computerized headquarter made it possible to observe and make detailed forecasts about customer behaviour. This in turn helped to rationalize the supply chain, find equilibrium prices easily and utilize precision merchandising (Garcia, 2006). These steps made it possible that the Wal-Mart Company in 1979 had 270 shops in the United States, increasing the total revenue in 1970 from 44 million dollars to 1,248 million dollars in 1979.
For the first time Wal-Mart was also mentioned in Forbes Magazine. Extending the amount of Wal-Mart shops to over 1,400 in the following years, the first Wal-Mart “Supercenter” opened its doors in 1988. This format offered over 36 different types of tradable goods including car tires, guns, TV Systems and pharmaceutical products on an area as large a s 64. 000 m2 employing a maximum of 500 persons. With this type of store Sam Walton revolutionized again the retailing sector, especially in large urban areas, offering an unmatched variety of products and making other small-scale shops almost uperfluous. This made it possible that by 2005 , 1,906 Supercenters existed worldwide (Garcia, 2006). Sam Walton always thought that the key to the popularity of Wal-Mart lies in the local identity which is created by every store. Thus, every customer has to be welcomed at each store personally by the so called “People Greeters”, which sole purpose is the is to be located at the entry of each store, say hello and maybe give the customer a shopping cart.
In the inside, each store has to be a place that distinguishes itself widely from the competitors in terms of prices and good service, thanks to a sophisticated distribution system and a company culture which seeks constant improvement. The company which perfect ionized the process of buying and selling product changed the world with two simple ideas: self-service and “always low prices” (Garcia, 2006). In the United States Wal-Mart is now the largest retailer, which makes the company also the largest employer with about 1. 4 million employees in the US and 2. 1 million employees in the whole world (2010).
This means an astounding 1% of the US workforce is employed in Wal-Mart (Blodget, 2010). Additionally the jobs have to be considered that directly depend on Wal-Mart which account to a multiple of the directly employed workers. 3. The Company Culture of Wal-Mart – Pillars to Success 3. 1. Supply Chain Control and Clever Marketing “Always low prices” sounds like an easy recipe to success and it makes you wonder why competitors are not able to adopt this idea and have similar success. In order to understand this we have to take a look at another aspect where Wal-Mart shows great differences from competitors: the organizational structure.
In the previous part it was already mentioned that Wal-Mart revolutionized the supply chain management through introducing modern technology and thus revolutionized the logistics that is behind this retailing giant. Today, the basis of the supply chain management is the so called “Tellzone Scanner”. These little scanners are directly connected to the cashier system and to the central computer in Bentonville. With one scan of an item this little tool shows every imaginable information such as sales trends, items in stock and sales forecast.
This gives a large information advantage, rationalizes the supply chain and minimizes the needed storing capacity. Sales are registered each day and on the next day the fitting resupply order comes in ensuring another crucial and trust-winning impression for the customer: always full shelves (Richmond, 2003). With clever marketing strategies Wal-Mart put direct competitors such as K-Mart far behind in terms of sales numbers. One to mention is the method of the lowest opening price. In every product category one can find a so called entry model. For example the cheapest microwave of lowest quality.
This model is indeed the cheapest one compared to direct competitors. Most customers though demand higher quality products and shift their view quickly around the shelve looking for a higher category. The clue is that these higher category products are often a bit more expensive than the offers of competitors. Most customers buy this product anyways because they are deluded by the price of the entry model, just do not think about it or do not want to go to another store because, and this is by far the biggest convenience of Wal-Mart, one can buy almost anything there, even guns and tires for cars.
Furthermore the management of Wal-Mart strongly believes in making efforts to use every cost saving opportunity and passing the benefits to the customers. One of the largest savings compared to the competitors is the presence of Wal-Marts own transportation system and car pool. Wal-Mart transportation costs add up to three per cent of its whole expenditures compared to an average of five per cent for the competitors. Due to the huge size of the sold quantities it is possible to price products competitively and offer higher discounts than other retailers. The sales of the high volumes then ensure then that the low pricing is consistent.
The effective supply chain management has led to a faster inventory turnover, precise forecasting of inventory levels, increased storage space, reduction in safety stock and better utilization of working capital minimizing personnel costs and other handling costs corresponding to storage and transport (Richmond, 2003). 3. 2. Labour Policy An on-going conflict concerning the company culture of Wal-Mart is the labour policy. Being criticised for comparatively small wages and taking advantage of workers, not providing them with health insurance and forcing them to ake unpaid overtime Wal-Mart has a stunningly bad reputation. Even store managers sometimes are requested to work 70 hours per week and make their budget as lean as they can (Fishman, 2003). As the biggest company on earth, the union oppugnancy Wal-Mart is practicing has tremendous importance in an economical way, but also in an ideological way. The paternalistic-conservative leadership does not allow any compromises with unions. A showcase example of this was given in the year 2000 when 10 butchers from a Wal-Mart in Texas were joining a union and the corresponding meat department was closed two weeks later.
In June 2003 after the butchers suited Wal-Mart a labour judge decided that the closure of the department was coherent with prevailing laws. Wal-Mart called for an appeal and as a result the first attempt of Wal-Mart employees to join a union failed (PBS, 2004). Initially more successful was the struggle of a group of workers of a Wal-Mart Supercenter in the Canadian city Jonquiere for the establishment of a union in their branch. It was the first of the North-American Wal-Mart stores which successfully could organize a union representation and even negotiate a fixed pay scale.
The sad result: Wal-Mart executives short-handedly closed down the whole Supercenter with the reasoning that demands of the union made the whole business unprofitable. The business principle of Wal-Mart to attract customers with lowest prices is according to the majority of sources only reachable if the labor relations are organized authoritarian and if unions are kept away from the business (Ortega, 1998). 3. 3. Controlling the Suppliers To guarantee its low prices Wal-Mart revolutionized the American economy by turning around the relationship between retailer and supplier.
The original push system, where producers decide what to produce and afterwards trying to sell the product to the retail sector was replaced by a system in which retailers decide what to sell and when to sell. In the case of Wal-Mart this was made possible due to the sheer market and buying power and to the large information advantage. Nowadays, this system has taken bizarre forms. Located in Bentonville, right near the company’s headquarters one can find a large office building with hundreds of little rooms that have only on urpose: negotiations with suppliers. If a supplier wants to sell a product he has to march into one of these dark, little and sterile rooms already suggesting that he is not worth a lot to the company. Using the information advantage about the supplier and knowing everything about production processes Wal-Mart basically dictates the prices of the products the supplier wants to sell even making suggestions of what to change in the supplier’s production process (Freeman & Ticknor, 2003). In 2003 Wal-Mart had about 21. 000 suppliers worldwide.
But numerous firms, primarily from the United States had to shut down because Wal-Mart simply has the power to dictate selling prices and is using this power very aggressively. Among those suppliers one can find the traditional jeans company Levis which, because of the pressure made by Wal-Mart, completely gave up production and nowadays only imports clothes that were produced in China. Levis was forced to shut down its two fabrics remaining in the United States putting 2. 500 workers out of the job. 20 years before there have been 60 fabrics in the United States that were owned by Levis (Fishman, 2003).
But Levis had no choice. For this and for many other American companies the cancellation of contracts with Wal-Mart means or meant economical bankruptcy due to the immense volume which is handled with these contracts. But not only the price dictate is a reason for the phenomena. Additionally Wal-Mart has many quality criteria regarding the goods it buys from the supply firms. Thus, it is really often the case that a supply firm is completely set-up to produce for Wal-Mart and to produce goods that are only available at Wal-Mart.
One of the criteria Wal-Mart is holding up is the so called “Just In Time Production” to avoid long waiting times and long storing periods at the warehouses. The necessary investments in the organizational structure to put up with this system are often extremely high and have to be made by the supply firms. Entrepreneurial risks are easily laid off to the suppliers with this strategy. As a consequence, cheaper competitors from the third world, especially from China which were seeking access to US-Market reached it with the help of Wal-Mart.
While in the 80’s and 90’s a popular Wal-Mart slogan was “buy American” the retail giant in 2006 was responsible 26 billion USD worth of imports from China which let the total trade deficit with China grow 11 per cent between 2001 and 2006. As a result it is said that Wal-Marts trade deficit with China alone eliminated about 200. 000 jobs in the United States (Scott, 2007). 4. Wal-Mart in China The principle of systematic pressure and making suppliers to price takers rather than price makers is also prevailing in China.
Costs for producing a product need to be constantly reduced to satisfy Wal-Mart management. As a result this is often laid off on the workers which have to work longer hours and get smaller wages. Yet, in general the working conditions for Chinese worker in the epicentre of Wal-Marts supply firms Shenzhen are really poor. Most of the workers come from the countryside and do not get more than 120 USD per month. Since the profit margin for the suppliers is minimal there is almost no chance for better working conditions in the firms.
And for the workers which do not have any other work alternatives, quitting is not really an option (Goodmann & Pan, 2004). More than 80 per cent of the 6. 000 fabrics which produce for Wal-Mart can be found in China. Referring to an own estimation of Wal-Mart the company pays around 15 billion USD annually for products that have been produced in China. This corresponds to 13 per cent of the Chinese exports to the United States (Jingjing, 2004). Indeed, Wal-Mart has about a 100 auditors which have the purpose to make yearly inspections in the fabrics and guarantee fair working conditions.
Supposedly about 72 fabrics were put onto an index list in 2003 because they violated the prohibition of child labour. Further it is claimed that legal minimum wages are always paid and that production is in compliance with security guidelines. In contrast to this though it is claimed by foreign NGO’s and Chinese union-secretaries that before those inspections the fabric managers are informed and that the workers are often trained in order to give the “right” answers to the respective auditors.
And even worse, in some cases it has been reported that the auditors have been actively bribed s by supply firm managers (Servant, 2006). Meanwhile Wal-Mart has also opened numerous stores in China and is continuously expanding onto the Chinese Market. In 1996 the first “Supercenter” opened its door in Shenzhen right near one of the textile fabrics which is contracted by Wal-Mart. The Chinese marketing strategy is not very different from the one in the US. “Every Day Low Prices” are propagated and are addressing especially the customers which belong to worker families and the lower middle-class.
At the same time the philosophy of getting involved in the community is aggressively implemented. Charity performances for poor persons are supposed to improve the image of the multinational; students are invited for internships and competitions. A special focus is set by Wal-Mart on the good relations with Chinese officials and local authorities (Wal-Mart, 2012). Wal-Marts policy of union-free working environments was also intended in China. But since 2001 the Chinese union-association ACFTU was constantly pressurizing the Wal-Mart management to allow labour unions in its branches.
After years without success and resistance by Wal-Mart the management of the ACFTU started a media campaign against Wal-Mart which was even tolerated by the Chinese government. They finally threatened to sue and Wal-Mart reacted in a quite arrogant way: For one part the workers are guaranteed sufficient possibilities for complaining and crucial worker rights are included in the workers contracts. For the other part Wal-Mart stated that a union organization can only be founded if this is based on the free decision of the workers to do so.
So far the workers in Chinese Wal-Mart stores have not showed interest to join such an organization. But finally, after a long struggle with the ACFTU and the Chinese government the first labour union was established in 2006 in a Wal-Mart store in Fuijing and Wal-Mart had to give up its aggressive anti-union attitude in China. Not being the only defeat for Wal-Mart, at almost the same time the company announced its retreat from the German market (Wal-Mart Watch, 2008). 5. Wal-Mart in Germany
Wal-Mart entered the German market in 1997 by taking over 21 stores of the former “Wertkauf” company. Initially the company had quite good earnings which led to the purchase of 74 markets of “Spar”. In the eyes of many experts the misery of Wal-Mart Germany started with this move. The management bought the “Spar” markets for an excessive price, was unable to implement uniform design in most of the stores and could not establish the low logistics and supply cost that characterize Wal-Marts core business. Furthermore the management of Wal-Mart entered the German market with sheer arrogance.
Unwilling to learn the language, ignoring the complex legal framework concerning the retailing sector and ignoring strategic advices from former executives of “Spar” and “Wertkauf”. Willing to provide “excellent” service Wal-Mart added a large amount of worker to the overtaken stores but soon faced immense losses due to the labour strategy and the relatively strict worker protection laws and strong unions in Germany. Thus, the company soon faced trouble with the German union ver. di ignoring sector-specific wage bargaining processes which ultimately led to strikes, bad publicity and losses in sales.
In the end Wal-Mart just could not maintain itself on the highly competitive German market, being more expensive than competitors like “Aldi” and “Lidl”, violating German laws and regulations and not reaching the needs of the German customers which have quite different set of customs and standards than American customers. The company made massive losses on the German market which added up to three billion Dollars in ten years of operation and finally retreated in 2006 (Knorr & Arndt, 2003). 6. Success Always at Low Prices?
If we consider the bare market-power of Wal-Mart, it is no coincidence that a great part of the economic and social changes that take place on a global scale can be shown on the Wal-Mart example. It can even be said that some of the global developments have been initiated, influenced or accelerated in Bentonville. Wal-Mart even lead the way in the struggle against worker unions, in outsourcing of labour or the overexploitation of the workforce due to the deregulation of the labour market in the United States (Dicker, 2002).
Wal-Mart has shown how to use pressure against sub-contractors to force them to sell their products at lower prices and thus force them to introduce lower-wages or outsource their labour. As mentioned before, the products one can buy at Wal-Mart are indeed cheaper as in any other retail store, by an average of 14 per cent. But at what real price? The regular customer or bargain hunter will answer this question differently than the millions of employees in the ancillary companies that have been dictated the always low prices by Wal-Mart.
What makes the customer happy has often been generated on the backs of the workers. To keep the prices low worker conditions have to be deteriorated in order to save money. Therefore, it is better too that unions are ignored and that goods are nowadays produced in China (Greenhouse, 2003). The fact that the bargain-hunting customer causes the “impoverishment” of the producer, which in some cases he also is seems to be a devious idea. But the sheer market volume makes it possible that this contradiction is real and directly visible.
Thus, the company gloats about saving the average American working class family an annual amount of roughly 2320 Dollars. Furthermore, the company states to have pushed the purchasing power in the year of 2004 by an average of 401 Dollars in the United States. But this is only correct under the assumption that the customer spends the saved money within other economic activities and stimulates the economy (Miller, 2006). Critics of the company relate to less pretty index-numbers. Since those low prices do not fall from the sky they have to be generated by sacrificing at the cost of another good.
As an example it can be observed in regions with strong Wal-Mart presence, that the salaries in that region lie on an average of 2,5 to 4,8 below other regions. Wherever the company settles down, its pure presence creates a pressure on salaries by keeping salaries of their own employees low and by dictating prices to the supply firms. With this the company creates an environment of low prices but also pushes up the number of persons that don’t have another choice than to buy goods at Wal-Mart (Freeman & Ticknor, 2003).
Yet, at no time the company disrespected the two basic principles concerning the handling of the labor: paternalism and union adverseness. 7. Conclusions The question one might ask when looking at Wal-Marts position as a result of clever entrepreneurship and the extremely neoliberal economic policy of the US is, if it is a good or bad phenomenon. In this essay we have definitely seen that Wal-Mart passes on cost advantages on to customers who can profit from low prices, reliability and good quality.
On the other hand we have seen that this advantage is produced on the backs of many underpaid workers in the United States and in the “invaded” foreign countries. Wal-Mart is trying to enlarge its already astounding retail imperium by pushing onto foreign markets with the same strict ideology and thus, forcing US suppliers to outsource their businesses and harshly competing in foreign retail markets while slightly skating along the frontiers of legal frameworks. We have seen that this works in many developing countries that are still seeking strong economic growth and need to use every chance for foreign investment.
But we have also seen that the in times of extreme globalization even the self-secure Wal-Mart company can meet the limits of the possible. In Germany, where compared to the US, workers have stronger rights and the retail sector is widely established, Wal-Mart could not compete. Still the irony of the whole business development is that the home country of Sam Walton is now suffering from the “beast” it has created with the neoliberal and free trade policy because Wal-Mart is strongly pushing the US trade deficit and causing a high loss of jobs.
All in we can say that Wal-Mart’s only corporate responsibility taken is to deliver low prices and keep high sales volumes flowing. It shows no attempts to be socially or environmentally responsible in an active manner. But in a world which is basically led by corporations and has, for the most part, trade policies that are in favour of them, this development shall be no surprise. 8. References Blodget, H. (2010, September 20). Business Insider. Retrieved April 17, 2012, from http://articles. businessinsider. com/2010-09-20/news/30081785_1_minimum-wage-real-wages-employees Dicker, J. 2002, June 28). Union Blues at Wal-Mart. The Nation. Fishman, C. (2003, December 1). The Wal-Mart you don’t know. Retrieved April 14, 2012, from Fast Company: http://www. fastcompany. com/magazine/77/walmart. html Freeman, R. , & Ticknor, A. (2003, November 14). Wal-Mart Is Not a Business, It’s an Economic Disease. Executive Intelligence Review. Garcia, R. (2006). Mexico-Wal-Mart: Una relacion de exito y mutuo beneficio. Puebla, Mexico, Mexico: Universidad de las Americas Puebla. Goodmann, P. , & Pan, P. (2004, Feburary 8).
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