Supporting Cost Leadership Strategy

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It is this simple vision of Sam Walton that Wal-Mart has adhered to from the very beginning. And it is that very concept that has propelled Wal-Mart into becoming one of the largest corporation in the world. Wal-Mart has become a prime example of a cost leadership corporation that has revolutionized the way consumer businesses interact and conduct with each other in today’s retail environment, in order to give their customer the best value; always.

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The purpose of this essay is to discuss how Wal-mart was able to achieve such a feat through their cost leadership strategies to bring more value to its customers, how it contributes to their stakeholders, as well as how it positively impacts the society overall. Definition of Cost Leadership Paragraph Since most of the discussion is on Wal-Mart and its successful implementation of cost leadership strategies, it is imperative to define the cost leadership strategy to give a clearer understanding of the discussion put forward.

Cost leadership strategy has been generically defined as a firm being the lowest cost producer, to sell at or below industry prices; By doing so firms are able to gain a larger market share, allowing them to achieve higher overall profits through high volumes of lower marginal profits – That is exactly what Wal-Mart has done. Unlike Wal-Marts competitors who have focused on earning marginal profits by the dollar, Wal-Mart focused on marginal profits by the cents, which allowed them to attract large numbers of customers thus achieve a significant chunk of the market share.

It has been stated that “Every seven days more than 130 million Americans shop at Wal-Mart—equivalent to 40 percent of the country. Each year, 93 percent of American households shop at least once at Wal-Mart. ” Which is a clear proof that Wal-Mart –by focusing on earning marginal profits by the cents has attracted enormous crowds, in similar context it has been stated that “Wal-Mart is the largest retailer in both Mexico and Canada, and the second largest grocer in England. ” (Fisherman, 2006).

However the question still remains what is it that Wal-Mart has done, that caused them to be so successful? Cost Leadership paragraph Wal-Mart from the very beginning has strived to bring its customers the best value by sticking to its core values, “Always low prices. Always. ” as a matter of fact, Wal-Mart strives to charge 15% lower prices then its competitors. There are many factors that allowed Wal-Mart to provide that best value, or shall we say best bang for the buck.

The first and foremost mentioned by Charles Fisherman in his article The Wal-Mart Effect and a Decent Society, mentioned that Wal-Mart strictly focuses on supplier costs and forces them towards value engineering, basically increasing value added activities and eliminating non value added activities, stating that “It reaches deep inside the operations of the companies that supply it and changes not only what they sell, but also how those products are packaged and presented”.

By penetrating vertically into the supply chain Wal-Mart forces suppliers to eliminate even the tinniest non value added activities which save time, financial resources, and other resources that are used up in the manufacturing, packaging, shipping and selling of the product, that is magnified by the large volume of sales to make a significant difference. This applies pressure on the suppliers to keep costs low consistently, allowing them to be more effective and efficient with the resources.

Mr. Fisherman also states that another element to keeping the prices low to keep customer value high is by keeping the employee wages low and the unions in control. In order to keep the salaries low Wal-Mart focuses on recruiting teens and students, who are more likely not to be financially burdened by being breadwinners of their families and those who are most likely not to require health benefits.

It should be dually noted that Wal-Mart does care for the employees and their families during the changes time, by recognizing the increase in health care costs “In response, Wal-Mart has announced improvements to its health-care insurance offerings,” (Cascio, 2006) which will provide health benefits to its full time and part time employees and their families, while continuing to maintain their cost leadership position.

In comparison to Wal-Mart’s competitor Costco which has taken care of its working force through generous wages, and benefit plans we can see that “They worry that the company’s operating expenses could get out of hand,” (Cascio, 2006) considering labour costs of these kinds of organizations tend to be quite a bit it can even be an issue of going concern. Also by keeping in mind that Wal-Mart has pressured suppliers to produce goods at their lowest possible prices, its suppliers are taking advantage of the outsourcing trend.

By outsourcing their productions to developing countries, this not only brings more value to the customer by keeping the labour production costs low, but also allows the employees of those developing nation to earn a decent living, unlike before who are most likely to live at or below the poverty line, clearly a win-win situation. Another factor that has kept the costs low for Wal-Mart to focus on providing products at the highest value to their customers is through their highly complex implementation of the just in time distribution system.

The complex just in time distribution system eliminates Wal-Mart’s need to incur inventory costs such as warehousing, inventory damage costs, and threat of becoming obsolete at a minimal level. This has been done by networking Wal-Mart’s individual retailing locations to the head office, whose inventory system is networked with various suppliers, so as soon as the system detects that product levels are low it triggers the suppliers to ship the produce and ship the goods when required.

These are the three biggest contributors to achieving Wal-Marts cost leadership strategy, out of the many ideas they have employed. But how does this affect the stakeholders, if at all? Stakeholder Paragraph Sam Walton believed in three stakeholder focused guiding principles “1. Customer value and service; 2. Partnership with its associates; 3. Community involvement” (Wal-Mart. com, 2008). From these broad three we will derive five kinds of stakeholders that have benefitted from Wal-Mart’s aggressive cost leadership strategies.

The five kinds of stakeholders being customers, shareholders, employees, suppliers, and the communities they operate in. Customers’ being the focus of Wal-Mart’s cost leadership goals have benefitted tremendously from the high value, and low prices of the everyday goods and groceries sold at Wal-Mart stores. Because Wal-marts prices are lower then that of their competitors, “Wal-Mart is saving consumers in excess of $150 billion a year. (Fisherman, 2006)

What this means to the customers is that they have the ability spend more to increase their standards of living, and on aspects that are more important such as education, health care, and other leisurely items. Especially in context of the North American demographics with baby boomers, the largest sector, going into retirement, it will be more important for them to spend cautiously – and with Wal-Mart with its low prices, one can say that it too is a form of support.

Shareholders have also benefitted from the cost leadership strategy of Wal-Mart, with increased sales yet lower costs shareholders have benefitted from high rate of returns from their investments in Wal-Marts stocks. Employees are also stakeholders of Wal-Mart that have benefitted from Wal-Marts strategy. In order to keep the costs low, Wal-Mart has provided jobs to teens and students as aforementioned, giving the sector employment opportunities in terms of part time and full time employment.

Employees also have the opportunity to become shareholders of Wal-Mart by contributing part of their pay to purchase Wal-Mart shares, for long term growth purposes. The other kind of employees that are benefitting, as aforementioned, are those that are employed in developing countries – who are given the opportunity to support them selves above the poverty line. One may argue that cheap labour is being exploited, however from their perspective it is giving them the ability to earn a living rather then beg or scavenge for scraps of others.

Suppliers are major stakeholders of Wal-Mart, there are some suppliers that are existing only on the basis of providing products to Wal-Mart. Wal-Mart is teaching them to manufacture more efficiently, and also be strengthening the business relationships overtime. Last but not least, the communities too are benefitting from Wal-Marts involvement, with Wal-Mart becoming one of the largest organizations in the world through their very effective cost leadership strategy the communities and environment is also benefiting.

First of all, Wal-Mart through their implementation of cost leadership have improved the input being required to produce goods, as in the case of deodorant boxes being eliminated, which are saving the environment in two folds, one – less trees are being cut to produce the card board, and two – less waste is being produced, this is one out of many examples that Wal-Mart has implemented because of their leadership on cost reduction strategies, this overall gives the communities a healthier environment to live in.

Another way Wal-Mart has contributed to the communities is by having such large profit margins they are able to significantly give back to the communities in many ways, as they say “operating globally, giving back locally. ” (Walmartstores. com, 2008) Wal-Mart contributes a part of their earnings, only acheiveable through their cost leadership strategy, to local donations, education grants, environmental awareness programs and more. We can clearly see that not only Wal-Mart has benefited through its successful cost leadership strategy, but has benefitted the many kinds of stakeholders it has.

Cost Vs. Benefit to Society Paragraph This portion will discuss the cost versus benefit to the society and the economy as a whole. There have been many controversies arising in the case of Wal-Mart such as the loss of jobs; companies have been driven out of business as they are not able to compete with the giant; improper wages and treatment of the employees; threat of closing locations due to unionization and more. We will look at these facts through the macro perspective of how they affect the economy and the society as a whole.

The biggest controversy has been the fact that there have been many loss of jobs due to closures of many businesses. In regards to the jobs perspective “Wal-Mart creates new Wal-Mart jobs…in the process of creating 125,000 new jobs in the U. S. last year, Wal-Mart destroyed 127,500 jobs. ” (Fisherman, 2006) There is a discrepancy of about 2,500 jobs however such kinds of discrepancies will always exist. It should also be noted in a similar context that “Wal-Mart is thenation’s, and the world’s, largest private employer, with 1. million “associates,” (Fisherman, 2006)

The benefit of Wal-Mart’s existence on the national employment has made a significant positive contribution. This issue has another controversial element, which is the fact that Wal-Mart drove a lot of companies out of business, this fact is absolutely true, however it has been done for the benefit of the nation. It is those businesses that have been driven out of business that were unable to produce quality goods with utmost efficiency, and it was that inefficiency that increased the costs of associated products.

Why should the customer have to pay for a producers inefficiency, knowing that there are other producers that can produce the same kind of good, with equal or more quality more efficiently thus at a lower price, providing the customers a higher sense of value. That is exactly what Wal-Mart did, Wal-Mart has done the customers a favour by weeding out the inefficient producers, to give customers the highest value for the lowest cost, without compromising the quality of the goods.

But what about the loss of jobs that resulted thereof, therefore in a similar context we shall also argue the fact that since companies were driven out of business, similarly Wal-Mart’s support of the more efficient producers of goods allowed them to expand to fill in for the jobs that were lost. Wal-Mart has forced the economy to produce goods more efficiently – allowing the standard of living to increase by providing more goods at lower costs. Another controversy that has stirred up against Wal-Mart is the fact that they pay their employees very low wages.

This is true – that in order to provide more value to the customers and a higher return to the shareholders they have paid low salaries, however it must also be recognized that Wal-Mart gives their employees the opportunity to become part of the shareholders, which gives them the opportunity to share Wal-Mart’s wealth through increase in stock prices, stock dividends, and etc. Wal-mart encourages its employees to contribute part of their pay to purchase Wal-marts shares – this not only increases the employee shareholders wealth over time, but also motivates them to perform more actively towards Wal-marts success.

In similar regards it has also been mentioned that Wal-Mart stores were closed when talks of unionization were in process, the fact of the matter is that many of the Wal-Mart stores are unionized, however in order to keep the unions in control to keep the costs of products low to provide higher value to the customers at lower costs, it is necessary keep the existing unions in control, and that is why Wal-Mart closed it’s stores as an example to others. We can see through these arguments put forward that some sacrifices have been made, however they have been made in pursuit of a greater good which is prevalent on a macroeconomic level.

Wal-Mart’s adherence to the cost leadership strategy has proved to be a very successful one. Through their innovative ways to reduce their costs- it has earned them large profits, saved the customers billions of dollars, provided efficient use of input resources. Because of their cost leadership programs Wal-Mart has brought benefits to many stakeholders including customers, shareholders, employees, suppliers, communities, and more. And realizing through an macro perspective have done nations much good by creating jobs around the world – all of this just because of their persistence towards the cost leadership program.

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