WhyWal-Mart chain stores have resulted in closure and reduction inperformance of small businesses.
Thepresent study aimed at identifying the negative effects of Wal-Martstores on small businesses, analyze those challenges, and suggest thepossible solutions. The key problems that Wal-Mart chain stores causeto small businesses include closure of small businesses, reduced rateof growth, price competition, and killing the spirit ofentrepreneurship at local levels. The competitive advantage ofWal-Mart stores compared to small businesses results from itseconomies of scale, effective chain of distribution, and highbargaining power. Small businesses have three alternatives that theycan use to counter these challenges and ensure their survival as wellas long-term growth. These options include the differentiation ofproducts and services, market segmentation and specialization, andeffective management of chains of supply and distribution.
Section1: Problem identification
Inthe past, the establishment of large store was perceived as one ofthe key economic drivers. This was based on the notion that largeretail stores take the advantages of scale to supply a wide range ofcommodities and high quality goods to the local people while creatinga large number of jobs. However, critics have been raised concerningthe negative impact that larger and chain retail stores have on smallretail shops owned by the local people. Wal-Mart is one of thelargest chains of retail store in the world, whose operation has beenfound to cause negative effects on the local retail businesses.Research shows that opening a single Wal-Mart store kills threeretail jobs for every two job opportunities it creates for the localpeople, which means that Wal-Mart reduces retail jobs by a net of 2.7% in every region they operate (Blasio 4). In addition, the entry ofWal-Mart in any location reduce sales made by small retail operatorsby 10-40 % where small local supermarkets, sole proprietor retailstores, and discount variety stores are adversely affected. Forexample, the establishment of Wal-Mart stores in Chicago drove about306 small retail business out of business in 2008 (Blasio 5).
Someof the strengths that have given Wal-Mart a competitive advantageover the local retailers include the large scale of operation,international operations, and a well established information system(Jurevicius 1). Wal-Mart has two major opportunities, including theincrease in acceptance of products with retailers label and growth ofretail trade and especially in the emerging markets. Wal-Martweaknesses include the limited differentiation and an increase innegative publicity. This chain of retail stores faces two majorthreats, including rising commodity prices and resistance of Wal-Martstores from the local communities.
Section2: Issue and fact analysis and exploration
Itis evident that Wal-Mart operations reduce the sales volume of thesmall businesses and results in closure of some. There are threemajor factors that have enabled Wal-Mart to outperform smallbusiness. First, Wal-Mart is one of salient examples of largecompanies that enjoy economies of scale compared to their smallbusiness competitors. Wal-Mart, given its larger size, has a largenumber of efficiencies that it utilizes to bring costs down comparedto the prices offered by small scale businesses operating in the sameregion. In addition, the large size of the companies increases itsbargaining power, which allows it to get supplies at a cheaper price.For example, Wal-Mart has the capacity to acquire a DVD from itssuppliers at $ % per piece while small businesses operating in thesame region acquire the same product at $ 5 (Bankupalli 3). Thisindicates that Wal-Mart has a competitive advantage over small scalebusinesses that provide a living for a large number of localresidents.
Secondly,Wal-Mart has successfully applied the chaining strategy to increaseits presence in many parts of the world. This has increased thepopularity of Wal-Mart compared to small scale retail operators.Currently, Wal-Mart is operating a chain of about 5,000 storesworldwide (Bankupalli 2). This has allowed Wal-Mart to establish aninexpensive chain of distribution, which has increased itsprofitability and competitiveness in terms of product prices. Thisimplies that Wal-Mart can make large scale purchases and distributeacquired products to many stores at a cheaper price. Comparatively,small scale business operating at local level relies on establisheddistributors or use expensive means of revamping their stock, thusreducing their capacity to compete with larger stores, especially theWal-Mart. Moreover, the chaining strategy gives Wal-Mart anopportunity to gather a large amount of information pertaining to thelikes and dislikes of consumers, which enhances its capacity tospread the best practices in all stores (Bankupalli 2). Small scalebusinesses, on the other hand, have a limited capacity to collectinformation pertaining to what different customers like or dislike,which reduces their competitiveness in the market.
Third,Wal-Mart has acquired a competitive advantage as a result of costexternalization, which increases its capacity to outperform smallbusinesses. Study shows that most of the Wal-Mart costs areexternalized in macroeconomic terms (Crawford 1). Wal-Mart advancebusiness frameworks that lead to negative repercussions, includinglow wages, environmentally destructive processing plants in thedeveloping world, and shuttering the small business across America.Another study has shown that Wal-Mart’s decision to push forfurther reduction of wages overseas have increased the destructivenature of the corporate business model (Korfhage 1). This is becausethe reduction in wages outside the United States and other regionsthat Wal-Mart has stores gives foreign manufacturing and suppliers acomparative advantage over local small enterprises.
Section1 and 2 focused on the identification and analysis of problems thatWal-Mart has caused to small business. First, the establishment ofWal-Mart stores has resulted in the closure of much small retailbusiness in the neighborhoods of Wal-Mart. Secondly, Wal-Mart hassubjected emerging supermarkets to cutthroat competition, thusreducing their capacity to grow and increase job opportunities forlocal residents. Third, Wal-Mart takes advantage of its large size topush for cheaper supplies, which kicks out small scale suppliers whooperate at local level. Fourth, over the years, Wal-Mart has managedto push for low wages in the developing economies, which has enabledmanufacturers and suppliers from those economies to acquire acomparative advantage over local small scale producers and suppliers.Fifth, Wal-Mart has been utilizing its competitive advantage andeconomies of scale to triumph over sole and emerging business, whichis killing the spirit of entrepreneurship at the local level.Although many small businesses have been cornered by Wal-Mart, thereare fourth major alternatives that can help them compete effectivelywith the established chain stores. These options include competitivepositioning, market segmentation, product differentiation, andapplication of niche strategy.
Differentiationof products and services
Productdifferentiation is a strategy that can help small scale businessesthat have been subjected to the risk of closing in using alternativemethods of returning and expanding their market shares. Productdifferentiation focuses on quality, product design, services, andfeatures of products, instead of competing on the basis price (Dirisu259). The small scale businesses should realize that the currentbusiness environment, which has forced firms to compete for marketshare, revenue, and customers, requires them to address the specificneeds of the customers. For example, local manufacturers andsuppliers who have been overtaken by foreign manufacturers andsuppliers who have managed to reduce wages can start supplyingquality products additional features that producers from developingeconomies cannot manage. By doing this, small scale suppliers andretailers will be able to divert their attention from changes inprices, and prioritize customer needs.
Marketsegmentation and specialization
Smallbusinesses should divide their market into segments by consideringconsumer buying behavior as well as specific traits of consumers ineach segment. This implies that small business can identify marketsegments that they can fit and grow rather than focus on business ingeneral terms. There are three factors that should be taken intoaccount when segmenting the market and selecting one that each smallbusiness should focus on. First, the target market should besustainable or have sufficient size that can justify the creation ofa customized marketing mix (Defoe 1). Secondly, the market segmentshould be identifiable and measurable in terms of age group andgeographical regions and other social categories. Third, smallbusinesses should consider the potential response of the targetmarket segment to suggested marketing mix. Small businesses shouldthen identify the market segment that gives them a promise of growthand specialize in the products that satisfy consumers in specificmarket segments. For example, a small general shop can focus on thesale of stationary in order to ensure that its customers willidentify it with a given line of product that meet the qualitystandards.
Effectivemanagement of chains of supply and distribution
Thesmall business has been losing their market share following thecapacity of Wal-Mart to adopt a cost effective supply chain, whichhas enabled the chain stores to reduce the cost of sales and offercompetitive prices. The small businesses can address this challengeby sourcing their inventories from manufacturers and identifying thecheapest means of transport available in the market. Althoughelimination of middlemen who supplier the small business with stockwill reduce their role in the value chain, the small businesses willreduce the cost of operation, thus increase their revenue(Shahidullah 6). The small businesses that will be able to establishtheir own supply lines and reduce the length of the distribution willsurvive the cutthroat completion.
Wal-Martis the largest chain of retail stores in the world, which havesubjected small enterprises to the risk of closing business. Althoughmost of the operations of Wal-Mart are within the confines of law, itis evident that Wal-Mart has been taking advantage of a wellestablished chain of stores and economies of scale to triumph oversmall businesses. Economies of scale allow Wal-Mart to offer similarproducts to those that are sold by small business within the samelocation at lower prices. The reiterations taken by small businessesto counter the prevailing challenges should focus on helping thesebusinesses to reduce the cost of operation and target profitablemarket segments. These options can offer the small businesses anopportunity to enhance their competitive advantage and help themsurvive amidst the stiff competition from established chain stores.However, small businesses should not expect a soft landing by usingany of these strategies because the established chain stores arewatching their movements and they are likely to present morechallenges.
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