has so many locations, so the fixed cost can be spread over its huge volume of
outputs. Then it can achieve economies of scale.
Second resource of economies of scale may be increased productivity of
variable inputs, such as specialization of labor and efficiencies in energy
usage. Wal-Mart has so many locations around the world. There is the market
that is big enough to support it to make specialized investment. For example,
specialization of labor can increase their efficiency and then reduce the cost.
There is a group of people who are customer specialization. They offer a good
after sale service to customers and do consumer survey regularly to collect
advices from them. From an enormous amount of information, Wal-Mart may
concern consumer likes and dislikes, and it can spread its best practice across
its entire stores. Another example is specialization of its inventory. The
inventories in Wal-Mart are all divided into different groups, such as foods,
electronics, and furniture. It is more convenience for staff to collect information
of inventories.
Furthermore, Wal-Mart has established a specialized distribution channel that
was not easily matched for its competitors. The company developed the ability
to distribute its merchandise from a vast network of distribution centers served
by a private truck fleet. This allowed them to restrict inventory while
simultaneously open more stores. Efficient distribution channels will help to
lower price.
Economies of scale may also arise when firms carry inventories. Firms carry
inventory to minimize the chances of running out of stock. Of course, there are
costs to carrying inventory and the inventory costs will drive up the average
costs of good sold.
Wal-Mart’s inventory control system is legendary. It does not want to hold
inventory, it does not want backorders. It always orders fewer cases but more
frequently. Like many huge companies, Wal-Mart will not wait. It requires
shorter lead times and implements “zero tolerance” policies. And this measure
can help Wal-Mart save a lot of money on inventory.
The fourth resource of economies of scale and scope is purchasing. Most
people have purchased items in bulk. They may find sometime price falls as
the amount they purchase increases. Big companies that make large
purchases from their suppliers may also obtain discounts, enabling them to
enjoy a cost advantage over smaller rivals. Likewise, companies with low costs
can price their products at the same level as competitors, but make a higher
profit while doing so.
Wal-Mart is perhaps the most salient example of a company benefiting from
economies of scale, especially in purchasing. As a dominant player in retailing,
the company’s size provides it with enormous efficiencies that it uses to keep
low cost. Since Wal-Mart has roughly 5000 large stores worldwide, it owns a
great bargaining power with its suppliers. For example, Wal-Mart once sold a
gallon-sized jar of whole pickles only $2.97 in America. It’s much cheaper than
other groceries.
Another resource of economies of scale is advertising. The advertising cost
per consumer of a product may be expressed by the following formula:
Cost of sending a message
Number of potential consumers
receiving the message
Number of potential consumers
receiving the message
Number of actual consumers
as a result of message
÷
3
Based on the formula, we may find that big firms may enjoy lower advertising
coast per consumer either because they have lower costs of sending
messages per potential consumer or because they have higher advertising
reach.
Advertising Age estimated global measured advertising expenditure of $1.1bn
in 2008, making Wal-Mart the world's 35th advertiser. There are many ways
Wal-Mart used to advertise such as delivering brochures, advertising on TV
and newspaper and make billboard on the sides of highways. Everyday
millions of people will see the advertisement of Wal-Mart. In America,
approximately 200million people visit Wal-Mart's stores every week, and
almost 95% of households shop there at least once a year.
The last source of economies of scale is research and development.
Because usually the cost of research and development is high, increasing the
scale of company may spread over this cost. The research and development
for companies such as Intel, Microsoft, and GE usually refers to technology.
When Wal-Mart starts its business in a new area, they need to do some
research to find out the culture of the society and habits of local people. For
example, the hypermarket in China is better to offer the infrastructure carrying
traffic to their locations. And in Japan the placement of hypermarkets in malls
which include entertainment venues will be more attractive to customers.
What’s more, they also need to find out the surrounding of its placement. For
example, if access by pubic transportation is limited, then the availability of
parking is necessary. This kind research will help Wal-Mart take advantage of
economies of scale.
Firms understand that there are limitations to economies of scale, so that
beyond a certain size, bigger is no longer better and may even be worse.
Diseconomies of scale may arise for number of reasons. Sometimes it’s
because the labor costs is too high, the spreading of specialized resources is
too thin and bureaucracy.
The diseconomies of scale for Wal-Mart maybe is that its pressure on
competitors, its impact on communities, its treatment of employees and its
dealing with suppliers, to varying degrees, generated badwill for the company.
There are even books, films, and occasional conferences devoted to
degrading Wal-Mart.