• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economies of Scale: Wal-Mart. Economies of scale means declining average cost when volume increases.

Extracts from this document...

Introduction

Economies of Scale: Wal-Mart Economies of scale means declining average cost when volume increases. When the marginal cost is less than average cost, there are economies of scale. For example, an IT company spends a huge fixed cost to develop software and marginal cost of producing a CD compare with the fixed cost can be considered as small and unimportant, so before capacity constraints kick in, the average cost will decline as fixed cost are spread over lager volumes. Economies of scope refers to cost savings when different goods or services are produced "under one roof". For example, there are two products: A and B. If the cost of producing A and B together is smaller than producing them separately we can say there are economies of scope. Here, we use Wal-Mart as an example to explain the sources of economies of scale and diseconomies of scale. The most common source of economies of scale is the spreading of fixed costs over an ever-greater volume of output. Fixed costs arise when there are indivisibilities in the production process. ...read more.

Middle

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. ...read more.

Conclusion

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. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Case Studies and Analysis section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Case Studies and Analysis essays

  1. Proctor & Gamble, Inc. (Scope Case)

    Threats * Competition (especially Plax and Listerine) * Maturing mouthwash market * Easy to duplicate (cosmetic status (no seals)) The biggest threat to Scope is the increasing competition from Plax and Listerine, who are growing faster than Scope in the industry.

  2. The Diversity of Distribution Channels in the Retailing Industry

    Distribution of e-retail products and services E-retail is shopping online where customers can by products and service over the internet, Tesco also sell the products online at http://www.tesco.com/ , normally Tesco workers assemble orders in store and some products are assembled in special warehouses using scanners and conveyor belts.

  1. NETFLIX CUSTOMERS SATISFACTION

    Jevons (2001) ?rgues th?t there is ? link between customer satisfaction ?nd fin?nci?l perform?nce of the firm. He mentions th?t customer satisfaction ?nd loy?lty ?re vit?l to the fin?nci?l success of the firm. He focuses on customer's repe?t purch?se beh?vior th?t is triggered by m?rketer's ?ctivities.

  2. PEST is a planning tool which is used by a business to evaluate and ...

    This PEST factor will affect Ginsters as it could affect their transportation of their goods this is because if it cold and wet the roads may be icy Ginsters will be unable to transport their goods across the country. This is because it will be dangerous for their van drivers

  1. The Impact of Migration on the Reduction of Poverty

    Lack of employment opportunities in the home country coupled with the lure of earning a higher income in the developed countries are the twin factors that prompt migration. This is explained in the statistics of the United Nations Population Fund (2004)

  2. Disneyland and M&S. I am going to investigate customer service in two separate ...

    If the employees weren't trained correctly in their specific areas of work then this would also decrease their level of customer service provided which in turn would have negative effects on Disney. Internal suppliers must be treated with a high level of customer service, this would be vital to the

  1. Unit 32 P3 explain how the developments in the consumer market have impacted on ...

    Morrison?s and Tesco have around ten or even more tills and in Tesco promises that there queue will never be longer than two people, in order for them to achieve this they have multiple tills and good staffing, the importance of having good staffing is so that they can operate

  2. Competitive advantage - Definition and Examples of Wal-Mart and Apple

    you can always reach their customer center with a friendly well-trained representative. The order process is very easy, taking only a few minutes. For example, when you go to apple store to buy its products, the system will email your receipt automatically after your purchase.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work