Economies of Scale and Competitive Advantage: A Case Study of Walmart

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Economy of scale is a concept which highlights the savings in cost that are incurred owing to
the higher production levels. This is quite straightforward considering higher production
would imply a higher ordering quantity from the supplier which typically would imply higher
discount. Also, if the ordering quantities are higher, then it may be economical to source the
relevant supplies from foreign suppliers (Mankiw, Mankiw & Taylor, 2015). Besides, the
fixed costs would remain the same but per unit fixed cost would become lower for the
company as the output has increased. Owing to decrease of per unit variable cost and fixed
cost, there is a decrease in the per unit total cost which effectively leads to savings for the
companies and hence allows them to gain competitive advantage over their peers (Nicholson
& Snyder, 2015).
The above concept has high relevance in the retail sector particularly for companies like
Walmart, which are able to gain a competitive edge over the competitors on account of lower
prices on an everyday basis. In this industry, the prices at which the goods are sold is pivotal
for retention of customers and to maximise the market share. As a result, this industry in
general experiences a high concentration and is not very fragmented (Nicholson & Snyder,
2015). In case of Walmart, economies of scale tend to offer competitive advantage for the
company since the smaller competitors are not able to match the prices offered. Walmart has
about 5000 stores worldwide and therefore has significant bargaining power when it comes to
suppliers. The company is able to get the best prices which the other competitors would find
hard to obtain from the suppliers owing to lower order quantity (Morningstar, nd).
Additionally, costs are also saved by Walmart with regards to product distribution which
further adds to savings. The end result is that it is able to offer a price which most
competitors are not able to match and as a result, it is able to build a sustainable competitive
advantage (Nicholson & Snyder, 2015). This is because, for matching the price, another
retailer should have the scale of operations of Walmart but for the same the competitors
would have to lower their prices and sell their products at losses. It would not be possible for
the competitors to sustain this price war where Walmart would emerge as the winner.
Competitors like Costco have been able to survive by cutting their margins to half in
comparison to profit margins of Walmart (Alden, 2012).
Thus, based on the above discussion, it is appropriate to conclude that a key role in
domination of Walmart is played by economies of scale which tends to act as a source of
competitive advantage. It is noteworthy that the role of economies of scale is not limited only