The tussle within the retail market between Costco and Wal-Mart Stores has occupied public debate for a while now. While it is logical that each of the two leading retail stores has a distinct business model, the debate has made the difference in labor practice and return on investments for investors. The difference between the two retail chains lies in the way how each of them has embraced globalization effect on business models. While Wal-Mart has maintained the traditional linear supply chain, Costco has adopted the globalization favored flat business model, with increased penetration in the global market. The purpose of this paper is to advance the argument that any business that wants to survive must be prepared to go flat. The bottom line is that globalization is real and incessant, regardless of the part of the world the business already operates in. Secondly, the labor market has become competitive more than ever, and paying well to the employees is the epitome of gratitude that an organization can destine to its employees in order to increase their loyalty.
Linear Supply Chain vs. Flat Supply Chain
The traditional business model adopted by Wal-Mart several years ago has been linear, with the company in frantic efforts to reconcile internal process with the processes taking place at their partners and suppliers. However, when Costco came into the picture with a more flattened model, with extraordinary low pricing and highly paid employees, many pundits argued against the model as one that is out to diminish investors. On the other hand, Costco’s approach is the one which tends to take care of its employees and consumers more than its investors (Ouchi 2007). The variance is that it has come up with the ramification of each approach by the two retail stores.
In order to understand the phenomenon that comes with supply chain management, there is a need to comprehend the traditional linear supply chain where companies mainly focuse on issues like lean manufacturing, shorter lead times and just-in-time deliveries. However, the logistical nightmare that has come with the increased globalization of business operations has ensured that many businesses have their supply chain flattened. This has killed the role of many local middle men, low cost of supplies and competitiveness. The latter has given such businesses like Costco the luxury to pay their employees above the market rate and better benefits such as healthcare (Ouchi 2007). While one would argue that the flat supply model has more negative impacts because it does away with the middle men and has ridiculously low return on investments for the investors, it is important to note that high payment and better benefits for employees and low commodity pricing have more than less value in terms of socially responsible investments. A recent study conducted by PWC cited that globalization emerged as the most powerful phenomenon in the world today. It should be noted that Costco’s flat model is in line with the global trend, and that traditional linear model, whether seen as more humane than the flat model, is not sustainable because as it stands, businesses around the globe will go flat and outdo those American businesses that have refused to change. Moreover, latest data suggests that, although, Wal-Mart still has more profit margins, Costco has had more new customers over the past five years.
Labor Needs and Cost
The competition on the labor market is intense in the global businesses. While retail stores like Wal-Mart have consistently remained with their low wage structure for their employees, Costco has adopted a totally different philosophy as far as wages and fringe benefits are concerned. According to analysts, employees may earn nearly equal amount of salary at entry level for both retail stores (Greenhouse, 2005). However, after five years, salaries for Costco employees may even double those of Wal-Mart’s (Greenhouse 2005). This could explain the reason why Costco has the lowest employee turnover in the retail sector, thus, there is benefit from the employee loyalty.
While Wal-Mart makes huge profits at the detriment of customers and employees, the company investors are satisfied with the business model because of high profits, thus, dividends. Ironically, the leading retail store uses more resources in the corporate social responsibilities than Costco. According to Costco Chief Executive, Jim Sinegal, their approach to business is that they return to the society via low prices for consumers and better salaries for employees, unlike their competitors whose focus is on higher profit for investors at the expense of other stakeholders (Greenhouse 2005). In fact, despite low profitability, Costco has experienced, in comparison to that of Wal-Mart’s, the former’s share stock has been consistently more bullish for the last five years. This can explain the shift in the paradigm of investor’s trust and loyalty, considering the long-term target of many investors.
Should the Government Also Go Flat?
Globalization has seen a lot of changes in the government’s regulations on trade. Global trade barriers have continued to fall, with various global trade agreements signed to stimulate local businesses. Government continues to regulate various norms that prescribe and regulate how businesses operate and how foreign institutions conduct their businesses. Moreover, some regulatory agreements and protocols such as the Kyoto protocol have a significant impact on certain businesses in particular regions (Appiah 2006).
Significantly, one of the major roles of governments is to protect the citizens from scrupulous business operations. At the same time, it is the role of the same government to protect businesses that provide utilities to the public, offers employments to the citizens and many other fringe benefits that come with local businesses (Appiah 2006). However, this flattened world of businesses has come with equal measure of challenges to the governments with the dilemma of protecting local middle men and allowing free trade at the same time. There are imminent risks governments going fully flat in the global businesses. First, the government may face socio-political risks of high level of unemployment among its citizens as businesses would be sourcing for labor, supplies and technologies from the global sources rather than local. So, as much as government embraces flat businesses for the corporations that want to operate with flat models, there is a need to understand that government is not a business entity but a watchdog for all entities. Moreover, government is to protect every citizen’s interests, and not the interest of the businesses alone.
In a nutshell, the benefits of flat business models can be enormous but also carry the danger ooof local suppliers losing their businesses. However, there is a possibility of government helping entities to build flat supply chain responsibly. Flat supply chain responsiveness means that the government should ensure the local businesses are supported by subsidies, lower taxation in order to effectively compete with the international suppliers. Thus, it is prudent to conclude that government going flat is efficient for long term businesses. However, this must be tempered with the need to protect local businesses from the onslaught of the international trade. This is largely because the government is directly responsible to all stakeholders, who are citizens, and must protect their rights and interests.