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Article Excerpt
Questionable methods for increasing nominal wages reduce real wages (i.e., buying power) by creating inflation, shortages, lower quality, and long-term unemployment. To increase real wages (i.e., the ability to buy more), economic principles prescribe increasing productivity (i.e., greater output from less input). In contrast, marketing principles prescribes increasing the value of output (i.e., greater customer benefits) through innovation. Beyond increasing real wages, innovation spawns new occupations better matching individuals with skills and providing greater nonmonetary benefits (i.e., job satisfaction). Unfortunately, threatened entrenched incumbents often solicit protectionist legislation claiming negative externalities (e.g., short-term unemployment, lower wages, and burdens on society). Innovation does require labor to move from inferior to superior organizations (i.e., unemployment). However, protectionism only delays and dramatically aggravates the inevitable trauma associated with progress, as worker skills, firm practices, and buyer welfare fall further behind. Recent attacks demonizing Wal-Mart (e.g., the dubious Vlasic pickle claim) epitomize this situation--they are archaic vanilla protectionism, menacing both imperiled consumers and every consumer-driven business.
Key words: Wal-Mart; low-prices; unemployment; wages; benefits; customer-driven orientation; market-based economy; consumer-driven organizations; trade unions; marketing principles; marketing theory; low prices; unemployment; wages; inflation
The Foundation of Marketing Theory
The mission of marketing is an extremely noble one. The marketing function represents consumers (Neal 2002, Shugan 2006) within customer-driven organizations. Marketing theory champions consumer welfare, draws greater attention to consumer wants, and advocates consumerism (i.e., consumer-driven markets) where competitive markets help protect consumers from many powerful organizations (e.g., incumbent business, organized labor, the governing state, and international bodies). Customers should have free choice, and those choices should drive all organizations (e.g., see Levitt 1975, Kohli and Jaworski 1990, Narver and Slater 1990).
Based on a foundation of consumerism, the last several decades have brought remarkable advances in marketing theory. We now better understand competitive response (e.g., Ailawadi et al. 2005, Steenkamp et al. 2005), branding (e.g., Keller and Lehmann 2006), innovation (e.g., Hauser et al. 2006), customer relationships (e.g., Rust and Chung 2006), structural models (e.g., Fornell and Larcker 1981, Chintagunta et al. 2006), product positioning (e.g., Hauser et al. 2006), advance selling (Shugan and Xie 2005), category management (e.g., Borle et al. 2005), and more. However, consumerism is still the foundation of marketing theory.
Marketing scholars assiduously and arduously teach prospective students of business and not-for-profit organizations to earn their revenue by helping their customer--the buyer (e.g., see Drucker 1954, Keith 1960, Levitt 1975). We teach that the buyer (often, the consumer) should be the focus of every organization. We strongly advocate long-term customer relationships and building brand equity (e.g., Rust and Chung 2006) over short-term quick-profit strategies involving misrepresentation, collusion, and unethical behavior. Marketing principles advocate laborious strategies for earning profits by providing the buyer with greater value (e.g., Cressman 1999) made possible by, for example, creating incentives for innovation (Toubia 2006), exploiting advances in technology (Shugan 2004, Narasimhan et al. 2006, Friedman 2006), understanding how brand reputation fosters quality innovations (Mitra and Golder 2006), using social relationship marketing programs (Palmatier et al. 2006), getting better returns from advertising (Sriram et al. 2006), and employing rebates (Bruce et al. 2006). Fundamental to these principles is free consumer choice--the right to choose freely the provider that best meets consumer needs, using the power of competitive markets.
Successfully advocating and implementing (e.g., see Griffin and R. Hauser 1993) a customer-driven orientation is a difficult task (Jaworski and Kohli 1993). Many organizations seek advantage over competitors through obstructive regulation (e.g., see Tybout 2000), coercion (e.g., see Phillips 2002), and force (e.g., see Drew 1996). Many large corporations want returns for their investments and research expenses, regardless of the costs to consumers. Many small businesses want rewards for their risky endeavors and their personal investments (e.g., time, money, commitment, reputation), regardless of the costs for consumers. Many trade unions want union dues, monopoly power over their trade, and control over who will get jobs, regardless of the cost to consumers. The governing state often wants more taxes for providing federal, state, and local expansion, regardless of the costs to consumers. These organizations can organize, collude, and exert relentless political or coercive force in their own best interests. Although these organizations should have free speech, consumer markets should dictate who survives and prospers.
Consumers, regrettably, seldom have the time, energy, or resources of these powerful organizations. Without competitive markets and customer-driven organizations, standards of living would dramatically decline. Competition forces all organizations to concede to consumer demands. Competition rewards or punishes all organizations according to the value consumers place on their output. Competition among providers ensures consumer satisfaction (e.g., see Mittal et al. 2005). The marketing function facilitates competition by encouraging organizations to focus on consumers and continuously adapt to changing market conditions (Slater and Narver 1995). Otherwise, we get waste, inefficiency, and poverty, and consumers suffer.
If people were extremely smart, perfectly informed, and superb information processors, competitive markets would be unnecessary. When people are constrained on these dimensions, competitive markets allow the complex assimilation of the knowledge and expertise of many individuals with their own private knowledge who are willing to bet their own assets on their opinions (Shugan 2006). For example, when selling a house, neither the buyer nor seller knows the market price of the house. The joint knowledge of each reveals a possible market price superior to the knowledge of either. Markets reflect the knowledge of myriad buyers and sellers.
Parenthetically, there are also substantial undesirable social consequences from stripping consumers of decision-making authority. Rewarding inefficient organizations that produce unwanted output or fail to adapt to changing markets not only punishes efficient adapting organizations but also eventually produces more catastrophic outcomes for the employees of inefficient organizations. For example, consider the point when centrally planned socialist economies (and other nonmarket-based systems) ultimately collapsed under the weight of shortages, government inefficiency, and lower standards of living, if not starvation (Sen 1981). Unrealistic promises and years of subsidized inefficiencies inevitably produced an abhorrent transition period involving unacceptable suffering, violence, and poverty. Despite the ultimate potential of prosperity, the transition requires brutal sacrifices (Kornai 2000) as organizations acquire needed expertise, start innovating, and become efficient. Disastrous massive unemployment is one likely consequence. Forcing above-market wages has caused massive unemployment and maintained great depressions at many times in several countries (Temin 1990).
The next section warns that some recent vicious attacks against Wal-Mart are archaic vanilla protectionism, menacing every customer-driven business. These attacks ignore the laws of supply and demand. They threaten competition, private property, consumerism, and other absolute requisites of a customer-driven market-based economy, if not freedom itself. As such, these attacks threaten the consumer and warrant a vigorous defense by marketing scholars who can clearly articulate the need to protect consumers by allowing, if not encouraging, competition.
Attacks on the Consumer
Many past exemplars of a customer-driven orientation have vanished when myopic new management sometimes discounts the future by burning the brand name or failing to adapt to changing markets. At least until 2007, Wal-Mart was an exemplar of a customer-driven organization embracing basic marketing principles. As evidence, observe that given a choice, many consumers choose Wal-Mart. For example, Singh et al. (2006) show that Wal-Mart, after entering a new market, captured 17% of the sales of one previously popular incumbent supermarket. However, at least one of generic attack against Wal-Mart threatens to undermine basic marketing principles. Wal-Mart critics argue that Wal-Mart should ignore the interests of consumers by subsidizing supply chain inefficiency and mitigating competition with less efficient retailers. For example, in July 2000, Germany's Cartel Office ordered Wal-Mart to raise her prices or face stiff fines (Andrews 2000). To be fair, the Cartel Office also ordered competitors Aldi and Lidl food chains to raise prices. These competitors had matched or undercut Wal-Mart prices to thwart Wal-Mart's entry into the German market. Hence, with only a 10.9% market share of the German market (Beck 2000) in a highly competitive market with other very large retailers, the German state ordered Wal-Mart to raise her prices. Although the German state could tell a predatory or limit pricing story, there was no argument that either Wal-Mart ever attempted predatory pricing or that predatory pricing is a viable rational strategy. For more, see McGee (1958) for the classic argument for the futility of predatory pricing; see Lott (1999) for a recent refutation of predatory pricing; see Hawker (1995) for how courts ultimately rejected predatory accusations against Wal-Mart in U.S. courts. In fact, the mere threat of entry can be sufficient to compel near competitive pricing (i.e., contestable market theory).
To make matters worse, the German state mandated limited shopping hours (Heller 2004) and supported trade union obstruction (Clardy 1998). In early 2006, Wal-Mart withdrew from the hostile German market, probably catalyzed by incredulity and apparently blatant mismanagement of that hostility (Linebaugh 2006).
Parenthetically, it is interesting to note that the primary advantage (at least in productivity) that the booming 2006 U.S. economy enjoyed over the respective more stagnant German economy, with Germany's much higher levels of unemployment and slower growth in gross national product, lies almost exclusively in the retail and wholesale subsectors (Blanchard 2004). Moreover, the trend in Germany now favors giving German organizations more flexibility in compensation and employment practices (Blanchard 2004), allowing them to mimic Wal-Mart's more efficient workforce management strategy (e.g., cross-training). Perhaps, Wal-Mart's unpropitious failure in Germany may ironically help the United States maintain a superior competitive position and standard of living over Europe, at least, with respect to Germany. Here, Wal-Mart may be the United State's primary competitive advantage.
The next section identifies the culprits behind the direct attacks on Wal-Mart and the indirect attacks on consumers.
Direct Attacks on Wal-Mart, Indirect Attacks on Consumers
Although Wal-Mart has won most of her battles in the competitive market by offering buyers better value, Wal-Mart faces increasing political opposition from powerful entrenched interests. For example, some urban areas in the United States resisted new Wal-Mart stores and Wal-Mart has abandoned two major international markets, Germany and Korea (Bodamer 2006). Opposition has come from large trade unions seeking to unionize Wal-Mart employees (e.g., Kinzer 2004), local governments seeking protection for extant business (Parsons 2006), interventionists (perhaps, anti-business) groups demonizing Wal-Mart to attack free markets (Bishop 2006) and higher-income consumers who shop elsewhere. Unfortunately, political and hostile attacks from these special interest groups have extracted their toll. According to Merrill Lynch, Wal-Mart's productivity in 2006 fell to 70.5% down from a high of 95.6% in 2001 (Bodamer 2006).
Trade unions are responsible for the most vehement attacks on Wal-Mart and claim that Wal-Mart should provide their employees with more compensation. Unionization of Wal-Mart is critical to union survival given historic declines in unionized industries (e.g., steel, automobiles, airlines, textiles, trucking, mining), probably aggravated by high labor costs. The 2005 president of the AFL-CIO, John J. Sweeney states: "We're confident that we are going to be able to organize Wal-Mart (Irwin 2005, p. 1)." After Wal-Mart employees repeatedly rejected unionization (Lee 1994, Gaynor 2005), trade unions changed their tactics.
To coerce Wal-Mart, trade unions are attempting to increase her cost of business by increasing the minimum wage, increasing mandatory overtime pay, mandating health care benefits and supporting ambiguous rules that would force retailers to defend their compensation plans in court (Rankin 2005, Reda 2006).
The issue is highly political. Pollster John Zogby found that 76% of people shopping weekly at Wal-Mart voted for George Bush, while former presidential candidate John Kerry won 80% of those not shopping at Wal-Mart (Jenkins 2006). Ms. Hillary R. Clinton (once a Wal-Mart board member) and other members of the Democratic Party are taking anti-Wal-Mart positions (Jenkins 2006). Democratic senator Barack Obama of Illinois and former Democratic vice-presidential candidate John Edwards are publicly involved in protests against Wal-Mart (Birchall 2006a).
Sadly, politics are certainly interfering with (and might prevent) scientific inquiry into the facts and the legitimacy of various arguments against Wal-Mart. Most political arguments are shallow and merely advocate transferring wealth from relatively low-income consumers, shopping at Wal-Mart, to trade unions via higher consumer prices. Given that Wal-Mart probably sets consumer prices at near optimum levels, higher labor costs would certainly require consumer price increases, a loss of profit, and a dramatic loss in market share, as Wal-Mart would need to close marginal stores, or...
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