Sunday, August 27, 2006

Shallow Ghemawat

Despite having had his Business Strategy textbook in my possession for quite some time I never bothered to read it. Reason? First, strategy is like macroeconomics: it can give you a framework at best, not the tools. There are no tools. And without tools you are left floundering with four P's, 5 C's thirteen Z's and what not. Secondly, I amkind of myopic with my readings: what I am not likely to apply pronto, I procrastinate reading. Reason? I have too much to catch up with in real-time (*cringes*, sorry for being cliched.)

Anyway, I do read Harvard Business Working Knowledge regularly and I came across the article The Real Wal-Mart Effect by Ghemawat. I am intrigued by the larger consequences of Wal*Mart type mass retailing for the Indian economy and so I read with great interest.

I was disappointed.

If you go through the article you find Ghemawat in praise of Wal*Mart. You find him saying things like
"..questioning whether Wal-Mart's overall economic impact has been positive or negative reflects a failure to engage properly with the data."

And then he proceeds to "engage the data". In the manner of a 6th grader newly introduced to ratios and proportions.
"Thus, juxtaposing these customer savings against the estimate cited by Fishman and others that Wal-Mart destroyed 2,500 jobs (on a net basis) in 2005 yields customer savings of more than $7 million per year for each job lost."

"Wal-Mart still accounts for less than 10 percent of total nonautomotive retail sales in the United States"

And, lastly,
Wal-Mart operates 2-1/2 times as much selling space per inhabitant in the poorest one-third of states as in the richest one-third. And within these states, it focuses on poorer districts and consumers. Without Wal-Mart, therefore, the rural poor in particular would pay several percentage points more for the food and nonfood merchandise that—after housing—is their second-largest household expense.

For an HBS professor, of no less a subject than Business Administration itself, I cannot believe the way he has slapped this unintelligent data on me.


I mean, think about it, people!

1. The US$ 7 mil of savings that are caluclated have no meaning. Wal*Mart's efficiency does not come from optimizing value creation. It's not like their shampoos have better a detergent base that costs less. Wal*Mart cuts corners. All of them. (1) It doesn't pay healthcare to it's employees, throttles unions and pay packages (2) It is sending logistics and transportation industry into a decline (3) It makes its suppliers (P&G, etc.) cut corners (4) It charges more (not less) where there is no competition.

The loser, in the end, is not the citizen as a consumer, but the citizen as a producer. The average truck driver, the P&G factory worker, even the Wal*Mart worker: they all earn less because of Wal*Mart.

2. Only 10% of non-automotive sales? Only??? What in the world is that supposed to mean?

3. In poorer parts of any country, land is cheaper. So Wal*Mart builds bigger stores. In the poorer parts, there are fewer, less competitive stores, a.k.a. Wal*Mart competition. So Wal*Mart can move in, slash a few prices, drive the competition out of business, and hike prices again. Really, it has happened [citation needed though]. It is well known that Wal*Mart sports higher prices in places where it has less competition. One and one makes two, right?

Apparently not. For Professor Ghemawat at least. Can someone please argue in his favor? I want to read his book without a bias against him.

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