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Planning and Decision-Making: Cost Leadership and Walmart
The objective of this study is to examine the role that cost leadership plays in planning
and decision-making. Companies globally seek methods and strategies to help them stay
sustainable and remain competitive. Cost leadership is one method used and is the focus of this
study. This study will review the literature on cost leadership and examine how Walmart
implements cost leadership in its business strategy and operations. Research indicates that cost
leadership is a strategy used by companies to remain competitive by outperforming competitors
and offering services or products at the lowest cost (Blocher et al., 2021). The cost leader realizes
sustainable profits at lower prices, which helps limit the ability of competition to grow (Blocher
et al., 2021). The cost leader generally has a reasonably large market share and avoids niche or
segment markets; instead, the cost leader uses its price advantage to attract a large percentage of
the market (Blocher et al., 2021). Cost leaders may focus entirely on reducing costs to ensure a
price and cost advantage (Blocher et al., 2021). The following section will examine cost
leadership, followed by examining cost leadership at Walmart, a multinational retail organization
(Nilufer, 2020). The writer chose Walmart because they previously worked for the company and
saw first-hand how it operates, making it a suitable choice for the analysis.
Cost Leadership
Companies must seek methods to overcome the competition (Farida & Setiawan, 2022;
Islami et al., 2020). Companies can realize a competitive advantage from their strategic choices,
ensuring they acquire market opportunities (Farida & Setiawan, 2022). A competitive strategy is
generally developed to determine the company's positioning of its services or products, focusing
on increasing profits (Farida & Setiawan, 2022). Many companies utilize the cost leadership
strategy (Islami et al., 2020). Cost leadership has been described as "the holy grail" to ensure an
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organization's sustainability and long-term success (Jerab & Mabrouk, 2023, p. 1). Cost
leadership can be established through various methods, including (1) bulk-ordering discounts, (2)
reduced costs in ordering, (3) lowering costs of transportation, and (4) optimizing ordering runs
(Roy & Roy, 2024). Bulk ordering discounts involve ordering products in large quantities, which
enables the business to negotiate lower prices from its suppliers since suppliers tend to offer
discounts for larger orders (Khan, 2019; Roy & Roy, 2024). Reduced ordering costs can be
achieved by making fewer orders, which reduces the processing and administrative costs and
results in cost savings (Roy & Roy, 2024). When carrying costs are lower, including handling,
storage, and insurance, a company can reduce the costs of holding inventory and transportation
(Roy & Roy, 2024). Finally, optimized production runs for companies producing their products
ensure optimization (Roy & Roy, 2024).
Cost leadership strategy supports enhanced productivity, price competitiveness, growth in
market share, economics of scale, allocation of resources, pressuring competitors, long-term
sustainability, and, importantly, the perception of customers (Jerab & Mabrouk, 2023). When a
cost leader is successful, it gains a positive reputation among consumers and in the market. It is
viewed as providing value for money, resulting in repeat business and customer loyalty. The
primary internal factors arising from cost leadership include innovation, operational efficiency,
commitment of employees, a culture of cost control, and adaptability (Jerab & Mabrouk, 2023).
The primary external factors arising from cost leadership include the market dynamics
such as competition, compliance, and regulation, such as adherence to labor laws and
environmental standards, relationships with suppliers to acquire low-cost products, and meeting
the expectations of customers, supported with advances in technologies (Jerab & Mabrouk,
2023). Cost leadership is focused on improvement continuously supported by ongoing market
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research, flexibility, planning for various scenarios to anticipate any changes in the market, and
building strategic alliances to enhance cost leadership. The cost leadership strategy is a dynamic
and ever-evolving process and requires a culture of innovation, adaptability, and efficiency as
customer preferences and market conditions are monitored (Jerab & Mabrouk, 2023). The cost
leadership strategy is based on Porter's Generic Strategy, which lists the sources of competitive
advantage to include low cost, uniqueness, and a strategy focused on lower cost and
differentiation (Ali & Anwar, 2021). The following figure shows Porter's Generic Strategy.
Figure 1.
Porter's Generic Strategy
Source: Ali and Anwar (2021)
The above figure shows that the best cost strategy focuses on the target market (Ali & Anwar,
2021). Porter held that the three strategies are generic since different businesses will apply them
differently, but each strategy provides a direct means to achieve a competitive advantage (Ali &
Anwar, 2021).
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Walmart's Cost Leadership Strategy
Walmart was founded in 1962 by its owner, Sam Walton, and its headquarters is in
Bentonville, Arkansas (Nilufer, 2020). Walmart has approximately 11,500 stores globally and
employs more than two million individuals (Nilufer, 2020). The company's mission is "to help
people save money so they can live better" (Nilufer, 2020, p. 10). Walmart is the top retail
organization globally and strictly focuses on a low-cost strategy realized via the company's
supply chain management (Nilufer, 2020). Walmart's business strategy and financial decisions
are centered on cost leadership (Roy & Roy, 2024). A critical part of cost leadership is effectively
controlling costs (Roy & Roy, 2024). Walmart's inventory policy is very stringent, meaning
suppliers bear the costs associated with holding inventory (Nilufer, 2020).
Walmart also has strict sustainability principles that benefit its cost leadership strategy
(Nilufer, 2020). The company is focused on waste reduction, which saves packaging costs and
makes the products lighter for transport, thus saving transportation costs and reducing the needed
shelf space (Nilufer, 2020). Research has shown that companies are more productive and can
only realize lower costs when controlling raw materials, input costs, and labor (Nilufer, 2020).
Walmart's everyday low-price strategy means it can consistently offer products lower than its
competitors, reducing customer uncertainty (Nilufer, 2020). Walmart has established itself as the
foremost authority in offering products at competitive prices, which is the primary factor in cost
leadership (Roy & Roy, 2024). In 2017, Walmart saved more than $485 billion due to its cost-
reduction strategy (Roy & Roy, 2024). Walmart negotiates aggressively with manufacturers to
acquire favorable deals and passes those savings on to the company's customers (Roy & Roy,
2024). The company also uses the Omnichannel model that integrates digital and physical
components of its retail business using efficient supply chain management and competitive
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pricing strategies to achieve customer satisfaction (Roy & Roy, 2024). Walmart realizes sales
comparable to significant global retailers, such as Home Depot (Roy & Roy, 2024). The
company minimizes labor costs due to workforce optimization, which depends on each store's
specific demands (Roy & Roy, 2024). The efficient management of staffing levels helps the
company maximize productivity (Roy & Roy, 2024).
A low-cost strategy, such as that used by Walmart, emphasizes standardized products
available for price-sensitive consumers at a low cost and lower than the prices of competition
(Islami et al., 2020). Walmart has achieved its low-cost strategy and has risen above the
competition. Customers know that when they shop at Walmart, the prices are lower than their
competitors. Although competitors may have sales and offer prices that are lower from time to
time, Walmart's customers know they can achieve a lower overall cost by shopping at Walmart.
Walmart is different from other companies that once realized a monopoly raises their prices;
instead, Walmart uses its monopoly to institute price reductions (Chen & Zhang, 2023). Using
integration both up and downstream in the supply chain, Walmart realizes a competitive
advantage over its competition, benefiting its suppliers and consumers (Chen & Zhang, 2023).
Conclusion
This study examined cost leadership's role in planning and decision-making, explicitly
focusing on Walmart. Walmart's cost leadership strategy aligns with the literature on cost
leadership because it emphasizes lowering consumer costs by implementing specific strategies,
including waste reduction and savings on packaging and transportation costs. In addition,
Walmart aggressively negotiates with its suppliers to obtain the best price, which is supported by
bulk purchasing of products, which enables suppliers to provide lower prices. Additionally,
Walmart keeps a strict inventory policy that lowers its overhead costs. The result is that Walmart
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can offer lower prices than its competitors, which gives the company an enormous competitive
advantage. Lower prices and reduced price uncertainty result in satisfied customers returning to
the company to make future purchases. Although other companies may offer sales on products,
the consistency of low prices at Walmart gives it a competitive advantage. Walmart focuses on
internal factors, such as labor and productivity, while also focusing on ordering and
transportation to reduce costs for price-sensitive consumers. Heightened productivity due to how
Walmart optimizes its labor force also contributes to its ability to maintain lower costs than its
competitors. This study has shown that Walmart's cost leadership strategies are effective for its
business operations and ensure that customers return to make repeated purchases. Although
Walmart sells its products at lower prices, it still realizes an enormous profit year-over-year due
to its savings in ordering, inventory, labor, transportation, and reduced shelf space.
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