BUSN 620 Interactive Assignment Chapter 5

Interactive Assignment Chapter 5

The Competitive Advantage of a Low-Cost Provider Strategy


Walmart has achieved a very substantial cost and pricing advantage over rival supermarket chains by both revamping portions of the grocery retailing value chain and by outmanaging its rivals in efficiently performing various value chain activities. Its cost advantage stems from a series of initiatives and practices. Review the Low-Cost Provider Strategies section in Chapter 5, as well as Concepts & Connections 5.1. These materials will help you understand major avenues for achieving competitive advantage based on lower costs.

In this exercise, please read the following overview and answer the questions that follow.

Concepts & Connections 5.1 describes Walmart's broad approach to managing its value chain in the retail grocery portion of its business to achieve a dramatic cost advantage over rival supermarket chains and become the world's biggest grocery retailer.

In employing a low-cost provider strategy, a company must do a better job than rivals of cost-effectively managing internal activities and/or it must find innovative ways to eliminate or bypass cost-producing activities. Low-cost provider strategies work particularly well when price competition is strong and the products of rival sellers are very weakly differentiated. Other conditions favoring a low-cost provider strategy are when supplies are readily available from eager sellers, when there are not many ways to differentiate that have value to buyers, when the majority of industry sales are made to a few large buyers, when buyer switching costs are low, and when industry newcomers are likely to use a low introductory price to build market share.

Sources for Concepts and Connections 5.1: www.walmart.com; and Marco Iansiti and Roy Levien, "Strategy as Ecology," Harvard Business Review82, no. 3 (March 2004), p. 70; and Clare O'Connor, "Walmart vs. Amazon: World's Biggest E-Commerce Battle Could Boil Down to Vegetables,"Forbes Online, March 2014.

1.

Walmart has used its low-cost advantage to achieve success in the supermarket industry by

underpricing rivals to attract price-sensitive buyers.

offering large promotional discounts instead of everyday value prices.

refraining from using price cuts to steal sales away from rivals and avoid price wars.

charging a price roughly equal to those of lower-priced rivals.

offering differentiated merchandise at reasonable prices.

2.

Walmart's low-cost advantage results primarily from its ability to

do a better job than rivals in performing value chain activities cost efficiently.

pressure suppliers for deep discounts.

use advanced production technology and design.

reduce handling and shipping by having suppliers locate their plants close to company's facilities.

remain alert to the cost advantages of vertical integration.

3.

Walmart has been particularly effective in managing which of the following types of cost drivers?

learning and experience curve effects, employee incentives, bargaining power, and production technology

advanced production technology, vertical integration, bargaining power, and input costs

input costs, communication and information technology, production technology, and vertical integration

supply chain efficiencies, input costs, communication and information technology, and bargaining power

communication and information technology, production technology, outsourcing, and incentive systems

4.

A low-cost provider strategy is appropriate for use in the supermarket industry for all of the following reasons EXCEPT

most buyers use the product in the same ways.

price competition among rival sellers is vigorous.

buyers incur low costs in switching their purchase from one seller to another.

consumer buyers have significant power to bargain down prices.

there are few ways to achieve product differentiation that have value to buyers.

5.

In what way, if any, has Walmart failed to some degree in the execution of its low-cost provider strategy?

Walmart has cut prices by more than its unit cost advantage.

Walmart has failed to emphasize avenues of cost advantages that can be kept proprietary.

Walmart has not failed in the execution of its low-cost provider strategy.

Walmart has ignored innovations and cost-saving technological breakthroughs.

Walmart has become too fixated on cost reduction and ignoring increased buyer interest in added features.