Why Walmart’s Diversification into Healthcare Failed: A Case Study Applying Michael Porter’s Three Essential Tests of Corporate Strategy

This case study evaluates Walmart’s effort to diversify into the U.S. healthcare sector using Porter’s three essential tests for corporate diversification: the attractiveness test, the cost-of-entry test, and the better-off test. Drawing upon recent data and strategic management theory, the paper investigates the misalignment between Walmart’s core competencies and the operational demands of healthcare delivery. While the healthcare sector offered growth potential, Walmart’s approach failed to pass Porter’s Three Essential Tests of corporate strategy and was unsustainable. The case study contributes to corporate strategy discussions by illustrating the risks of unrelated diversification by large conglomerates and the importance of Porter’s three essential tests in analysis corporate diversification strategy.

Introduction

Walmart Inc., globally renowned as the world’s largest retailer by revenue, has a long-standing strategic trajectory characterized by aggressive growth, operational efficiency, and selective diversification. Among its most ambitious strategic experiments was its foray into the U.S. healthcare sector—an initiative that ultimately culminated in a complete withdrawal by 2024 (Yaraghi, 2023; Creswell & Sanger-Katz, 2024; Feuer, 2024). This paper analyzes this diversification initiative through the analytical framework developed by Porter (1987), focusing on the three critical evaluative criteria he outlined for corporate diversification. Central to this analysis is the question: Why did Walmart, despite possessing unrivaled scale, operational capabilities, and consumer access, fail to establish a sustainable competitive advantage in healthcare?

Company Background

Established in 1962 by Sam Walton in Rogers, Arkansas, Walmart has evolved into a retail juggernaut with over 10,500 stores operating across 24 countries, employing more than 2.1 million individuals globally as of 2024. Its ascendancy has been underpinned by a commitment to low-cost leadership, enabled by innovations in logistics, supply chain management, and information systems. Walmart’s competitive advantage is historically rooted in cost minimization, high inventory turnover, vendor partnerships, and a just-in-time supply chain infrastructure that delivers exceptional price value to consumers. In short, Walmart pursues a successful strategy at the business strategy.

Walmart’s corporate strategy—its diversification strategy-reflects a mixed record. The company has enjoyed success in adjacent sectors such as financial services (e.g., Walmart MoneyCard), and in select international markets (e.g., Flipkart in India) (Walmart Inc., 2018). However, failed ventures in Germany and South Korea exposed the limits of Walmart’s ability to replicate its U.S. business model across culturally and institutionally distinct markets (Knorr & Arndt, 2003).

Its healthcare venture represents a notable departure from its traditional domains of retail and logistics. Motivated by long-term macroeconomic trends such as an aging U.S. population, rising healthcare costs, and insufficient access to affordable care, Walmart perceived an opportunity to leverage its extensive retail infrastructure and consumer trust to deliver lower-cost, high-access healthcare solutions. Between 2014 and 2024, Walmart introduced a wide range of healthcare services, including Walmart Health primary care clinics, expanded pharmacy offerings, telehealth initiatives, and insurance partnerships (Walmart Inc., 2023, 2024). The strategic objective was to integrate these services into the daily lives of Walmart customers, effectively transitioning from a retail firm to a hybrid healthcare provider.

Diversification Initiative Overview

Over the course of a decade, Walmart launched multiple initiatives aimed at capturing market share in healthcare delivery. Its Walmart Health clinics, which offered an array of services from primary care to behavioral health, were positioned as affordable, accessible alternatives to traditional healthcare providers. It entered into insurance partnerships, such as the Medicare Advantage collaboration with Clover Health, and invested in telehealth and digital health infrastructure, including the acquisition of health data management capabilities. The expansion of in-store pharmacies and the launch of virtual care platforms were also central to this strategic pivot.

However, despite the breadth of these initiatives, Walmart announced in April 2024 that it would be shuttering all Walmart Health Centers and discontinuing its virtual care business. The company cited mounting operational costs, workforce challenges, and scalability issues as core impediments to success.

Theoretical Framework: Porter’s Diversification Tests

Porter (1987) proposed three critical tests for assessing the strategic validity of corporate diversification: the attractiveness test, the cost-of-entry test, and the better-off test. Each test represents a distinct dimension of strategic fit and value creation potential in diversification contexts.

The Attractiveness Test evaluates whether the target industry possesses favorable structural characteristics conducive to long-term profitability. This typically involves an assessment of market growth, regulatory stability, industry fragmentation, and the intensity of competitive forces. Porter’s Five Forces framework (Porter, 2008) is commonly used to operationalize this test, examining barriers to entry, supplier and buyer power, threat of substitutes, and competitive rivalry.

The Cost-of-Entry Test examines whether the financial, operational, and strategic costs of entering a new industry—whether through organic development or acquisition—are sufficiently low relative to the returns expected. This includes the costs of building new capabilities, complying with regulatory frameworks, acquiring or training specialized personnel, and integrating new systems. High sunk costs or rapidly escalating operational complexity can undermine diversification returns.

The Better-Off Test is the most stringent and strategic of the three. It asks whether the firm’s entry into the new industry generates unique synergies that create additional value for both the new business and the existing core. These synergies may take the form of cost synergies (e.g., shared resources, economies of scale, centralized procurement) or value synergies (e.g., increased revenue through cross-selling, brand enhancement, or innovation). A positive result on this test implies that the whole is greater than the sum of its parts.

Academic literature has engaged with these tests critically. Markides and Williamson (1994) observed that many diversification attempts failed not due to unattractive industries or high entry costs, but because firms overestimated potential synergies. Montgomery and Wernerfelt (1988) emphasized the challenges firms face in leveraging Ricardian rents and unique resources across sectoral boundaries. More recent research, such as that of Teeceet al. (1997), contends that Porter’s framework underestimates the role of dynamic capabilities, path dependency, and emergent strategic learning. Nevertheless, the framework remains a foundational analytical tool in corporate strategy due to its clarity, logical structure, and applicability across industry contexts.

In the case of Walmart, Porter’s tests serve as an apt diagnostic framework. They enable a disaggregated analysis of strategic misalignment: the Attractiveness Test clarifies the structural hurdles in healthcare; the Cost-of-Entry Test reveals the underestimated costs and executional challenges; and the Better-Off Test probes the absence of meaningful synergies. Together, they offer a comprehensive explanation of Walmart’s diversification failure.

Evaluation of Walmart’s Diversification

In applying Porter’s framework to Walmart’s healthcare expansion, each test reveals distinct but interconnected shortcomings that contributed to the initiative’s ultimate failure. The Attractiveness Test highlights systemic barriers and structural inefficiencies that undermined the profitability of the healthcare sector for new entrants. The Cost-of-Entry Test exposes the underestimated financial, operational, and regulatory burdens of building healthcare capabilities from scratch. Most critically, the Better-Off Test illustrates the absence of meaningful synergies between Walmart’s core competencies and the unique demands of healthcare delivery. Together, these tests provide a comprehensive lens for diagnosing Walmart’s strategic misalignment and set the stage for a detailed evaluation of the company’s diversification effort.

Applying the Attractiveness Test through the Five Forces lens reveals that, although the U.S. healthcare sector is a multi-trillion-dollar industry with strong demographic tailwinds, it is structurally challenging for new entrants. The threat of new entrants is constrained by high regulatory barriers, capital intensity, and the necessity of clinical credibility. Supplier power is substantial, as licensed healthcare professionals and pharmaceutical companies wield considerable influence over costs and service quality. Buyer power is amplified by large payers—including government programs like Medicare and Medicaid and consolidated private insurers—who dictate reimbursement levels and influence care standards. The threat of substitutes remains low due to the essential and inelastic nature of healthcare services. However, rivalry is intense, as incumbents such as CVS Health, UnitedHealth Group, and Walgreens Boots Alliance pursue vertical integration and scale advantages. The highly fragmented, politicized, and regulated nature of the healthcare market thus renders it less attractive than it might appear superficially.

Under the Cost-of-Entry Test, Walmart’s entry incurred substantial financial and operational costs. Establishing health centers entailed capital outlays for specialized infrastructure, legal and compliance expenses associated with state-level healthcare regulations, and the recruitment of licensed clinicians—an especially scarce and expensive resource in the post-pandemic labor market. Additionally, integrating health IT systems, achieving HIPAA compliance, and managing clinical quality introduced complexities far beyond Walmart’s typical operations. These costs, many of them non-recoverable, eroded the potential for sustainable profitability and rendered the initiative financially untenable.

The Better-Off Test reveals the critical absence of synergistic value creation. Walmart’s expectation that its consumer reach and brand trust would translate into competitive healthcare offerings proved overly optimistic. Cost synergies—such as leveraging shared infrastructure, administrative systems, and foot traffic—were minimal due to the specialized nature of healthcare service delivery. Clinics required distinct physical setups, workflows, and staffing models, limiting overlap with retail operations. Value synergies—such as enhancing brand equity, increasing customer lifetime value, or bundling healthcare with retail offerings—also failed to materialize. Walmart struggled to generate meaningful consumer trust in its healthcare brand, facing skepticism regarding its clinical credibility. Moreover, patient retention, cross-selling opportunities, and strategic differentiation lagged behind expectations. The distinction between cost and value synergies is analytically significant. Cost synergies are predicated on operational efficiencies, while value synergies are rooted in strategic complementarities that enhance market positioning. Walmart’s initiative failed to deliver either. The healthcare operations neither reduced costs across the enterprise nor introduced new revenue streams that enhanced the firm’s core strategic position. The inability to generate these synergies underscores a fundamental failure of the Better-Off Test.

Diagnosis: Why the Diversification Failed

Walmart’s failure to establish a viable healthcare presence is attributable to multiple, interrelated causes: strategic misjudgment, insufficient domain expertise, and organizational misalignment. A key factor was capability stretch—the mistaken belief that Walmart’s strengths in retail operations, supply chain management, and cost leadership could transfer seamlessly into the highly specialized and regulated domain of healthcare delivery. This stretch strained the organization beyond its core competencies, exposing gaps in clinical governance, patient care delivery, and regulatory compliance. The company underestimated the strategic distance between retailing and healthcare, where competitive advantage is rooted not in logistics or price competition, but in trust, continuity of care, and clinical outcomes. Ultimately, Walmart’s inability to adapt its capabilities to the healthcare context underscores the risks of unrelated diversification without a realistic assessment of strategic fit.

Strategic Implications

This case offers critical insights for students of corporate strategists and executive decision-makers. First, it reaffirms the necessity of rigorous strategic due diligence when evaluating diversification opportunities, particularly in unrelated sectors. Second, it illustrates that apparent market attractiveness must be interrogated through structural analysis, not merely macroeconomic indicators. Third, it emphasizes that competitive advantage is difficult to replicate across domain boundaries, particularly where capabilities are tacit, regulated, and experiential. Fourth, the failure of Walmart’s healthcare experiment exemplifies the limits of scale as a substitute for domain expertise. Finally, the case underscores the enduring relevance of Porter’s theoretical framework as a tool for diagnosing strategic misalignment and guiding corporate strategy formulation.

For students of strategic management, this case presents a valuable opportunity to apply theoretical frameworks to a real-world failure. It challenges students to think critically about the boundary conditions of firm capabilities and the strategic logic of diversification. The exercise of evaluating a large corporation’s misstep using Porter’s framework fosters analytical precision, while simultaneously reinforcing the importance of strategic coherence in cross-sector expansion.

Conclusion

Walmart’s foray into healthcare constitutes a textbook example of the risks associated with unrelated diversification. Despite formidable financial resources, operational infrastructure, and brand equity, Walmart failed to establish competitive viability in a sector misaligned with its core capabilities. Porter’s diversification tests provide a robust, conceptually grounded framework for understanding this failure, offering instructive lessons for both practitioners and scholars. As industry boundaries continue to blur, the need for analytical rigor and strategic coherence in diversification decisions becomes increasingly essential.

Conflict of Interest

Conflict of Interest: The author declares that he does not have any conflicts of interest.