1. What is your assessment of Costco’s business model and strategy? How well is Costco’s strategy working?
Costco has a good business strategy and model especially because of the competitive edge the company enjoys with this kind of strategy. Costco’s strategy on ultra-low pricing, low operating costs and its keenness on geographic expansion is greatly responsible for its success. The idea behind the company’s model and strategy is to obtain a high volume of sales by enticing customers with their low prices. Costco’s strategy is working well as depicted from the company’s performance. The company has for a long time been able to cap its markup at 14% for brand-name merchandise. In contrast, its competitors have set their markups between 20 to 50 percent. This scenario shows a significant difference between Costco’s prices and that of its competitors. Although the revenues obtained are low and can barely cover all the operating expenses, several customers are attracted and retained. As such, Costco benefits from the membership fees paid given that it accounts for over 70% of the company’s operating profits.
Additionally, Costco’s strategy performs well because they have narrowed their product selection to 3,600 items that are active. This strategy is quite different from the one practiced by other stores who are likely to deal in approximately 40,000 items and between 125,000 to 150,000 for a Wal-Mart Supercenter. Ideally, Costco’s strategy to limit their items to the sale of active products means that they are able to avoid incidences of goods becoming obsolete thus minimizing losses (Hess, 2010). Moreover, Costco is able to recover their money quickly because they provide fast moving goods like dairy products, cheeses, apparel, seafood, DVDs, and cookware. Costco’s growth strategy was also a big advantage to the company because it was able to reach new markets. For instance, Costco’s move to open four warehouses in the US and two in Japan provided the company with the opportunity to explore new markets and increase its clientele.
2. What recommendations would you make to Costco top management regarding how best to sustain the company’s growth and improve its financial performance.
The company’s management has made a good decision by limiting their products to 3,600 that are active. Furthermore, the move to engage in treasure-hunt merchandising is good especially because Costco is able to gain more consumers by providing attractive deals on big-ticket items. However, the top management can also conduct a survey to find out what the customers really need. Having a small range of product items may be risky for Costco, as they may not be meeting some of the customers’ needs. Therefore, conducting market research is an important step for the top management because the company will be able to sustain its growth, increase its profitability by determining consumer needs, and possibly even identify a market gap in the process (Treacy, 2005).
Besides the use of low pricing, the top management can also focus on retail displays, which may have a considerable impact on their financial performance. According to Treacy (2005), effective retail displays that give products an attractive and well-organized outlook can lure consumers to make a purchase. Consequently, this enhances the growth and profitability of Costco due to an increase in the sales volume. Furthermore, the top management need to develop staff training programs as this will assist in continuously improving employee skills that will ensure proper service delivery and improved skills. Given that growth is part of Costco’s strategy, it is necessary for the management to ensure that the employees have the right expertise to handle new challenges. As such, training employees will enable the top management to maintain the growth of the firm because employees will have the skills required to serve new markets.
3. What are the chief elements of Costco’s strategy? How good is the strategy?
Costco’s strategy involves the elements of ultra-low pricing, product selection, treasure-hunt merchandising and the growth strategy. The strategy is very good because it has assisted Costco have a competitive edge over other industry players. Firstly, the ultra-low pricing has enabled the company obtain a wide membership from its target market. As such, Costco has managed to collect a significant amount of revenue from membership fees making it possible for the company to fund over 70% of its operating expenses. Secondly, product selection is good because it promotes efficiency in the company’s operations. Costco has managed to items like food, soft lines, hardlines, ancillary and effectively make sales from the same as indicated by exhibit 2 in the case study. Moreover, selling a limited range of products helps the company eliminate the difficulties of managing several items thus giving them room to focus on quality service delivery to their clients.
Thirdly, a treasure-hunt special is a good strategy because of its ability to prompt consumers to make immediate purchases. Through offering irresistible deals on major items like sofas, digital pianos, and Movado watches Costco is able to entice customers to impulse buy because they are aware that the items may not be available on their next shopping expedition. Therefore, Costco derives the benefit of making quick sales from this strategy. Finally, the growth strategy is good as it ensures that a business does not stagnate. Costco has been opened in approximately 14 to 34 locations annually thereby making it possible to reach new markets and acquire a wider consumer base.
4. Do you think Jim Sinegal has been an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support can you offer for
these grades? Refer to Figure 2.1 in Chapter 2 in developing your answers.
Yes, I am of the opinion that Jim Sinegal has been an efficient CEO. I would give him a grade of A in the development and execution of Cisco’s strategy. Jim Sinegal was able to achieve this aim in accordance to figure 2.1, which is found in chapter 2. To begin with, Jim came up with a strategic mission, vision, and values for the organization. The strategic mission and vision of Costco was that of low pricing, growth, and treasure-hunt merchandising. The core values devised by Jim relate to the five principles devised by Jim Sinegal. Secondly, Jim has proved himself to be a good leader because he set his objective to be that of gaining a competitive edge over its competitors which would eventually enable the company to increase its consumer base.
Thirdly, the strategy that was crafted was that of dealing in a limited range of goods that are deemed to be active so that Sinegal would ensure that there is efficiency in the activities of Costco. The fourth step undertaken by the CEO of Costco was to implement the strategies devised using various personnel. As such, Sinegal ensures that employees are well-compensated so that they can ensure that the laid down goals are successfully achieved. Finally, Sinegal monitors and evaluates the performance of the strategies implemented by comparing with that of other companies like Sam’s club and even BJ wholesale so that corrective measures can be undertaken in situations where a given strategy does not gives an outcome that is not satisfactory.
5. What core values or business principles has Jim Sinegal stressed at Costco?
Jim Sinegal stressed on five key principles, which are obedience to the law, extending care to Costco’s members, taking care of employees, respecting suppliers and offering rewards to shareholders. According to Jim Sinegal, there is need for full compliance with the law in every community where they carry out their business. This means that Costco has to adhere to antitrust laws, ecological standards, wage laws, respect public officials, as well as their positions and comply with hour and wage laws. Secondly, there is need for the company to look after their members given that they are the main reason Costco is still in business. As such, Costco should provide its members with top-quality products at good prices, assure members of the authenticity of their products, give quality customer service, and give back to the society by way of CSR (Corporate Social Responsibility). The third principle is to look after employees’ interests. In this regard, employees should be given great benefits, competitive wages, career opportunities, provision of work that is challenging and fun as well as a safe working environment. Fourthly, suppliers should be respected since they are partners with Costco. The company needs to honor the commitments it has with suppliers, decline gratuities, and avoid any conflict of interest with suppliers. Finally, the return given to shareholders should be maximized as they are partners to the business.
6. Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful? Why or why not?
Costco’s expansion outside the US has financially been successful even though it has not attained the same level of profitability as seen in the US market. The reason why the expansions are deemed to be successful is because the total revenue earned in Canada and other countries has constantly been increasing. In 2005, a revenue of $3,155 was recorded followed by $4,144 in 2009, $6,271 in 2010 and finally $ 9,991 in 2011. This is evidently a success because of the gradual improvement the company has recorded over the years. Similarly, the total revenue for the Canadian operations has been increasing gradually from $6,732 in 2005 to $14,020 in 2011. Moreover, the number of warehouses established annually has been increasing gradually in countries outside the US thereby resulting in financial success.
7. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?
Costco is performing extremely well from a strategic perspective. Due to the company’s alignment with the right strategies including low pricing, product selection and a growth strategy the company has managed to attract several members. The company attracted very affluent clientele in discount retailing. Actually, individual members had an average income of approximately $75,000 with more than 30% earning more than $100,000 annually. The competitive advantage that Costco has over Sam’s Club is that product selection. Sam’s had adopted the practice of low pricing but did not incorporate that of product selection which promotes efficiency and the ease of managing a company’s products. Another advantage Costco has over Sam’s club is the five basic principles that Jim supported.
The five principles of caring for suppliers, members, and customers, rewarding shareholders and obedience to laws incorporate the interest of various stakeholders. These principles give Costco a competitive edge because the initiatives taken by Sam’s club such as low pricing, sparse decor, and wooden shelves only focus on customers and leave out other stakeholders. Costco’s advantage over BJ Wholesale appears to be that of having a limited range of about 3,600 products as opposed to 7,000 items for Sam’s club. This limited range is advantageous for Costco because of their ability to meet the customer’s demands effectively using goods that are more active. Costco has a winning strategy because they aim to create a gulf against their competitors by charging very low prices. For instance, instead of charging $50 for jeans like was the case in other departmental stores Costco charged $29.99, which would ‘create a riot’ thereby giving them an edge as they are able to attract and retain many customers.
8. Are Costco’s prices too low? Why or why not?
Yes, Costco’s prices are too low. Firstly, the company has eliminated all the historical frills and costs that are associated with conventional retailers and wholesalers. As such, Costco incurs extremely low overhead costs allowing them to charge very low prices. Another example that indicates that Costco’s prices are too low can be seen from the fact that it uses the revenue obtained from membership fees to offset more than 70% of its operating costs. This means that Costco charges very low prices thereby making it difficult for them to sustain their operations in the absence of the membership fees. Furthermore, the idea of creating a gulf between the company and its competitors only means that there was a big difference in the prices of their products showing that the firm charges very low prices so they can benefit from a wide customer base.
9. What do you think of Costco’s compensation practices? Does it surprise you that Costco employees apparently are rather well-compensated?
Costco has very competitive compensation practices. Even so, I am not surprised about the good compensation Costco employees are receiving because this is largely the reason for their success. Costco cannot successfully achieve its strategies like low pricing and growth if the employees are not properly motivated (Doyle, 2005). Jim Sinegal recognizes that paying good wages is the key to a successful business because employees are like the ambassadors of any establishment. Furthermore, employees play a significant role in assisting organizations implement their set goals. Additionally, proper compensation enhances the retention of workers with few cases of employee turnover (Podmorroff, 2005). Therefore, it is not surprising that the employee turnover at Costco is below 6 to 7 percent mainly because of the attractive compensation strategies the company has adopted. In fact, the employees who were interviewed by an ABC reporter confessed that they loved the place and would wish to retire in that company. Moreover, Costco is bent on reducing its costs and it can only achieve this objective by reducing employee turnover through good compensation practices. Usually, employee turnover is expensive hence the need for Costco to avoid such unnecessary expenses at all costs.
Doyle, S. (2005). The manager's pocket guide to motivating employees. Amherst, MA: HRD Press.
Hess, E. D. (2010). Smart growth: Building an enduring business by managing the risks of growth. New York: Columbia Business School Publishing.
Podmoroff, D. (2005). 365 ways to motivate and reward your employees every day-- with little or no money. Ocala, Fla: Atlantic Pub. Group.
Treacy, M. (2005). Double-digit growth: How great companies achieve it-- no matter what. New York: Portfolio.