Costco Wholesale Corporation - Essay Example

 Case Study on Table of Contents Case Study on Table of Contents 2 Introduction 3 Question 1 4 Question 2 4 Question 3 6 Question 4 6 Question 5 7 Question 6 8 Question 7 8 Question 8 9 Question 9 10 Question 10 11 Conclusion 13 References 14 Introduction Costco Wholesale Corporation had started its business operations in the year 1983 in Seattle at Washington. From 2000 to 2011, Costco has shown remarkable growth in sales and has become the third biggest trader in the United States and eighth biggest trader internationally. In the list of Fortune 500, Costco’s name is being counted in the 25th biggest organization as of the year 2010. The huge success towards the immense growth of Costco is due to its business strategies. In any market and at any situation, Costco implements the right strategy to progress. Even in the uncertain economic condition of 2010, Costco’s sales was 76.3 billion USD which was 9% more compared to 2009 (69.9 billion USD). Costco had tackled the recent financial crisis very effectively and had strong financial position at that time. The case will analyze the effectiveness of Costco’s strategy in achieving huge success in the retail industry. Because of the effective strategy, at present Costco has become one of the leading players and a strong competitor in the market of the USA. The basic assumption of this case study is to evaluate if the strategy of Costco is operative or not (Thomson Reuters, 2010). Question 1 What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco has unique business model as compared to other competitors and it endeavors to bring on certain new aspects in the retail field. The wholesale risk-taking capability has incessantly reinvented Costco and provided the organization a competitive advantage. By the durable perseverance on the highest superiority to earn revenue, Costco has certainly gained the faith of the associates. The faith and status of Costco has permitted the company to enlarge its business. Besides, the wholesale consumer products have also contributed to the success of Costco. Costco’s business model was made on the basis of minimizing the costs and improving the care for the customers and employees (Llopis, 2011). Question 2 What are the chief elements of Costco’s strategy? How good is the strategy? What generic strategy is Costco pursuing? From the case of Costco’s strategy, six elements can be identified which are: 1. Immigrant Perspective: Costco always tries to stay positive towards the cultural perception by incessantly viewing and grabbing opportunities which are ignored by other organizations. At times, other organizations are reluctant to grab those opportunities when the market condition is not in favor of them. 2. Circular Visualization: Costco had visualized the economic recession and was aware about the changes in retail sector. When Wal-Mart’s cost leadership strategy forced numerous retail companies to make business relationships, Costco’s circular visualization had helped the company to reorganize a new retail distribution channel aimed at providing value to its business associates by constant innovation. 3. Passion towards Innovation: Costco is very much passionate about innovation which has helped to develop community based and team-oriented method aimed at new type of business model. 4. Entrepreneurial Spirit: To certain extent, Costco’s business leadership is the impact of its entrepreneurial spirit. Costco functioned on the warehouse grounds and realized the specific requirements of their business associates. Costco tries to maintain the purchasing experience of the customers to be different, active and better from others and thus it follows innovative marketing approach in their business model. 5. Function with Broad Determination: Costco seeks to provide the requirements of the stakeholders sensibly. Costco is very much careful about hearing, learning and applying the thoughts of its business associates and dealers. The company also shares thoughts with their business companions to gain significant results. 6. Hold a Cultural Pledge: Costco promises to provide cultural experience to consumers every time they walk into Costco’s warehouse location. Costco tries to be honest, reliable and truthful about its pledge towards customers. Source: (Llopis, 2011). Question 3 Do you think Jim Sinegal is 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? The CEO of Costco, Jim Sinegal has made great contributions towards the achievements of Costco. He has insistently polished the business model of Costco. The strategies taken by Jim Sinegal were very effective for the company and it is one of the key reasons for the success of Costco (Thompson, 2008) & (Thomson Reuters, 2010). Jim Sinegal offers its business associates with specialized commercial accounts, banking facilities, financial planning and health planning among others. Thus, they (business associates) have no reason to do business with other companies apart from Costco. Though Wal-Mart tries to maintain expansive supply chain and distribution system internationally, Jim’s good strategy lets it to leave behind Wal-Mart in multiple ways. The major reason of Costco’s success is the entrepreneurial capability of Jim Sinegal. His innovative strategies have continuously benefitted the company, the dealers and the business associates. The entrepreneurial spirit of Costco has become a standard for Costco’s business model. Question 4 How well is Costco performing from a financial perspective?  The effectiveness of Costco’s strategy can be seen by the strong financial performance. In the year 2010, Costco had spent almost 1.1 billion USD for the manufacturing and the foundation of new warehouses as well as modernization of existing outlets. Costco had opened 14 new divisions in 2010, and it has 582 warehouses internationally, out of which 425 is satiated in the USA. In 2010, the total sales of Costco was 76, 255 million USD which was 9.1% more than 2009 i.e. 69,899 million USD. The financial profitability was the outcome of new warehouses, the modernization of existing stores and the skill to manage expenses. Costco’s comparable sales have also increased by 7% in 2010 because of purchasing regularity of customers (Thomson Reuters, 2010). Question 5 Based on the current data you have obtained, is Costco’s financial performance superior to that at Sam’s Club and BJ’s Wholesale? Through effective strategy, Costco has gained a competitive position against its competitors Sam’s Club and BJ’s Wholesale. Whereas Costco focuses on the wealthy and cultured urban residents, Sam’s Club focuses on bulk middle-market situated in small metropolises. Costco’s yearly average sales were twice compared to Sam’s Club with respect to per retail stores. The strong organizational culture is one of the major factors for Costco’s performance (Cravens & Piercy, 2009). In comparison to BJ’s Wholesale, Costco has more warehouses. BJ’s Wholesale had started warehouse in 1980 and subsequently expanded to 177 stores in 2007, whereas Costco had 582 stores in 2010. Costco had almost 44.6 million members in 2005 whereas BJ’s wholesale had only 8.8 million members according to 2007 statistics. The CEO of Costco, Jim Sinegal has made great contributions towards the achievements of Costco. He has insistently polished the business model of Costco. The strategies taken by Jim Sinegal were very effective for the company and it is one of the key reasons for the success of Costco (Thompson, 2008) & (Thomson Reuters, 2010). Question 6 Does the current data indicate that Costco’s expansion outside the U.S. is financially successful? Why or why not? Costco’s current financial data indicates that the company’s expansion outside the US market is economically successful. Because Costco’s sales and income have increased and it has become stronger in almost all nations where it functions, mostly in Asian and Canadian market. Besides the United States, Costco has 22 warehouses in the United Kingdom, 9 warehouses in Japan, 7 warehouses in Korea, 6 warehouses in Taiwan and one warehouse in Australia as of 2010. The demand of Costco’s product is strong in international market. Costco’s international sales had also increased by 8% in 2010. These figures and statistics provided above describe that Costco has successfully expanded its business outside domestic market (Thomson Reuters, 2010). Question 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’s strategy is different compared to what is seen in other departmental outlets such as Sam’s Club and BJ’s Wholesale. Costco does not necessarily steal sales from other retail stores; rather it attracts people who come in the Costco’s store for the first time. The growth strategy of Costco comprises of three major components which are: creating more warehouses, establishing a bigger and loyal customer base, and implementing well-executed merchandising practices to encourage customers towards Costco’s outlets and make them purchase bulk amount of products per trip (Luxenberg, 2004). Costco’s product strategy is a factor for gaining competitive advantage over Sam’s Club and BJ’s wholesale. Costco provide customers to choose from 4000 categories only. Though Costco’s business covers broad ranges of products, Costco has restricted its product categories to minimize the losses. Costco has accepted the ‘intelligent loss of sales’ because of maintaining low products selection, but with this strategy, Costco has become much efficient in product selling. Almost one-fourth of Costco’s products offerings are changing continuously. With this strategy, the purchasers of Costco’s products try to buy items at one time which make the company to sell their products quickly compared to other competitors. Costco has its own winning strategy. Every time Costco does not deliver extra offerings directly from top manufacturers, rather it seeks for prospects to get those offers rightfully from ancient market or from any upset retailers who want to sell off certain extra or slow selling stocks. This strategy gives Costco high profit than the other companies (Thompson, 2008). Question 8 Are Costco’s prices too low? Why or why not? The basis of Costco’s effective strategy is the price leadership capability. Costco is known for its quality products with inexpensive price which is lower than other customary wholesale and retail stores. Costco only stocks those products whose costs can be negotiated. It provides the company a substantial amount of cost savings. The major part of Costco’s strategy to preserve the low price was to restraint the profit margin at 14% compared to other organizations which was 20% to 50%. The reason for maintaining low cost is to differentiate itself with other competitors. Costco’s idea is to make customers visit their stores repeatedly by inspiring them with inexpensive products offerings (Thompson, 2008). Question 9 Does Costco pay its employees too much? Does it make sense for Costco to compensate its employees so much better than the employees at Wal-Mart/Sam’s Club? Why or why not? Costco pays excess amount to employees which help to give them job satisfaction. Costco treats its employees well which is another cause for Costco’s strategic effectiveness. Costco is not only generous about the clients but also liberal about the workers. The average salary of employees in Costco was 17 USD per hour in 2005 which was 42% extra compared to one of its rivals Sam’s Club. Costco provides employees with impressive health plan which transcends other companies’ health strategies. To survive in the business, Costco has followed the strategy of ‘Mr. Price’, i.e. selling limited products, maintaining low cost, depending on high quantity, providing lucrative salaries to employees, and providing customers opportunities to purchase membership. Costco compensates their employees much better compared to employees of Wal-Mart/Sam’s Club. Costco has sensible approach towards retaining its employees. The insurance policies of Costco cover dental expenditures and temporary employees are also entitled for getting health insurance policy after six months of employment which is lesser compared to Wal-Mart (2 years). 85% of employees in Costco have health insurance compared to 50% of Wal-Mart (Greenhouse, 2005). Costco has good sense of business strategy which results in higher employee loyalty and more experienced and cooperative employees’ base compared to Wal-Mart or Sam’s Club (Pfeifle, 2005). Question 10 What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take to sustain the company’s growth and improve its financial performance? Costco has already become one of the leading organizations in retail sector. To sustain the growth of Costco, Jim Sinegal can increase the brand image and awareness of Costco by spending on advertisements. There are many new prospects for Costco to expand its business in the emerging markets of India, China and Europe. Jim Sinegal must be aware of taking benefit from every opportunity. Costco needs to concentrate more on marketing aspects. Proper marketing strategy such as sales promotion or product packaging can help Costco to sustain the growth. Besides there is need to accelerate the growth through innovating new strategies or methods as the demands of customers are increasing. Jim Sinegal needs to understand the requirements and trends of customers and accordingly make a move towards gaining competitive advantage. Conclusion Costco has implemented unique business model which is one of the reasons for success of the organization. Costco pursues the cost leadership strategy and provides quality products similar to other companies with low rates. Costco’s financial performance is also better and it has experienced considerable growth from its initiation. In present days, Costco’s business has spread internationally. Jim Sinegal has great contribution over the huge growth and performance of Costco. Costco treats its employees well which in turn increases employee loyalty and productivity. As a Co-Founder, Jim Sinegal has implemented appropriate strategies for Costco and supported organizational improvement. References Cravens, D. W. & Piercy, N. F., (2009). Strategic Marketing 8E. Tata McGraw-Hill Education. Greenhouse, S., (2005). How Costco Became the Anti-Wal-Mart. Reclaim Democracy. Retrieved Online on September 22, 2011 from http://reclaimdemocracy.org/walmart/costco_vs_sams.php Llopis, G., (2011). The Costco Factor: To Win The Business Game, You Need to Change How You Think. Forbes. Retrieved Online on September 22, 2011 from http://www.forbes.com/sites/glennllopis/2011/01/31/the-costco-factor-to-win-the-business-game-you-need-to-change-how-you-think/ Luxenberg, S., (2004). Costco's Growth Strategy. Penton Media. Retrieved Online on September 22, 2011 from http://nreionline.com/mag/real_estate_costcos_growth_strategy/ Pfeifle, D., (2005). The Costco Strategy. The New York Times Company. Retrieved Online on September 22, 2011 from http://query.nytimes.com/gst/fullpage.html?res=9C06E4D9113FF932A05754C0A9639C8B63 Thomson Reuters, (2010). Costco Wholesale. Annual Report 2010. Retrieved Online on September 22, 2011 from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzU1MjR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 Thompson, A. A., (2008). Costco Wholesale in 2008: Mission, Business Model, and Strategy. The University of Alabama. Read More