The Mission Business Model and Strategy at Costco Wholesale Corporation - Case Study Example

The Mission, Business Model and Strategy at Costco Wholesale Corporation Name: Institution: Tutor: Date: Introduction The wholesale club membership in the United States has been the new trend ever since it was introduced in the second half of the 20th century. The level of competition and strategic management plans by the various players in the industry reveal the extent to which the level of industrial maturity has reached as far as wholesaling and retailing is concerned. The limited number of players in the wholesale club industry is the main reason behind the heightened stiff competition. This is mainly because of the requirements and obligations that one has to meet in order to qualify as a credible wholesaler. Costco Wholesale Corporation, Sam’s Club and BJ’s Wholesale are three of the few wholesale companies that offer membership opportunities to their customers as a move to foster brand loyalty and customer loyalty. This case study seeks to shed some light on the business model, mission and strategy at Costco and how Jim Sinegal, the company C.E.O, has helped in enhancing the overall performance of the company. The study will also compare and contrast the performance of Costco with that of Sam’s Club and BJ’s Wholesale. Question 1: The Company's Business Model Costco Wholesale Corporation is an established firm with an overall experience that dates back all the way to the late 1970s (Courtemanche & Carden, 2014). The company is headed by Its long-term serving C.E.O Jim Sinegal, who is a strong believer of pre-conceived business frameworks, which, he believes are a great avenue for long term business success. The driving forces that can actually be considered as the pillars of success at Costco are; the mission, the business model and the company's strategy. The business model at Costco focuses on the relationship with the members as well as the effectiveness as evidenced by the company's rapid inventory turnover and the high volumes of sales. This business model that focuses on the consumers at the expense of profit prospects is one of the main reasons the company is ranked one of the best in the industry. Furthermore, it is in pursuant of the goals in the company's mission which is to become a corporate citizen, not only locally but also at the global scope. This business model is highly appealing as evidenced by the returns experienced by Costco Wholesale Corporation. The company benefits from the advantages that come with rapid inventory turnover and high sales volumes. Question 2: The Elements of the Strategy The main elements of Costco's strategy are pricing, product selection, treasure hunt merchandising and low cost emphasis. The pricing strategy is a key element not only for Costco but also for any other company that seeks to overcome the rivalry of its competitors. In the case of Costco, it was important for it to minimize on the irrelevant expenses in order to realize low overhead costs, which would in turn make it possible for the company to charge consumer friendly prices to its products. Through pricing, Costco is able to remain afloat by outcompeting its rivals such as supermarkets, departmental stores and retail stores. Product selection is another element in which the company categorizes its products in such a way that reduces the expenses that come with managing a wide variety of product categories. The company is willing to attend to a limited section of its market in order to save on significant costs. This goes a long way in lowering the overhead costs, which give the company an upper hand as far as competition is concerned. Treasure hunt merchandising is where the company sells high end products that are more appealing to the customers and are considered to be high budget products. These products are capable of raising the company's revenue in the event of low consumer turnout (Courtemanche & Carden, 2014). Through treasure hunt merchandising, Costco is able to stand out as a one stop shop among the rest of its competitors. The other indispensable element of Costco's strategy is the emphasis laid on low prices. This is one of the most important strategies of the company since it is through low operational and overhead costs that Costco is able to offer unbeatable prices, which gives the company a competitive edge over the rest. Question 3: The Effectiveness of the C.E.O Costco has enacted an all rounded strategy that leaves none of its components outside. The company' strategy has been to make a difference in the way businesses offer their products and services. This is to say that Costco's intention in the market has been to revolutionize the traditional trends displayed by businesses, which more often than not happens to be motivated by profit instincts. Jim Sinegal, the company C.E.O has been on the forefront in effecting the company's strategies by implementing the strategic framework. He has made sure the company achieve long term goal of rapid inventory turnover as well as high sales volumes. This has been made possible by the company's incessant efforts satisfy customers and suppliers as well as to comply with the law through legitimate operations. The shareholders are appropriately rewarded by the company as a move to implement the strategic plan. Jim Sinegal has been an effective C.E.O. To begin with he has made sure the pricing of products at Costco is in correspondence with the needs of the customers regardless of the position at which the company stands in terms of profits. Secondly, the C.E.O has been agile with the idea of product selection since he knows that through intelligent strategies, the company can save a lot of costs that would translate into high profits in the long run (Courtemanche & Carden, 2014). Question 4: Business Principles The C.E.O of Costco was a son to a steelworker from whom he emulated five business principles that he felt obliged to share with the company. These principles include; obedience to the law, caring for the members, caring for the employees, respecting the suppliers and rewarding the shareholders. The law sets regulations under which every business is expected to operate. Jim Sinegal realized that compliance with the law not only saves the company the trouble of putting up with penalties and unnecessary charges, but also enhances the business image to the public. This goes a long way in giving the business a competitive edge over its rivals (Courtemanche & Carden, 2014). Costco believes that the members are an important aspect and the main reason for its existence. Consequently, the company goes out of its way to protect the interests of its members in order to win their trust which is reinforced by the fee paid for the membership. The company knows that losing these members will have a negative effect on the sales and profit margins in the long run. The employees of Costco are given high priority when it comes to their welfare. This is because of the fact that the company C.E.O believes that employees are the greatest asset to the company. The other principle that Costco embraces is the respect for its suppliers. This respect is fueled by the fact that suppliers are regarded as business partners and the growth of the company is dependent on the growth of its partners. Finally, the company believes in rewarding its shareholders accordingly. Question 5: Competition in the North American Wholesale Club Industry The North American Wholesale Club industry is one that is characterized by high competition among the wholesale stores and between wholesale stores and retailers as well as other large scale discounters. This competition is influenced by forces such as price, merchandise quality, product selection, member service and location. The competition in the industry is manifested by the different companies manipulating these five forces in a bid to win customers and realize high profits in the market. These companies not only compete among themselves in the industry but also with retailers and discounters who are not necessarily in the wholesale club industry. The targeted consumers have always been large organizations, restaurants, caterers and individual consumers who are out to hunt for great bargains. The greatest force of competition that is used by the various companies is pricing (Courtemanche & Carden, 2014). This is based on the fact that wholesale clubs are known to provide high quality products at competitive consumer friendly prices. As such, these companies price their merchandise low enough to keep their consumers coming back. In return, the companies experience longevity and rapid turnover on their inventory, which would not have been the case were it not for the emphasis on low costs. The quality of merchandise is a competitive force that determines the rate at which consumers remain loyal to one wholesale store than the other. Product selection, on the other hand, is a force whose effects are felt when one wholesale store experiences high operational costs than the other, hence receiving low returns in the long run. Question 6 and 7: Financial Performance Costco Wholesale Corporation's financial records from the year 2000 to 2011 reveal the company's growth and performance that is on a positive trend. A growth curve would reveal the graphical representation of the company's financial growth in terms of net income, operating income and total revenue. For instance, in 2000, the total revenue for Costco was at $32,164. This figure increased in the year that followed and the subsequent years up to a staggering $88,915 in 2011. This indicates the pay off of the company's strategies and principles as far as corporate culture is concerned. The operating income in 2000 was at $1,037 but this figure took a positive trend and grew up to $2,439 in 2011. The net income was at $631 in 2011 but the figures shot to $1,462 in 2011 (Courtemanche & Carden, 2014). These statistics reveal the impressive financial performance of Costco Wholesale Corporation. The number of members in 2011 was 64,000, which was an approximately 10% increase from the previous year. This is an indication that the company is performing impressively from the financial point of view. The financial performance of a company can be considered to be superior if the figures representing the various financial operations exceed those of its competitors. In the case of Costco, the operating and the net income reveal its superiority over Sam's Club and BJ's Wholesale. Furthermore, the stockholders' equity and the value of assets for Costco Wholesale Corporation is higher than that of Sam's Club and BJ's Wholesale. Question 8 and 9: Performance from the Strategic Perspective The low cost emphasis coupled with the pricing strategy by the company is perfect combination that allows the company to be where it is in terms of performance and competition with its rivals. The low prices charged for the products at Costco are strategic enough to enable the company make profits while at the same time providing its members with high quality products. This made possible by the company's business model, which focuses on high sales volumes and rapid inventory turnover. On the other hand, the rate at which the company is expanding its geographic location is highly moderated in order to avoid the overwhelming operational costs that come with rapid expansion plans. In addition, the merchandise selection strategy also helps the company to keep track of its overhead costs. The strategic elements of Costco play a central role in enhancing the competitive chances of the company. This is because as product selection and treasure hunt merchandising lower the operational costs, the pricing and the low cost emphasis come in handy when charging extremely low prices for its merchandise. The low costs for its products give Costco a competitive edge over the rest of its rivals who are unable to charge such prices due to their high operational costs (Courtemanche & Carden, 2014). The Costs charged for Costco's products are so low that the Wal-Mart analysts describe them as ''crazy'' and ones that do not make business sense. Despite the fact that these prices are low, the company still makes its projected profits since the low prices come about as a result of low operational costs and rapid inventory turnover. Therefore, through increased efficiency and reduced production costs in the market, the organization attains increased profitability levels despite the low commodity prices in the market. Question 10 and 11: Compensation Practices and Recommendations The organization has an efficient, focused and dynamic employee compensation program as a motivation approach to its employees. As such, the company C.E.O believes in the motivation of employees for better output. As such, at all costs, Costco ensures that its employees, whether part-time or full-time, are entitled to a compensation plan that is al rounded. However, the probationary period holds; 90 days for full time employees and 180 days for part-timers. This impressive compensation plan is one of the strategies that Jim Sinegal believes help in wowing customers in the market. This is because employees that are taken good care of act as ambassadors out there. In order to sustain the company's growth and improve its financial performance, the executives are obligated to uphold the corporate culture by implementing the five principles of the company as well as various strategies that are geared towards achieving high growth levels through minimizing overhead operational costs. In addition, the company should focus on improving the quality of services offered to the members so as to win their trust and loyalty. Conclusion In summary, Costco Wholesale Corp. is a successful company in the wholesale club industry thanks to the effective implementation of its strategies under the leadership of Jim Sinegal, the company C.E.O. Despite the stiff competition from large scale retailers and discounters, Costco has had a competitive advantage as a result of its effective marketing strategies such as pricing, product selection, treasure hunt merchandising and emphasis on low costs. These strategies have enabled Costco to maximize its profits in spite of the low prices charged on its merchandise. Rivals such as Sam’s Club and BJ’s Wholesale have had a rough time coping up with the incredibly low prices charged for Costco products. It has also been established from the case study that Costco attributes its impressive overall performance to the fact that it upholds high standards of business ethics and culture by obeying the low, caring for the customers and the employees, respecting the suppliers and rewarding the stakeholders. References Courtemanche, C., & Carden, A. (2014). Competing With Costco And Sam's Club: Warehouse Club Entry And Grocery Prices. Southern Economic Journal, 80(3), 565-585. Read More