Executive Strategy, Leadership and Organization at Costco - Case Study Example

Table of contents The role of efficiency, adopting to change and focus on human capital in the success of Costco 1 Why the low pricing strategy while providing higher employee compensation led Costco Success 2 Leadership Strategies for Costco CEO 3 Influence of CEO on Costco; can this approach be implemented in other organizations with success 4 References 6 Assignment 1 The role of efficiency, adopting to changes and focus on human capital in the success of Costco The success of Costco can be attributed to the efficiency in cost management and customer service. Costco is efficient in cost management (it keeps its costs low). Costco keeps its costs low so that it can maximize its profits. Costco keeps its costs low by making savings on reduced employee theft, low cost of turnover (lost productivity, recruitment, training and induction of employees) and higher employee productivity. Costco also minimize costs by adopting a no frills store which also acts as a warehouse, there are no individual shelves but pallets and incurring minimal marketing costs ( Costco has neither a marketing manager nor recruited an advertising agency since it does not advertise). Its marketing is mainly done from referrals by happy customers. The success of a company is highly dependent on the ability of the firm to adapt to change. The management of Costco has developed an open door and inclusive policy to employees in matters regarding to decision making (Employees are among the critical and key drivers of success at Costco). This means that anticipated changes are warmly accepted as long as the employees are informed in advance on the impending change and the factors necessitating the change. This is evident in 2003, the rising cost of health made it necessary to increase employee’s contribution to health insurance, the CEO just sent a letter to all the employees explaining why the increase was necessary and he received over 100 responses, majority being positive. Costco has focused on its human capital (employees) by making them highly motivated through higher compensation packages, inclusion in decision making, good cordial relations between management and junior staff and availability of opportunities for career development. Role of low pricing and higher Employee compensation in Costco success A combination of low pricing strategy and higher compensation for employees has led to the success of Costco. Costco emphasizes on a strategy of high quality products at the lowest available prices in the market. Costco emphasizes on quality of its products which clearly differentiates it from its competitors in the market who stock lower quality goods. Low prices of high quality goods attract customers to the Costco stores. In addition, temporary special bargains (meant to lower keep the prices low) create customer excitement and this increases purchases of items that shoppers had not intended to buy (promotes impulse buying). This ensures that there is constant movement of goods stocked (avoids dead stock) thereby increasing sales which translates to higher profits. Higher profits finally translate to the success of the company. In addition to low price strategy, higher compensation of employees by Costco has contributed to the success of the company. Higher compensation of employees and providing good opportunities of advancement has led to a most loyal and productive workforce. A loyal workforce is committed to its work and the success of the company. This high level of commitment by employees is evident in the turnover rate (around 6% for workers on the job for more than 1 year) which is well below the average rate of 44% for the retail industry in the United States of America. The cost from turnover i.e. lost productivity, recruitment, training and induction of new employees is 40% lower at Costco than it is for its competitors in the industry. In addition, employee theft at Costco is the lowest in the industry. This translates into cost savings. Savings for Costco are accrued from lower turnover costs, lower employee theft and higher employee productivity which more than offset’s the higher cost of compensation at Costco. A combination of low price strategy and higher employee compensation has contributed to higher and consistent profits for Costco (indeed, the operating profit per labor hour of every employee at Costco is nearly twice that of its competitors.) has led to success of the company Costco. Leadership strategies of Costco CEO Leadership is the process of influencing the efforts and activities of an individual /group toward goal achievement in a given situation (Hersey, P. & Blanchard, 1988). A leader by the virtue of his position, relationship or expertise is able to influence how other people behave. In the case of Costco company the CEO has adopted a democratic leadership strategy to achieve the goals set for the company. A democratic leadership strategy in Costco characterized by: Consultation when all issues are being addressed and in decision making. For the CEO of Costco he involves his staff in making decisions. The CEO has made it a practice for all his stores to hold conversations every morning before the stores are opened to suggest ways of how to make the store better, to improve the efficiency of the employees and how to serve the customers better. Creativity and think outside the box is highly valued in the company. Before major decisions are made and implemented the staff are asked for their input and are informed of impeding changes. This shows that there is involvement of staff in decision making and product development Democratic leadership in Costco is further illustrated in the constant flow of information by both management and employees. In addition, there is feedback from employees in regards to issues affecting them. In particular when the cost of health increased in 2003 thereby necessitating an increase in the health insurance contribution by the employees, the CEO sent communication to all employees on the need for increasing the contribution and he got over 100 responses majority of which were positive. In a democracy there is delegation of duties and tasks by senior managers to their subordinates. In Costco there is constant delegation of duties by the CEO to managers of stores and only supervises them during monthly budget meetings and store visits to ensure that the managers adhere to set values of the company and set goals and objectives.. Influence of CEO on Costco; can this approach be implemented in other organizations. By virtue of Jim Sinegal being the Chief Executive Officer of Costco, he is in a position of leadership that demands that he influences his employees to adhere to the values and goals of the company so that they can achieve the set goals. The CEO influences his employees in a number of ways as enumerated below; As the CEO of Costco the CEO is able to influence his employees by use of powers vested in his position. He can influence his employees by demanding that they achieve a set goal by following a particular strategy. The CEO of Costco exercises this influence by holding monthly budget meeting with store managers where he emphasizes the importance of exercising strict cost control measures, getting the details right and adhering to the values of hard work, respect for customers and high ethical standards. He also voices a strong concern for performance. As the CEO of Costco the CEO influences the company by being a motivator to the employees. The CEO motivates his employees to be highly productive by offering chances of career advancement, high compensation of employees, inclusion of employees in decision making and employment benefits e.g. having retirement benefits. The CEO influences his employees by encouraging them to think outside the box for solutions and incorporating the views of employees in decision making. As a co founder of the Company the CEO is a major shareholder and in essence is a decision maker in the company. By making decisions that ensure the profitability of the company and adherence to set values he is able to influence how the company is run and managed. As a role Model the CEO of Costco is able to influence the company. The CEO is a role model for his employees by offering an open door policy for his employees and by being incorporated as a normal employee of the company (he has an open office, answers his own calls and wears low priced clothes from the stores). In addition the CEO can remember all his managers by their names and attends all openings of new stores. this therefore, shows he cares for his employees and is intent on duplicating this to his senior employees; Through this he is able to influence his employees and the company at large. This approach can be implemented in other organizations with similar or better results. A CEO who influences his employees to be customer friendly, adhere to low pricing (to attract and retain customers) and greatly motivates his employees (to enhance employee commitment) is bound to get better results in the company. In deed today’s employees look to be a part of a company’s decision making and be motivated for him/her to be committed to his job while the customer is looking for stores that offer value at the lowest price. A combination of these two strategies that are developed by management and influenced by the leaders is bound to bring good results in the short and long run. REFERENCES Hersey, P & Blanchard, K. Management of Organizational Behavior, Englewood Cliff, NJ; Prentice Hall, 1988 pg. 86 Case study: Costco Read More