Costco Wholesale Corporation entered the wholesale club industry in the early 1980s. The idea behind a wholesale club was to maximize profits by minimizing operational costs and maximizing inventory turnover ratio. The company experienced tremendous growth from 1997 up to 2001 and has caught the attention of its competitors. Costco Wholesale is one of the largest retailer stores in the market. The company has differentiated and positioned itself well in the market through its mission statement. The company’s mission statement well understood throughout the firm.
Business Model. Costco’s business model relies on high sales volume doubled with quick inventory turnover, made possible by low prices and limited product selection among a wide variety of branded and private label this chain and has many benefits. For one, by gearing the business approach to rapidly turning over inventory, the company is often able to sell new merchandise and pay suppliers before the invoice is due, even when the company pays early to benefit from early payment discounts. This frees up capital, as Costco finances most new inventory purchases with supplier payment terms.
Fittingly, the company passes these savings on to consumers in the form of low prices. Another benefit of this model is that the company is not required to maintain high levels of working capital or take out loans, with interest to pay suppliers. Management believed that rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities, enabled the company to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters. Yes, this model is appealing for the following reasons: * Allows the company to sell and receive cash for inventory before it had to pay many of its merchandise vendors * Allows company to take advantage of early payment discounts
* Company is able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than having to maintain sizable working capital to facilitate timely payment of suppliers Strategy The generic competitive strategy employed by Costco is that of the best-cost rovider in the wholesale club category. The best-cost provider strategy is a mix of low-cost provider and differentiation. This strategy is aligned with Costco’s abilities and resources. That is, a streamlined supply chain, purchasing power, good supplier relationships, high sales volumes, quick inventory turnover, and excellent customer service. The three components of the company’s strategy are low pricing, limited product selection and what the company calls “treasure-hunt merchandising”, or high-end products acquired in closeouts and liquidations.
This approach works well with the company’s target market CEO Sinegal signaled that he intends to keep this strategy during his tenure, arguing that low price, high value products are precisely what it takes to achieve staying power in this industry. A long-term strategy is recommended and he hopes to heed this advice, being especially careful not to differentiate to the point of losing its price competitiveness. While Costco strives to beat the competition’s pricing, it also delivers exceptional value in its high-end offerings and customer service, giving consumers more for their money.
This strategy works well for Costco, given its customers are the most affluent of all the warehouse clubs, with average incomes around $75,000. However, these customers are also value conscious, as evidenced by the members who opt for executive memberships, although it costs more per year, to take advantage of a 2% discount on most purchases. While this group only accounts for about a fourth of the company’s memberships, they represent nearly half of its net sales.
The chief elements of Costco’s strategy is to offer members low prices of limited selection of nationally branded and selected private label products offered in a wide variety of categories resulting in rapid turnover. Another element of their strategy is to create a self-service with pro?cient distribution system and to reduced man-handling. Both of these strategies are good because they cater to consumer’s needs, pro?t the business, help keep a low gross margin, and stay ahead of competitors. A best cost provider strategy works best in markets where product differentiation is the norm and attractively large numbers of value conscious buyers can be induced to purchase midrange products rather than the cheap basic products of low cost producers or the expensive products of top of the line differentiators” (Thompson, 2010). The idea behind a Best Cost Provider Strategy is giving customers “more value for their money”. As company Costco is trying to employ this strategy, the things that make it successful is providing greater value to customers by sustaining their expectations on quality features, and charging less than their expecting to have to pay compared to prices your competition is offering for similar products and services. “When a company can incorporate appealing features, good to excellent product performance and quality, or more satisfying customer service into its product offering at a lower cost than rivals, then it enjoys best cost status” (Thompson,2010).
It appears that Costco is well above the curve when it comes to this strategy. Leadership and Strategy Making The process of crafting and executing strategy is done in 5 steps. Below, I will discuss the different steps and evaluate the performance of this company’s CEO, Jim Senegal in the process of strategy making, as well as discuss areas for improvement. Phase 1 – During this phase, the CEO and other senior management meet to discuss and draft a strategic vision for the company. The strategic vision lies out the path the 2 company will take in the future to improve its market position.
Good strategic visions reveal where the company is going in the future and provide reasons for that particular path. Vision statements should be written and distributed to employees at all levels of the organization. This is why it important to include the reasoning for the chosen path. Employees must find the vision both reasonable and beneficial; after all, they have a lot to lose. When a company shares a well-crafted, well-thought-out vision statement throughout the organization, the benefits are palpable. Motivation and productivity go up and it steers the course for the entire organization to be working towards the same goal.
I did not find any evidence of a strategic vision, or where the company plans to go in the future. However, the company’s growth strategy shows that the company has been steadily expanding the number of warehouses each year, with some stores overseas. The second growth strategy was that the company opened two test stores, Costco Home. While these two spots are steadily increasing revenue and profits, the company has decided to instead add extra space to new storefronts and essentially combine these two operations.
A third way the company intends to grow is by expanding its private label brand from 400 items to 600 items over the next five years. From a pure math standpoint, this will prove effective incrementally, as the markup on the private label is 1% higher than other goods. As for the direction the company is heading and why, Sinegal receives a C. Recommended action is to call a meeting of senior management to draft an exceptional vision statement with the direction the company is heading in the future to gain market share. The benefits are immeasurable.
Phase 2 – This phase is setting objectives, whereby the company determines the steps to take in order to reach its vision and sets specific, measurable goals accordingly. Considering Costco does not have an outlined strategic vision, Sinegal would receive an F in this area. Although Costco’s stated strategy includes low prices and its mission statement claims that the company is committed to selling its products at the lowest possible price, no specific sales goals were discovered. A remedy to this problem can be sought upon creating the vision.
This involves setting SMART goals or realistic goals with a timeline for completion. Phase 3 – Crafting a strategy that aligns with the stated vision and objectives is the third step in this process. The strategy of a company is all about how the company will achieve its objectives for growth. It is never acceptable to simply do business the way it has always been done because the market changes, the industry evolves, and numerous other external factors make it absolutely necessary for a business to evolve to retain or gain market share. This is particularly important in industries with high growth, such as this one.
Sinegal should incorporate managers from all levels in the strategic process, emphasizing value in regard to its competitive strategy. Until this time, Sinegal receives a D on this phase. Phase 4 & 5 – These steps are executing the strategy and evaluating its progress, accordingly. Sinegal will not receive a grade in these areas until the strategy creation process is complete. Keep in mind that evaluation of the strategy must be ongoing to ensure the company is headed in the right direction. I believe Jim Sinegal is an effective CEO and I believe without him in the company Costco would not be in the positive place they are now in.
Sinegal has an objective for the company (rapid turnover) and he takes action to make business run effectively to get results Competitive Outlook When an industry is experiencing high growth, a company must determine what makes it unique to its competitors and draw on the differences to gain competitive advantage. As mentioned previously, the three components of the company’s strategy are low pricing, limited product selection and what the company calls “treasure-hunt merchandising”, or high-end products acquired in closeouts and liquidations.
These practices do little to address the future prospects or unique capabilities of the firm. I would say that Costco’s competitive advantage is that they sell in bulk and often offer a better price per unit, so more people want to buy there. Also, I think that they make a lot of their money on membership fees each year. Another thing that Costco does is have free samples just about every day of the week. I think that this draws in customers and often times, gets consumers to buy more products (at least I know that this is the case for me).
The 3 components of Costco’s strategy are low pricing, limited product selection and what the company calls “treasure-hunt merchandising”, or high-end products acquired legally on the gray market from other wholesalers or retailers looking to get rid of excess or slow selling inventory. While Costco strives to beat the competition’s pricing, it also delivers exceptional value in its high-end offerings and customer service, giving consumers more for their money. Costco also utilizes a competitive strategy which is to be the best-cost provider in the wholesale club category.
I think being a Best Cost Provider is a great position to be in. As a company, you’re appealing to all 3 markets; the Lower, Middle, and Upper Class. You’re not limiting yourself to just 2 classes. If you were low end, lots of low and some middle class would purchase from your company. If you were high end, only some middle and a lot of high class would purchase from your company. The key to success is keeping that perfect balance between low and high.
Thompson, A. A. (2010). Strategy: Core concepts and analytical approaches. New York, NY: McGraw-Hill. Retrieved from http://www. glo-bus. com