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Costco: A Case Study

Misti Walker

Costco: A Case Study

Business Model

Costco’s business model depends on high sales volume coupled with quick inventory

turnover, made possible by low prices and limited product selection among a widevariety of branded and private label products. This business model is appropriate for this chain and has many benefits. For one, by gearing the business approach to rapidlyturning over inventory, the company is often able to sell new merchandise and paysuppliers before the invoice is due, even when the company pays early to benefit fromearly payment discounts. This frees up capital, as Costco finances most new inventorypurchases with supplier payment terms. Fittingly, the company passes these savingson to consumers in the form of low prices. Another benefit of this model is that thecompany is not required to maintain high levels of working capital or take out loans, withinterest to pay suppliers.

Strategy

The generic competitive strategy employed by Costco is that of the best-cost provider inthe wholesale club category. The best-cost provider strategy is a mix of low-costprovider 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 strategyduring his tenure, arguing that low price, high value products are precisely what it takesto achieve staying power in this industry. A long-term strategy is recommended and hehopes 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, givingconsumers more for their money. This strategy works well for Costco, given itscustomers are the most affluent of all the warehouse clubs, with average incomesaround $75,000. However, these customers are also value conscious, as evidenced bythe members who opt for executive memberships, although it costs more per year, totake advantage of a 2% discount on most purchases. While this group only accounts

for about a fourth of the company’s me

mberships, they represent nearly half of its netsales.

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 CE

O, Jim Senegalin the process of strategy making, as well as discuss areas for improvement.

3Phase 1

–

During this phase, the CEO and other senior management meet to discussand draft a strategic vision for the company. The strategic vision lies out the path thecompany will take in the future to improve its market position. Good strategic visionsreveal 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 lotto lose. When a company shares a well-crafted, well-thought-out vision statementthroughout the organization, the benefits are palpable. Motivation and productivity goup and it steers the course for the entire organization to be working towards the samegoal. 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 storesoverseas. The second growth strategy was that the company opened two test stores,Costco Home. While these two spots are steadily increasing revenue and profits, thecompany has decided to instead add extra space to new storefronts and essentiallycombine these two operations. A third way the company intends to grow is byexpanding 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 onthe private label is 1% higher than other goods. As for the direction the company isheading 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 thecompany 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 stepsto 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 lowestpossible price, no specific sales goals were discovered. A remedy to this problem canbe sought upon creating the vision. This involves setting SMART goals or specific,measurable, attainable, realistic goals with a timeline for completion. Once this is done,the company will not only know where it is going, but will also know the steps to take inorder to get there.Phase 3

–

Crafting a strategy that aligns with the stated vision and objectives is thethird step in this process. The strategy of a company is all about how the company willachieve its objectives for growth. It is never acceptable to simply do business the way ithas always been done because the market changes, the industry evolves, andnumerous other external factors make it absolutely necessary for a business to evolveto retain or gain market share. This is particularly important in industries with highgrowth, such as this one. Sinegal should incorporate managers from all levels in thestrategic process, emphasizing value in regard to its competitive strategy. Until thistime, Sinegal receives a D on this phase.