Costco: A Case Study
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.
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,
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.