MGMT 310 Major Report

Group 39 Section 001

Jared Armijo, Jerry Brown, Ubaldo Barrios Carrillo, Tyler Hull, Jamie Markowich,
Jon Wirtzfeld
Company Overview
Costco Wholesale Corp is membership warehouse club that was founded in 1983 in Seattle,
Washington. They provide their members low price consumables in large quantities: items such
as clothing, food, beverages, electronics, and appliances. Through their membership program
they have differentiated their value proposition by providing other services such as vacation
planning, auto workshops, and insurance. Their current main competitor is Wal-Mart (and to a
lesser extent Sam's Club which is owned by Walmart) who controls almost 70% of the
warehouse industry while Costco comes in second with 17.4%. Costco currently employs
1740,000 full time and part time employees, who serve their 85 million members.

Primary Data Collection

Primary Data collection was done via a survey sent to Alan Campbell, a Maintenance Operator at
a Costco location in South Carolina. He was sent a series of questions (see attachment 1) of
which he sent back via email. These questions covered a variety of topics that ranged from
organizational structure, culture, and positive/negative aspects of the organization. Alan was the
only individual interviewed because his 10+ years of experience at Costco is valuable by itself,
and he gave very in depth responses so other responses were unnecessary.

Alan gave us great answers that led us to the identify the problems. From his testimony, we came
up with our two problems. The first problem identified was the lack of innovation and creative
ideas that Costco has. Alan mentioned that one of the organizational issues he has encountered
during his time at Costco has been the narrow-mindedness of the upper management. He
admits that he feels that the issues come from the fact that Costco promotes from within. He feels
that if Costco brought in more individuals from other companies it would provide valuable
insight. Too often the managers who have been at Costco for 20 or 30 years only want to do
things according the Costco Way. If they had more individuals with experience outside of
Costco they use their other experiences to boost membership and sales. In addition, technology
is an issue with upper management. He felt upper management needs to do more with modern
technology if they want to tap into the mindset of the younger generation and adult consumer. All
of these issues relate to a lack of innovation at the top and it may hinder Costcos future growth
if it remains unaddressed.

The second problem that we identified was that Costco lacks a competitive advantage over its
competitors, mainly Walmart. Alan mentioned that he considers marketing and packaging to be a
huge issue. Costco mainly relies on word of mouth marketing and this can be an issue when
attracting new customers. With such little marketing, it can be difficult market the value of a
membership to consumers, particularly the younger generation. Creating packaging for young
professionals would boost memberships and thus profits. Membership is what drives Costcos
true profits and a lack of presence with the millennial generation is concerning for Costcos
future. Alan also felt like Costco has done a poor job of communicating the value of a
membership in comparison to other retail stores that dont offer a membership. He asks the
question, Why should one pay to shop when so many other options are available for retail
sales? This is the question that fueled our second problem, and led us to our solution of a
differentiation strategy.

For further reference of the primary data collected view attachment 1.

Problem 1: Costco's Lack of Innovation

Over the course of its 41-year life, Costco has grown to become an extremely successful
company and holds a hefty presence in an industry that has now matured. According to Costco's
most recent 10-K form, we operate 715 warehouses worldwide in 9 different countries (2016).
By utilizing our ~102,960,000 square feet of physical Costco warehousing across the globe, we
have been able to bring in more than $110 Billion in sales consistently every year since 2014 (FY
2016 Annual Report, 2016). With that growth, our shareholders have seen the value of our stock
increase by 51% from the start of 2014 to the start of 2017. Our company has achieved this
success by providing value to our customers through our memberships, and taking care of our
employees so that they feel like their work is important.

Although Costco's growth has been sustained in a tremendous way over the past 4 decades, today
it is threatened more than ever by a growing e-commerce market segment. The growing online
market is a threat to Costco, instead of an opportunity, because we have failed to take sufficient
advantage of it. Our current web portfolio is not great, with Costcos poor webstore being our
only real asset. For comparison, Walmart has a web portfolio which includes their own
Walmart.com, Sam's Club.com, Jet.com, and numerous online grocery delivery services.
Walmart's work in that segment has rewarded them with 36% growth in online GMV for Q4 of
2016 (Walmart: Annual Report, 2017). Costco's grew 15% online over the entirety of 2016
(Costco: Annual Report, 2016). Walmart is not even the biggest competitor in this segment,
though, that is Amazon. Bloomberg has reported that Amazon is currently courting suppliers like
General Mills and Mondelez in order to bypass warehousing stores like Costco in the value
delivery process (Soper, 2017). Amazon has effectively killed bookstores and other "mom-and-
pop" operations, and is now turning its sights on us.

This is the reason why Costco needs to learn how to be innovative online and offline if it wants
to survive and continue the success of the past 41 years. One of Costco's greatest assets internally
and externally is our consistency, but we must bend (not break) that image on both fronts in order
to push more online activity. Although this looks like a technological problem on its face, the real
issue stems from our hiring, promoting, and general managing procedures.

Antecedent 1: Recruitment Strategy is focused internally

Costco has long maintained the strategy that their main stakeholder is their employees.
According to the Panmore Institute they are, significant because they directly influence business
 performance (2017). They pay them a living wage, offer great benefits packages and promote
from within. This keeps company morale high, increases employee loyalty and increases
customer satisfaction. All of these attributes help to maintain the Costco image that they have
built up over the last 30 years.

This focus, however, on internal recruiting can also be a weakness. When nearly all of the
companys promotion and hiring from within ideas can grow stale, and innovation can grow
stagnant. An article written by the AZ Central mentions this idea, Staff already entrenched in the
company often lack a fresh perspective that only an outsider can bring. A business can stagnate
by maintaining the status quo (2017). This is apparent with Costco; they have maintained the
same business strategy for three decades. It has served them well up to this point, but recent
trends have suggested changes must be made. According to an article written by Phalguni Soni of
Market Research they admit that attracting millennials is a struggle for warehouse clubs such as
Costco (2016). The future of Costco depends on attracting these customers and if they want to
maintain their status as Fortune 500 company changes must be made.

Solution to Problem 1-External Hiring

In order to spur more creative ideas at the upper management positions, external hiring is
needed. Costcos current policy is to promote internally; this is great for employee morale but it
can result in the narrow-mindedness that Alan mentioned earlier and a lack of new and fresh
ideas at the top.
The benefits of external recruitment include:
Training new hires is cheaper and faster due to their past experiences
New blood brings in new perspectives and industry insights

Our Steps for Implementation:

Step 1: Plan a recruitment and training plan to see what employers are looking for in new
recruits, such as past experiences, talents and skills, etc. Then implement a training program that
will not only explain the job requirement to the new recruits, but also have train supervisors and
co-workers on how to teach new recruits.
Step 2: The second step is to advertise and market ourselves to potential applicants with our
brand and image. For example, promote the benefits and experiences that Costco employees can
earn by promoting them in our website, social media, commercials and ads. This will entice
people to submit their applications to Costco.
Step 3: After gaining data and information on the applicant's, rank them by performance to make
sure we are hiring the right people that will be efficiency and new ideas to the company.
Step 4: Hire the employees that we feel bring the most to our company.
Step 5: Arrange a training plan and schedule for the new recruits along with the supervisors and
co-workers that will be teaching them.

Organizational Problem 2: No Obvious Competitive Advantage Over Walmart

While Walmart currently does operate a rival wholesale warehouse, Sams Club, there is little
differentiation and there is very little competitive advantage of Costco over Sams Club. Both
services operate on very similar business models and rely on similar customer bases, reaching
out to both families and businesses. In January 2017, Walmart and Sams Club announced that
many of their top management positions would change, including Sams Club CEO Rosalind
Brewer. To adjust to the new changes, Costco will have no choice but to adapt its strategies.
Very few current policies actually present a competitive advantage over Walmart. For example,
even though the base membership price is slightly higher for Costco than Sams Club, there are
more services included for the price. For example, with the base price of $60, Costco members
would still have access to pharmaceutical care and services that would cost Sams Club members
about $100 per year. However, with the current system in place, this advantage is not prioritized
in the companys operations, and because of this, Costco gives the impression of having
absolutely no competitive advantage over Walmart or Sams Club.

Antecedent 2: Focus on targeting members only

Currently, Costco markets itself to customers through traditional methods such as mail and
community outreach around stores. Costco also sends a monthly magazine to members,
highlighting products, services, and the Costco brand. Finally, Costco does a small amount of
marketing in-store through samples and other promotions of products.

The majority of Costcos revenue comes from our members. According to Kell (2015), as of
December 2015, Costcos membership renewal rate was 91%. This has contributed to Costcos
steady revenues over many years. The renewal rate is so high because of the benefits offered to
customers. Costco offers many benefits with their memberships, including optical care, auto
services, business help, insurance, and access to pharmacies (Costco). Memberships cost $60 per
year, but the value of all Costco offers with a membership is greater than the price.

Costco has focused on targeting members only, since very little revenue comes from new or
potential customers. This has allowed our competitors such as Walmart to position themselves in
the minds of potential customers through broad marketing campaigns. For this reason, Walmart
controls almost 70% of the warehouse industry.

Solution to Problem 2 - Costco Lyte

Currently, Costco only offers products through their warehouses. We believe expanding and
opening new, smaller stores similar to Walgreens or CVS would allow Costco to serve more of
their members more consistently. Smaller stores with more specific product lines will allow
customers to spend less time in stores, making quick stops for their prescriptions, groceries or
snacks. These smaller stores would be called Costco Lyte stores.

Our steps for implementation:

 Step 1: Study urban markets where membership rates are high. Since Costco Lyte stores would
be membership based, we need to be aware of where our customers are located and how well
their needs are being served.
Step 2: Advertise and market new stores. Spreading the word to our members is something
Costco already does well. We need to continue to do that to let people know about new ways to
use their memberships. Advertising products offered such as essential groceries and pharmacy
services will be critical to our success.
Step 3: Understand the different demographics served by each Costco Lyte. Customer groups
targeted include individuals over 65, college students, and young families (Segment Details).
These groups would benefit most from Costco Lyte stores, and each store would offer slightly
different product lines based on their largest customer segment. For example, because
Individuals aged over 65 have been the main users of pharmacy benefit management (PBM)
services Costco Lyte stores in areas with many elderly people would be more pharmaceutical
based (Hoffman).
Step 4: Open new stores. According to Loopnet, CVS and Walgreens stores typically sell for $5-
7 million dollars, giving us an idea of the costs to open a Costco Lyte. Other costs are moderate
including developing efficient and accurate internal processes capable of organizing
prescription drugs on the basis of cost effectiveness and patient type (Hoffman). Costco already
has efficient internal processes; it is a key to maintaining their low prices. So, the main focus for
this step should be opening new stores.
Step 5: Evaluate satisfaction among Costco Lyte customers and adapt to their needs as necessary.
Our primary goal is to serve our customers and offer products needed. As customers wants and
needs change, so should the products offered.

Risks/Consequences of Dissenting from Current Practices:

Internal hiring has its benefits such as:
Increase morale of employees from promotions
Recruiting costs are lower.
Internal hiring also has its disadvantages and risks:
Those not promoted may experience morale problems
Employees might engage in political infighting for promotions
A management development program is needed

In evaluating the risks associated with our changes, there are two main components. The first is
the change in company culture. Costcos culture is largely tied to the wholesale industry, and has
done very little do branch into other areas of business. Internal hiring generally avoids this
problem, as people hired from within a company are typically more connected to the companys
culture and do not need to adapt. The second risk associated is the financial risks that are
associated with hiring externally vs internally. The additional resources needed to recruit
externally would directly impact the company, as resources would be spent both recruiting and
training new employees to the companys culture. This however, does not detract from hiring
externally, as an estimated 72% of positions are filled nationally from hiring externally (Krell).

The challenge for Costco will be appropriately utilizing the resources so as to not financially
damage the company while also bringing creative mindsets and different opinions to shape the
companys competitive advantage. There is also question as whether customers would respond
to the new product line as we hoped. Much of that would depending on our marketing team, so
before proceeding we would have to be assured that our marketing department was up to the
task.

Communication to Employees
To introduce these changes to employees, we will attempt a transformational and transactional
leadership. Since we are changing the organization dramatically, instilling a sense of duty will
help work ethic for employees. Costco is very focused on doing the best for their employees, but
focusing on internal hiring decreases innovation. Employees are going to be upset about the new
external recruitment strategy, because it means less chances for current employees to continue
development. This is why it is vital for a charismatic leader to lead the new solutions. We want to
inspire employees to think about how external hiring will benefit the company.

We want to tell our employees that Costco is in need of innovation and explain to them the
mindset we hope to achieve by hiring more externally. We want to ensure their jobs and make
sure they don't feel like they are being fired or pushed out. This is why we will start by hiring a
charismatic manager who will want to change the company strategy, but not internal culture.

With Costco Lyte, we will be giving internal employees the first opportunities to lead these
stores. It can give them the advantage over external recruitments when it comes to applying for a
supervisor role. We want to inform employees of potential benefits to them from the additional
stores such as promotions, short commute time, and closer culture. This is why transformative
leaders are vital to our new solutions.

Conclusion
Costco is one of the most prominent and successful businesses in the world today. Despite their
success, a lack of innovative ideas and competitive advantage threaten their future success. Many
of their problems can be related to their current recruitment and marketing strategies. This report
proposed two potential solutions for these problems with external hiring and the creation of a
new business line Costco Lyte. These solutions will help Costco stay competitive and set them
up for long term success. There are some potential risks and communication issues in the
implementation of the solutions, but if put in place correctly Costco will be in a better place long
term. If you have any further questions please reach out to our team leader, Tyler Hull, at
tylerhull@email.arizona.edu.
Attachments:

#1: Alan Campbell Interview Responses

What are some positive aspects of the organization structure?

Advancement. For a new employee, especially one under 30, the organizational structure allows
for numerous opportunities to advance up the corporate ladder. Costco structures their positions
under more general categories, thereby allowing different positions to be headed under one
starting salary. As you apply yourself in the different positions under one particular heading, you
become more diverse and therefore more marketable to other departments, especially as you
work towards supervisory and managerial positions.
Costco prides itself with promoting from within its own employee database, beginning with
openings for those in their own location. Though Costco employees are subject to a retail
environment, for a career minded individual with enough energy and drive, ample opportunity
exists, most especially if relocation is not an issue. Costco prefers a younger generation of
employees to train up in the Costco mentality. While that is a positive for the younger
generation, it can have a negative impact for those employees who are beginning after age 30 or
even 40, such as those who are restarting their career paths, like new military retirees, typically
joining the civilian workforce after age 40.

Another very positive aspect of Costco organization is their wages and benefits philosophy.
Costco typically pays a higher starting hourly and salary wage then most retail organizations.
This, alone, has a significant impact on their lower turnover ratio than other companies, even
outside of retail. Their benefits package is highly competitive, and extremely affordable; to
include a 401K company match, and even full time hourly employees benefit from twice yearly
bonuses based solely on profits company wide. Far less turnover definitely means more stability
for individual stores and the company as a whole.

What are some things that you believe upper management could do better?
Upper Management Corporate level: Technology.

Todays world is technology driven, and while Costco utilizes some of that for day to day
operation, they have only recently begun to tap into the merchandising market for online users.
Training all managers to fully understand current technological advancement would allow them
to understand their younger generational employees mindset as well as that of their new adult
shopping consumers. Communication skills and proper handling of text and emails in a
corporate setting should be required for all in supervisory and above positions with ongoing
training for all employees.

Costco maintains an open door policy when it comes to communication, there is no real need
to address your issues via a chain of command. That said, again, technology being used
effectively would lessen the length of time between addressing an issue and an effective outcome
from upper management.

Readdressing the younger generation - todays young professionals are embracing a more
minimalistic lifestyle. Buying in bulk for single people or couples isnt always convenient.
Tapping into that mindset and offering packaging that is still contains the top quality items that
Costco is known to carry while also offering a smaller package would be more openly received
by todays young professional as well as new empty nesters and our senior retirees.

How would you describe the culture of Costco?

The Costco Culture has been described as a cult following in the sense that it is a members
only exclusive club where outsiders are encouraged to join to be able to reap the benefits of
what only can happen if you maintain a membership. Calling it an actual cult is a bit extreme,
but if you literally define it, it definitely fits those criteria. Costco uses no form of actual paid
advertising relying solely on the word of mouth advertising from people to people contact
through its members. Offering top quality products, offering exclusive packaging deals and
expanding into areas that goes beyond actual retail merchandise, like auto sales and insurances,
travel, home improvements, and business banking (to name a few) has propelled Costco into a
market far above just a retail shopping experience. Membership has its privileges and Costco
delivers top quality everything for those who pay their dues. Even Costcos policy to fully
refund membership fees - even on the anniversary date - is exclusive to Costco. It therefore
promotes a loyal following that far surpasses what other warehouse memberships offer.
Costco beginnings are not exclusive to Costco, but the brilliant marketing strategy is what has
created this empire that has locations all over the world. Many individual locations pull in over a
million dollars in sales daily and the exclusive membership only fees attached to being able to
actually shop and purchase Costcos exclusive items net Costco pure profit. It is the members
that drive the numbers for Costcos bottom line, not just the sales figures from actual
merchandise.

The Bigger and Better mentality: Costco maintains a team of buyers and networks throughout
the world to gain access to some of the worlds finest ingredients to be able to put their exclusive
Kirkland Signature name on a product. Costco also has one of the finest return policies. No
questions asked period - on any and all products and services that are not governed by
limitations (like electronics). Personally, I feel that this policy is abused by its members daily. I
personally see returns that in any other establishment would be unapproved; however, Costco
stands firmly behind all goods and services and happily refunds for merchandise you are not
satisfied with to include items that are temporarily housed in specific locations during their
promotional Road Shows. Costco members deal exclusively with Costco alone. No fighting
with the actual manufacturer over any issue Costco takes care of their own.

What are some organizational issues that youve encountered during your time at Costco?
In my honest opinion, I believe my greatest concern (in my current location) is dealing with a
narrow-mindedness mentality of individual store management. I feel that this issue stems from
the one thing that Costco promotes as being their most positive enforcement: promoting from
within the company. I truly feel that when a manager is limited by performance dictated by only
doing things or approaching a problem The Costco Way, a level of complacency sinks in and
there isnt room for an idea explosion from those who have gained valuable insight from other
sources or careers outside of the Costco Corporation. Promoting from within based on just
longevity of service is also something that I feel falls under being narrow-minded. As I
mentioned earlier, Costco definitely leans towards hiring a younger, moldable generation. But
many, myself included, have already gained valuable knowledge and expertise that, if utilized by
the hiring location, would better profit membership and consumer sales; not to mention what that
vote of confidence would do for the morale of that individual employee. Knowledge of retail
experience alone and not embracing the talents that many of its employees have gained through
positions outside of Costco, I believe, is detrimental to the growth of the company and the
satisfaction of employees morale and well being.

Who is the biggest threat to Costco right now?

Simply put Costco is its own threat.

I think that Costco is a booming business and that it rushes to build more and more locations
faster than it allows a chosen area to fully grasp if the location will generate the membership
necessary to maintain profits. I would dare say that greed is a driving factor; that I feel forces
many to take short-cuts through the original principles of the companys founding philosophies.
Simply put, too much of too much of a good thing without enough well trained and well
experienced people to run the individual locations easily set up whole locations for problems. I
feel that Costco needs to refocus on what made the company great in the first place, choice
products, not an abundance of the same products in same categories and seeking to pass along
the savings to its members.

The animated scene comes to mind in the Disney movie Wall-E. The company that took over the
planet and the people were oblivious to the ramifications and consequences of overindulgence.
That may make me sound as though I am not a Costco fan, in fact just the opposite. Though I
have been an employee of Costco for ten years I have been a loyal member for twenty. Though
I may have my opinions of how to exceed expectations at the individual store level location, I
also have a vision for the larger picture.
What are somethings that Costco currently does that you believe they could do better?
Communication
Not just from corporate headquarters to its general managers, but more specifically for its
general managers to be well trained to listen to their own individual employees
Training
It is not enough to just shadow someone to learn. One must be trained in multiple aspects to be a
part of the team as a whole. Specific individualized training is vital.
Technology
As I referenced earlier; staying on top of technical advancement and the use of technology to
reach a larger member base is a key tool.
Marketing
It is not enough to rely on word of mouth. Costco does employ marketing teams in each their
individual locations. Marketing teams need specialized training to take the Costco vision outside
of the store and into corporate America. In particular, Costco drives marketing for memberships.
Members are the key to profits for Costco. Marketing to a larger corporation with many
employees is an ongoing area of change. Keeping current with its own neighboring businesses
and their needs is also important to Costcos membership drives and subsequent successful
renewals whether through the actual neighboring business or from those employees.
Generations
Shop in any Costco and one thing is clearly evident; membership is usually secured by those who
are typically middle class. Membership carries privilege, but membership costs. Why should
one pay to shop when so many other options are available for retail sales? Marketing products
and services to more than just the middle class market is something that Costco should strive for
in todays economy. As mentioned earlier packaging for young professionals and our seniors
would boost memberships and thus profits. Remember, membership is what drives Costcos
true profits.
Recruitment
Costco should look to diversify its employee database. I feel that there are so many markets
today with experience that would greatly benefit Costco and The Costco Way. Costco should
fully embrace the hiring of those who already value a career path and not just a paycheck.
Flexibility
Remember the roots of the business get back to the founding philosophies.
Growth
Slow down expansion; Instead of more, more, more--- concentrate on getting it working better,
better, better
Morale
Costco prides itself in being a company that pays well and boasts value of its people. But all too
often, the bottom line becomes all that drives individual general managers. Pressure for profits
and threats to job security stresses managers overmuch and this mentality causes meltdown to the
lowest hourly wage earner. In my experience thus far, those general managers who have
remembered to boost morale, see a loyalty from their employees and therefore a profit margin
that is easily attained.

Does Costco offer any flexible work schedules (work from home, telecommuting)?
I would dare take a guess and say that at the corporate level, Costco does have positions which
allow for flexibility to the work schedule. Costco employs teams that travel to regional locations
for meetings and inspections regularly. These teams are often away from their home offices for
weeks at a given time; therefore I naturally assume that communication is determined under
flexible arrangements in conjunction with opening and closing hours of operations per individual
locations as well as time zones.
As for at the individual hourly employee level, Costco will accommodate needs on an individual
basis under specific conditions, such as medical absences or temporary reduction of duties due to
a medical condition.

Do you believe Costcos current hiring strategy is effective?

In my experience (and under the individual general managers that Ive been employed) there
seems to be a mentality that only those with retail experience and former Costco trained
individuals will fit the criteria for hire.
I have explained earlier about The Costco Way. I feel that in my location, management
doesnt allow for the greater potential of offering positions to those outside of retail with
expertise in management skills. Learning the "retail game is doable for most who have
managerial backgrounds. The success of Costco is far greater than the profit bottom line.
Costco, like many employers, maintains a strict 90 probationary period before permanent hire.
Within those 90 days any reason is valid for grounds of dismissal.

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