Costco Competes in the $120 Case Study

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Buyer power is high. Consumers are well informed and have a number of discount and warehouse options from which to choose. As such, there is a high risk of substitution or switching, lending the buyer high power on aggregate. There are high barriers to entry. Tremendous economies of scale are required in order to adequately compete in the low cost sector. Infrastructure buildout costs are high for any firm wishing to compete with Costco. Exit barriers are also high, due to fixed costs and the fact that most firms in the industry only operate in the warehouse or discount business. There is a high threat of substitutes from discount retailers and other low-cost retailers. The intensity of rivalry is moderate. With only three firms in the industry there is an inherent rivalry between the major players. However, strong growth in the market has reduced the intensity of the rivalry somewhat. There are some corporate stakes between Costco and Wal-Mart/Sam's Club. Overall, the industry is an unfavorable one for new entrants but for an established player like Costco it is moderately favorable, save for the rapid growth that would otherwise make it favorable.

Alternative Strategies

Costco could continue to expand via growth. There are definitely opportunities in international growth and there may be opportunities as well in domestic organic growth.

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Another alternative strategy is the status quo. Costco is in an excellent position -- market dominance, financial health, strong performance. There is no need to change. A third option is to retrench but there is no evidence to support that strategy. A fourth option is a combination of other strategies -- for example pursue international expansion while adopting the status quo domestically.

Recommended Strategy

The first phase of the recommended strategy is to maintain the status quo. The company has a solid position and there have been few relevant changes to the operating environment that would necessitate any strategic changes at this moment. The second phase of the recommended strategy is to explore international expansion. With the domestic market growth slowing, Costco needs to find international markets to help it grow. This tactic will help it become a truly global company.

The third recommendation, for three or more years into the future, is to explore other retail models. Costco has an excellent brand name. It has dabbled in other store models but was never fully committed. Once opportunities for expansion dry up, this type of diversification will help the company continue to build its market.

Conclusion

Costco is a strong….....

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