Strategic Management: Costco Case Study Research Paper

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Strategic Management and Strategic Competitiveness

Costco Wholesale Corporation is a membership-based retailer offering private label as well as branded products in a range of merchandise categories including meat, deli, bakery, and produce; home furnishings, house wares, domestics; institutionally packaged as well as dry foods; motor vehicle and related products, seasonal items, toys, sports merchandise and items, beauty aids, and electronic products; food items, alcoholic and non-alcoholic beverages, and candy, to name but a few. The company additionally operates travel businesses, hearing aids centers, one-hour photo centers, optical dispensing centers, food courts, pharmacies, and gas stations in various local and international locations. With a total of 652 warehouses, 463 of them in the U.S., and the rest scattered across Australia, Korea, Taiwan, Japan, the UK, Mexico, and Canada; Costco is America's third largest retailer, and the largest membership-based warehouse entity in the world. The company faces fierce competition from BJ's Wholesale Club and Sam's club, but still manages to attract affluent and loyal customers, who return repeatedly - thanks to the thrill brought about by the constantly-changing inventory, and the discount-chic allure also referred to as the 'Costco effect'.

The Effect of Globalization and Technology Changes

Globalization translates to a higher number of both producers and consumers, increased diversity issues, higher trade volumes, a wider product variety, and of course, more intense competition. To thrive in the global market, therefore, managers have to devise ways and strategies that would enable them meet the unique interests, needs, and expectations of the different markets (Hitt, Ireland & Hoskisson, 2008). In a competitive marketplace, "only companies capable of meeting, if not exceeding, global standards typically have the capability to earn above average returns" (Hitt, Ireland & Hoskisson, 2008, p. 10).

One of the most significant benefits of the globalization of markets is reduced cost of marketing ("Global Business Environment," n.d.). To this end, a company "can make identical products for the global market and then simply design different packaging to account for the language spoken in each market" ("Global Business Environment," n.d., p. 28). Costco has employed this cost-saving strategy in its food service segment; the company's quarter pound hotdog takes the same design in all its food courts, but unlike in America, Canada, and the UK, where the hotdog is 100% beef; Australia, Mexico, and the Asian countries have theirs made of pork. This kind of saving, coupled with the fact that the company does not advertise its products have been responsible for the ever-increasing budget savings, which are a key source of competitive advantage for the company.

Like many other companies operating on a global scale, Costco uses its international sales to level uneven streams of domestic income, thereby eliminating "wide variations in sales between seasons," and subsequently steadying cash flows ("Global Business Environment," n.d., p. 29).

E-commerce is perhaps the most significant product of technology, more so for a company such as Costco, which has online sales contributing approximately 30% of collected revenue ("Global Business Environment," n.d.). In 2012, for instance, Costco collected $2 billion in revenues from its B2B online shopping site at costco.com only; and with the concept of web marketing rapidly expanding, and the internet becoming more commonplace, e-commerce will soon be the way to go. In 2005, Costco signed a deal with PhotoChannel Networks, whereby the former could offer online photo printing to its members through the PNI Digital Media Platform ("Global Business Environment," n.d.).

The company has, however, not had a smooth run in regard to technological advancement and technology changes. The same technology has been to blame for some of the highest losses the company has had to incur, with the most recent case involving a loophole that made it possible for shoppers to skirt membership fees by paying with a gift card. Differences in business regulations across countries have also posed a challenge for the company. Costco has to comply with regulations set by each of the countries it chooses to trade in; Australia, for instance, has one of the most liberal alcohol licensing policies, permitting the sale of the same on shelves within the store; Japan, on the other hand, has very strict laws governing the sale and trade of alcoholic drinks ("Global Business Environment," n.d.).

Value-Creation

The Industrial Organization Model of Above-Average Returns

The I/O model supports the long-held belief that the external environment happens to be the chief determinant of the business strategy a company selects (Hitt, Ireland & Hoskisson, 2008). The model specifies that a firm's performance depends more on the features of the industry within which it operates, than on the internal choices and decisions made by managers (Hitt, Ireland & Hoskisson, 2008).

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To this end, a firm has to locate the industry that presents the most attractive platforms for it to compete. Porter's five-force model describes the forces that determine the level, and nature of an industry's competition, and by extension, its level of attractiveness. Porter holds that an industry' profitability depends on the ease of entry; the nature of interactions among suppliers, as well as among buyers; the degree of rivalry between existing firms; and the availability of substitutes (Hitt, Ireland & Hoskisson, 2008). .

Five-Force Analysis of the Competition in the Wholesale Club Industry

Rivalry among Existing Firms: the competitive force is strong; all the three major players "offer low prices to attract members and provide them with considerable cost savings enough to cover more than the membership fees" (Calstalela, n.d., p. 1). The industry is maturing, and firms are beginning to aggressively pursue 'top-line revenue growth' via the establishment of unique stores, attracting new customers, and undercutting each other by growing shopper traffic. Switching costs are low, and members can easily switch from one club to another (Calstalela, n.d.). There is significant similarity in the merchandise offered in all the three stores; weak product differentiation fosters rivalry.

Threat Posed by Potential Entrants: the competitive force is weak; first because Sam's and Costco are established competitors, enjoying massive scale economies that cannot be easily accessed by a new firm; secondly, there are significantly large capital requirements for initial investment; and thirdly, a new comer would have to incur very high marketing and advertising costs in order to overcome the loyalty of existing firms (Calstalela, n.d.).

Supplier Bargaining Power: the competitive force ranges from weak to moderate. The bargaining power of any single supplier is limited because "no single supplier constitutes a large percentage of the merchandise that the wholesale club stock" (Calstalela, n.d., p. 1).

Buyer Bargaining Power: the competitive force is weak. Individual members are in no position to negotiate for better prices with their wholesale clubs because such clubs often have numerous members, buying in "relatively small quantities, with no single member accounting for a meaningful fraction of" the total sales (Calstalela, n.d., p. 1).

Threat Posed by Substitutes: the competitive force is strong because members do not have to shop at the warehouse clubs; they can as well make purchases from online retailers, particularly because the costs of switching from one product to another are relatively low (Calstalela, n.d.).

The industry analysis shows that due to the low switching costs, and the strong threat posed by substitute products; Costco can make above-average returns by taking advantage of its scale economies and offering standardized products at prices lower than those BJ's and Sam's; and stocking a considerable amount of differentiated products at a premium . Differentiated products are essentially those products that are not stocked by Sam's and BJ's, and which members therefore have to get from other retailers. Members would be willing to pay a price premium for such products for purposes of convenience.

The Resource-Based Model of Above-Average Returns

This model specifies that a firm's strategy selection depends primarily on the pool of resources and capabilities it possesses, and not on the structural organization of the industry within which it operates (Hitt, Ireland & Hoskisson, 2008). To this end, a firm can make above-average returns by selecting a strategy that effectively uses of "its resources and capabilities to exploit opportunities in the external environment" (Hitt, Ireland & Hoskisson, 2008). In other words, the strategies selected should enable the firm to use its unique resources to gain competitive advantage over other industry players. Resources are termed unique if they are valuable, non-substitutable, and costly to imitate (Hitt, Ireland & Hoskisson, 2008).

A SWOT analysis on Costco reveals that the company has significant strengths, including high membership retention rates; relatively low prices; strong brand, great reputation; and high employee retention. Costco, unlike Wal-Mart, which owns and runs Sam's Club, gives some of the highest paychecks and medical insurance to its employees. For this reason, Costco has one of the lowest employee turnover rates in the U.S., and has been described as one of the best places to work in. This happy-employee base is a strong resource and a fundamental source of competitive advantage for the company. The company's managers could build marketing strategies that make use of employees. The company could involve unions in….....

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