Strategic Management Essay
Costco is the fifth largest general retailer in the United States. Currently, it operated 608 warehouses, of which 439 are in the United States and the rest are in Puerto Rico, Canada, Mexico, UK, Japan, Taiwan, Korea and Australia. They also have an online business as well as, Costco Travel to complement their warehouse operations.
Costco actually focuses on selling their products to customers as a lower They gain an estimate of over $70 billion USD (2008) are generated through a workforce of approximately 142,000 employees. Costco focuses on selling products at low prices, often at very high volume. These goods are usually bulk‐packaged and marketed primarily to large families and businesses shoppers pay a membership fee to choose from a limited number of products in large quantities at deep discounts. Costco has 44.6 million members, with households paying $45 a year and small businesses paying $100
The results from the Detailed Value Chain Analysis reveal Costco’s value chain is successful at exploiting strengths, skills, and capabilities to leverage against weaknesses. Costco’s top three strengths include firm infrastructure, HRM, and Support Services. Costco’s major weakness is consistently low operating profit margins. Costco maintains operational effectiveness and better positioning than industry averages. Costco receives cost advantages from business (value adding) activities, and focuses to differentiate core competencies (skills) successfully outperforming competitor’s capabilities and achieving higher than industry averages across business activities. Costco lacks significant strategic innovations, and continues to follow down the inevitable path of coping and competing with Wal-Mart and Target, whom do not require a membership fee to shop for great deals, and offer the shopper enhanced experiences.
This is one of the areas where Costco gains its profit and value as Costco is known for having deals with the suppliers and driving hard bargains so that they can have a maximum of 14 percent gross margin as compared to other supermarkets that mark up their prices at least about 25 percent higher than the original price. This encourages the customers to shop at Costco and continue to come back to Costco to purchase an item as compared to other warehouse chains.
Also, the corporation limits its number of choices of supplies, brand wise for each item so that the customers would not have to choose and be confused as to which item to buy and this makes the suppliers happier as they know that they’re product would most probably be picked by the customers and they would be more willing to supply to Costco. Furthermore, they also have a no frills supply strategy whereby the store is not decorated and the stores actually look like a warehouse with all the supplies in pallots and boxes and customers can just search for their items while they walk through the rows of products and this savings also get added up into Costco’s profits. HRM
Costco views people as an investment so they compensate their employees fairly well as compared to their competitors. (Jelinek) Their employees average hourly wage increase from 11.50 to 19 dollars per hour after 5 years and this is actually 42 percent higher than their biggest competitor, Sam’s Club. They also provide their employees with good health benefits and dental insurance plans, which is why their turnover rates and theft by the employees are very low. This unique employee compensation scheme actually helps to improve Costco’s productivity as it encourages the workers to work harder and provide a better experience for the customers when they come in to shop as they are happy and proud to be part of Costco and to serve for Costco. Also, Costco’s customers who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices of the products do not come at the workers’ expense unlike other companies. Procurement
So as to control cost prices and also gain from the sales and be part of the designing process, Costco decided to produce its own signature brand called, Kirkland Signature which is Costco’s exclusive private label as the Kirkland products are only exclusive to Costco and they produce everything from men’s dress shirts to pet food to facial tissue. (Costco, 2011) By doing this, Costco can actually control the quality of the products being produced and also maintain the pricing of the products and thus they would be able to gain more profits by keeping the prices low so as to attract more customers to buy the products and also they might be able to offer time deals or discounts on the products that would in turn bring more profits for Costco without having to deal with the suppliers cost prices.
Applying Barney’s (1991) VRIN framework can determine if a resource is a source of sustainable competitive advantage. If other firms can easily understand and copy a capability, it is definitely not a long-term advantage for the firm. One of core competency that can be seen in Costco, through the VRIN framework is the inimitability of the Human Resource Management strategies. Since the employees in Costco are paid well and have good benefits they actually work harder and feel proud to work in Costco, due to their ex CEO, Jim Sinegal who has since retired. He inculcated the value system that if you provide good jobs and good wages and a career, good things would happen. This is true in Costco’s case as it does have the lowest theft rate and lowest turnover rate of its employees as compared to other competitors.
Due to these, the staff are extremely skilled in the Costco’s services and provide good customer services as well and these can definitely not be imitated easily by Costco’s competitors since the human resource of a firm can never be imitated, especially if the staff are incredibly loyal to the company that they rather even retire in Costco. The current CEO Craig Jelinek also follows in Jim Senegal’s footsteps and runs Costco with the same value system and pays the employees good wages making their human resource management strategy a unique one that is still able to be sustained. However, a problem would arise maybe a few years down the road if a recession occurs or there are economical problems that lead Costco to want to reduce the wages and benefits of the employees and this might be a problem for their productivity and also for their turnover rates and company morale. Its sustainability could be questionable for sure.
Another core competency would be the rarity of the firms services as unlike other warehouse stores, Costco has a membership service where customers actually have to pay to get a membership to enter the store which actually provides profits for Costco which can go into paying the employees wages and other costs of productions and this in turn leads to customers wanting to buy more products to offset and make full use of the membership price that they pay. The membership fee can actually be refunded if the customers are not satisfied with the service provided to them in Costco or if the products bought are not up to good quality. This is pretty rare in most retail stores and warehouse companies and they usually do not charge a membership fee for the customers to enter the store and do not inculcate this sense of loyalty and ownership in their customers so this can be seen as a pretty rare advantage only seen in Costco.
However, this core competency can also be viewed as a competitive disadvantage as by using this strategy, in the long run, if the other competitors actually reduce their products prices and they are relatively as low as Costco’s product prices or are almost on par with their products prices and qualities, the customers would definitely head over to their competitors stores so as to avoid paying the membership fee as it would be seen as a wasted cost for them and this could affect Costco’s cost price, wages as well as their productivity as their prices are low to compete with their competitors but this membership fee strategy helps to keep their prices low as well and losing this competitive advantage might be detrimental for Costco.