Costco Wholesale, formerly known as Price Club, is a membership-based warehouse chain that originally served small businesses during the mid 1970s (Cascio, 2006). The business found there would be greater buying power if they expanded to sell to non-business customers. When Price Club and Costco merged in 1983, Costco’s first warehouse was located in Seattle, Washington grossing over $3 billion dollars in just under six years (Costco, 2020). Ten years later, there were over 200 locations generating over $15 billions annually (Cascio, 2006).
Their simple philosophy is based on keeping costs down while saving customers money. Costco’s large membership base and incredible buying power has produced the best prices possible for their members (Cascio, 2006). Now, Costco has grown worldwide and is ranked as a Fortune 500 company. Their employee focus and commitment to quality has attracted and maintained millions of members producing positive, successful outcomes.
The purpose of this paper is to discuss the strategic management approaches Costco has implemented to increase profitability. Costco’s mission statement “to continually provide members with quality good and services at the lowest possible prices” is directly linked to their business model and strategy (Costco, 2019). They emphasize quality and cost leadership which attracts customers in a retailer. Hence, Costco’s mission statement guides their actions that plays a major role to their competitive advantage.
Costco Business Model and Strategy
Costco’s business model is a membership-only warehouse club that provides low-cost products to their members. Their generic strategies are low cost leadership, differentiation, and customer relationships because it exposes their strategic intent to attain global leadership. Their low-cost approaches requires constant improvement to efficiency; however, their differentiation strategy relies solely on high quality products and services. Equally important is their strong customer service approach through extended services, an impressive return policy, and customer rewards system.
Costco’s customer rewards system incentivizes members for purchasing and paying their employees higher than average in the industry (Greenhouse, 2005; Costco, 2019). Their low-cost strategic approach is effectively aligned with performance goals, culture, and customer driven focus. Moreover, their Human Resources system aims to continuously train employees on a bi-annual basis. Investing into their employees with decent wages, meaningful work, training, progression opportunities, healthcare and retirement benefits, social well-being, and job security contributes to their aim for low employee turnover (Cascio, 2006; Greenhouse, 2005). As such, their strong culture contributes to organizational citizenship, developing future leaders, and a unified leadership team (Costco, 2019; Greenhouse, 2005). Costco’s customers value low-price, quality goods and services, convenience, availability, and the overall shopping experience.
Porter’s Five Forces External Industry Analysis
This industry analysis includes the application of Porter’s Five Forces competition model to explore trends or predictions for possible opportunities and threats that shape the retail and grocer industry. These five competitive forces include threat of new entrants, rivalry among competitors, threat of substitutes, bargaining power of buyers, and bargaining power of supplies (Hitt, Ireland, & Hoskisson, 2015; Rice, 2010). Understanding the industry environment is key to successful and effective strategic positioning because Costco’s profitability is determined from the current industry’s structure and competitive landscape.
Threat of New Entrants
In the simplest definition, threat of new entrants is threats from new competitors to current competitors in an industry that poses a threat to the profitable market share (Hitt, Ireland, & Hoskisson, 2015). Barriers to entry are significant obstacles that make it challenging for new competitive businesses to enter into a certain market. Costco’s threat of new entrants are low because the barriers are too high. Their supply chain and distribution system Costco has is not easily imitated (Hamstra, 1995). Threat of substituted products or services is high because their limited selection of goods is lower compared to other large retailers such as Walmart and Target. Other large retailers and grocery stores provide common goods and not in volume bulk sizes.
Competitive rivalry with direct competitors such as Walmart, Target, Best Buy, and Sam’s Club is moderately high because they also have a strong positioning in the retail and grocery industry. Since Costco carries limited selections of high-quality goods, some consumers cannot afford those items (Greenhouse, 2005). Additionally, Costco does not sell small household items, cosmetics, and other items unlike their counterparts, Walmart and Target.
Buyer’s and Supplier’s Bargaining Power
Porter’s Five Forces of bargaining power suggests that buyers want to purchase products or services at the lowest prices; however, the pressure strong consumers place on an industry’s competitiveness to provide higher quality goods and services at the lowest return on invested capital (Cascio, 2006; Hitt, Ireland, & Hoskisson, 2015). In Costco’s case, the buyer’s bargaining power is high and a threat because of the significant industry rivalry and competition. Since Costco business model operates with ‘members only,’ this creates barriers to other non-member consumers. Consumers consider price and shopping experience when deciding to purchase products and limiting only membership-based customers could impact Costco.
Similarly to the bargaining power of buyers, suppliers exert pressure on businesses in the industry by increasing prices, reduced product availability, and lower quality products or services (Hitt, Ireland, & Hoskisson, 2015). Since bargaining power of suppliers is low for Costco, this is also an opportunity because they create partnerships with vendors and directly purchases from various manufacturers which increases their potential on profit (Cascio, 2006).
Value Chain Internal Analysis
A value chain analysis is a tool companies use to understand its valuable operations, and its strengths and weaknesses of their performance compared to their industry competitors (Hitt, Ireland, & Hoskisson, 2015; Rice, 2010). The analysis tool also identifies cost reduction opportunities, activities that impact their long-term growth, external threats, and opportunities. Costco’s efficiency and effectiveness activities (strengths) are supported by their infrastructure, human resources management system, and procurement that supports the overall company. Additionally, they have strong financial position and brand loyalty, and a customer driven focus. Their major limitation is their constant low operational revenues even though they have a better positioning than some of the industry averages.
In summation, it is evident that Costco aligns with their vision and strategic plans to meet and exceed performance goals. Although they have achieved efficiency and effectiveness, there are many expansion opportunities Costco can take advantage of to expand their customer base which impacts their profitability. To continue with their competitive advantage, growth, and viability, Costco must expand its quality goods and services to other consumers.
- Cascio, W. (2006). Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club. Academy of Management Perspectives, 20(3), 26-37. https://doi-org.tcsedsystem.idm.oclc.org/10.5465/AMP.2006.21903478
- Costco. (2019). Sustainability Commitment. Retrieved from https://www.costco.com/sustainability-introduction.html
- Costco. (2019). Employees. Retrieved from https://www.costco.com/sustainability-employees.html
- Costco. (2020). About Us. Retrieved from https://www.costco.com/about.html
- Greenhouse, S. (2005). How Costco Became the Anti-Wal-Mart. Retrieved from https://www.nytimes.com/2005/07/17/business/yourmoney/how-costco-became-the-antiwalmart.html
- Hamstra, M. (2019). Costco eases into E-commerce, maintains dominant physical stores. Drug Store News, 41(4), 60. Retrieved from https://tcsedsystem.idm.oclc.org/login?url=https://search-proquest-com.tcsedsystem.idm.oclc.org/docview/2306779686?accountid=34120
- Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2015). Strategic management: Competitiveness and Globalization. Cengage Learning.
- Rice, J. (2010). Adaptation of Porter’s Five Forces Model to Risk Management. Defense AR Journal, 17(3), 375-388.