Costco Yukl and Lepsinger (2002)

Costco

Yukl and Lepsinger (2002) argued that "effective leaders adapt their behavior to changing situations and find an appropriate balance for tradeoffs and competing demands." This implies that while the role of leadership is to set the course for the company, the leader must be aware that the appropriate course set will change with changes in the external or even internal environment conditions. Costco makes an interesting case study for this theory because the company's strategy has remained relatively static over time. There have been changes to Costco's tactics, but the company has maintained its core business and its core strategy of competing on a cost leadership platform.

Costco's different tactical moves have included introducing the Kirkland brand, geographic expansion and adding non-food items to its stores. Only the first of these moves supported the cost leadership strategy. Adding non-food items adds an element of differentiation to the company's strategy, even though the low-cost platform has been applied to those products as well. The company's willingness to be flexible is perhaps best exemplified by the geographic diversification that brought it into urban locations. These locations represent a shift in the Costco model, as high rent downtown spaces directly contradict the cost leadership model. The company has therefore demonstrated some flexibility in response to market conditions and emerging opportunities.

The CEO plays an essential role in flexible leadership for a couple of reasons. The CEO sets the tone for the entire organization in terms of its culture and philosophy. This can be seen at Costco in the way that Jim Sinegal visits stores, fussing over individual items. This rubs off on his managers, who will follow his lead in micromanaging sales and merchandising (Boyle, 2006). If the CEO is generally flexible in his or her approach to strategy, the organization will suffer from less inertia -- it will come to expect a flexible approach. This becomes ingrained in the corporate culture, pushing the entire culture towards increased flexibility.

The example of a Sinegal store visit only highlights the key element of flexible leadership theory with respect to the role of leadership. Leaders have tremendous power within the organization that they derive from both formal authority and their expertise. Sinegal in particular, as co-founder of Costco has more formal and informal authority than anybody in the company. His influence on Costco has been tremendous with respect to efficiency and process reliability and this stems from his expertise in the area. Sinegal has also developed a human resources philosophy that allows the company to be comprised of people highly loyal to both Sinegal and his ideas. This in turn allows the organization to be lean and efficient, such that it can drive its high-volume, low-margin business.

While Sinegal is capable of succeeding as a flexible leader, Costco as a company has not had much need to be flexible. The company has been a model of consistency in terms of revenue and profit growth. The mechanisms by which Costco executes its business model are strong, such that the company has been able to weather recessions and competitive threats alike. There has not been much need to adapt. This presents a challenge when evaluating Costco according to flexible leadership theory: its ability to shift its strategy to meet changing market needs has not really been tested because it has a solid strategy and executes it so well that the company has never truly been challenged by either external or internal stimulus.

In most other organizations, however, flexible leadership is essential. Most industries face rapidly changing environmental conditions, from the volatile economy to intense competitive pressure. The key success factors that drive a company may be irrelevant tomorrow. Although not my firm, I see this in a company like Palm. Once dominant in its industry, the minute the industry dynamic shifted with the introduction of a new product and a new competitor (the shift to smartphones and the entrance of Apple), Palm was unable to adapt to compete. Blackberry management was able to adapt and that company has continued to enjoy a strong market position, while Palm has all but disappeared. While this is an extreme example, it illustrates that there are few sources of sustainable competitive advantage, so leaders must be able to constantly find new ways for their firms to excel. This can sometimes imply significant changes to the business model, so the leader should not only be flexible but should be prepared to lead the organization through the process. The organization, therefore, should be responsive to the leader's demands for changes to company culture, processes and perspectives.

Human resources is probably the most important aspect of flexible leadership. Leaders rely on followers, which implies that if the followers are unable to deal with a flexible environment, so too will the leaders. Yukl and Lepsinger (2002) argue that organizations that place a higher priority on human resources will be more flexible, and better able to adapt to changes in the environmental conditions, leading to more rapid and complete changes in strategy.

My organization has long emphasized human resources as a key means to growth and profitability. This puts my organization in a good position with respect to being flexible. Our leadership has demonstrated the ability to understand the external environment and adapt to changes, and this rubs off on the staff. The team members look to the leadership and see that flexibility is a key source of strength for the company. This in turn implies that my organization is ready for flexible leadership.

Costco is an interesting study in flexible leadership because the company appears to be flexible but its flexibility has never truly been tested. The company has made slight changes to its strategy in order to fend off competition and to strengthen its market position, however, and has been successful whenever it has needed to do this. The company is as flexible and adaptive as it needs to be in order to succeed. Sinegal's approach to management has emphasized expertise as a means of success, and part of gaining expertise is learning constantly. Costco's managers make subtle changes to their stores constantly, and never stop learning about the business. As a result, they are ready to meet any challenge, whether it is a major new competitor or simply a product that is not selling as well as expected.