Business models and competitive strategies in small organizations

Business Model

The company is Costco. Costco Wholesale Connections is the largest membership warehouse club chain in the United States. A warehouse club chain is a retail store that sells a wide variety of merchandise where clients are required to buy products in quantities, reducing its price markup on products up to 15%. The cheap prices, kept down by the no-frills atmosphere to the store makes the store attractive to people buying in bulk seeking cheap prices and to small-business owners. Buyers are usually also required to pay annual membership fee (currently $55) in order to shop as well as to supply their own bags or carrying materials in order to package and carry away products.

Costco is the third largest retailer in the United States and the ninth largest in the world (Top 100 Retailers ). It is the largest retailer of wines in the United States. Costco Optical is the fourth largest optical company in the States. Targeted buyers are from the upper-end of spectrum and Costco entices them with expensive goods at discount prices. Net income for Costco exceeded 1.6 billion in 2006.

Costco's goods are usually bulk packed; they do not carry multiple brands where the item is generally the same excepting when they have a house brand to sell which is usually the Kirkland Signature brand. Selling much of the latter results in a high volume of sales from a single vendor further reducing the price and reducing marketing costs. Costco saves prices in other ways, too. Not only does it not supply packaging material to consumers, but its store sis laid out in a warehouse type style with products simply arraigned, usually cluttered on shelves, on shipping pallets on the floor, or in cartons in a raw, unembellished style. Skylights reduce need for light (hence cutting down on electricity costs, whilst electric light meters automatically turn off a percentage of powered interior lights.

Costco is only open to members and their guests (maximum two) excepting purchases of gas and liqueur in some states as well as prescription drugs due to federal law. Purchase can be made in various ways: directly from the store -- which requires a membership; from its website -- no membership but 5% surcharge is added to purchases made by non-members; purchases made with Costco Cash Cards that require no membership and no surcharge (Costco Wholesale).

As per paying with credit cards, American Express is the sole card that Costco accepts due to the company paying Costco low interchange fees.

Membership fees fall into three categories: (1) the individual (Gold Star); (b) Business; (c) Executive. The latter is double the price of the original ($100) and offers the possessor additional benefits (e.g. car insurance, homeowner loans, check printing services, and car purchasing savings). Executive members also receive an annual "2% Rewards Check" of up to $7,650.00 on all purchases made (Costco Wholesale).

Costco offers other services too. It is an investment broker and travel agent (Costco. Travel) as well as offering an auto-buying program that presents customers with prearranged pricing at select auto stores. Where members can also purchase boats, RVs and power sports.

Costco also has a multifunctional photography print lab center both online and offline with unlimited free digital file storage for customers.

It has three online shopping domains: Costco.com for the U.S.; Costco.ca for Canada, and Costco.co.uk for Britain.

Costco also has a restaurant (or food court) attached to its shopping center, which offers hot dogs, sausages, drinks as well as other fast-food products.

As of 2010, Costco possessed 572 warehouses with the majority (422) being in the U.S.A., 81 in Canada, 32 in Mexico, 22 in Britain, and the rest in Japan, South Korea, Taiwan, Puerto Rico, and Australia.

Costco's form of business is a corporation which is a limited liability business that has part of its legality character from its members who are partially responsible for its maintenance and running (hence Costco's members are intrinsic to the store's continuance paying it membership fee). Costco is privately owned and for-profit, owned by shareholders who via their board elect a managerial staff to direct the corporation. It is publicly held market in that it offers its shares (e.g. stocks and bonds) to the general public.

Its category is retailer / distributor where it acts as middle-person in distributing goods from manufacturers to the customer, generating a profit via the sales or distribution. Given the complex structure that Costco has become, it can be classified under various business models. These include:

1. Bricks and clicks where the company has both the offline structure (bricks) and the online structure (clicks) enabling clients to buy / pay for their product online and acquire it at the mortar institution

2. Collective business model -- comprised of various relatively large businesses in one where all pool together to provide benefits to members. Costco has photography, optical, food, restaurant services, home insurance and so forth

Being a retail service in various items, Costco does not follow the cloud computing model.

Competitive strategies

The following section was addressed with Porter's 5 competitive forces in mind.

With no threat of new entrants in the market since its performance, history, and reputation is too intimidating as well as cost for new entrants being prohibitively expensive, Costco has most intense competition from Sam's Club and BJ's Warehouse. Net income for Costco exceeded 1.6 billion in 2006. This was a $100 million more than Sam's Club made in that same year.

Costco also has bargaining power of its supplier where, when the wholesale price of a product is too high, Costco refuses to stock it as happened in 2009 when Costco no longer stocked coca-coal products due toe beverage maker refusing to reduce its wholesale prices. Only later, when they renegotiated, did Costco agree (Collier, 2009)

It has bargaining power of buyers too in that it presents them with cheaper products than those found elsewhere, but loses some of that bargaining power in that it fails to diversify its products (as elaborated upon later). Finally, Costco need not fear threat of a related product since its prime product Kirkland Signatures is attractive due to its cheapness.

Costco beats its competition by focusing on competitive pricing, a sizeable (although not diverse) selection of products, and treasure hunting for its merchandise. It is also careful to only buy from vendors who agree to sell under a certain price (Boyle, 2006 ).

Costco manages to achieve this by consistently keeping the markup of its products 6% lower than that of its competitors consistently servicing to the price-sensitivity of its consumers and keeping its products marked 15% below its usual product price. In this way, it has managed to make its 4000 plus products cheaper than its competitors.

Sam's Club, for instance, offers the same amount and diversity of products that Costco does; yet its earned income is usually double at each store than that of Costco, although it possesses 200 more stores than Costco does. Costco, likewise, almost triples sales at each store compared to BJ's Warehouse which stocks an 3500 additional products to those that Costco features. In 2006, sales per square feet for Costco were almost $920, whilst BJ's and Sam's club had a difference of $450 per square feet during that same year.

Part of Costco's success comes from the efficiency of using its area keeping products still stored on shipping pallets as opposed to shelving them as done in other stores and cutting down costs in other ways such as with electricity where skylights reduce need for light (hence cutting down on electricity costs, whilst electric light meters automatically turn off a percentage of powered interior lights.

Costco also sells a huge hybrid of products ranging from media, to groceries, to appliances, to jewelry, and beyond with, last year, even selling an original Picasso online. In 2006, the company for instance sold 96,000 carats of diamonds.

The number of Costco food courts, photo centers, and optical stores are also larger than those of its competitors, increasing 20-fold per year. Additionally, Costco is considered to be the largest retailer of wines in the United States, whilst Costco Optical is the fourth largest optical company in the States.

Allegedly eager to please its customers, Costco only features products that sell quickly, therefore refusing to stock certain products and also upping its competition. The high inventory turnover allows the company to stabilize its assets.

Other sources of competition come from Costco's niche where it sells high-end products (such s the diamonds and original Picasso painting) to upper class consumers for steep discounts.

Given its cost-effective and pragmatic strategies, Costco has succeeded in introducing stores more frequently than its competitor, launching approximately 20 to 25 stores per year, compare to the annual 10 stores opened annually by Sam's Club and BJ's Warehouse. It has succeeded in doing so by keeping their property taxes low building in areas, which are distant from other retailers. Compare to BJ's Warehouse, on the other hand, which keeps its stores together and closer to other retailers, leveraging property costs (Bary, 2009).

The company also rapidly pays off its debts, thereby preventing long-term debts from building up and providing Costco with limited interest surcharges. Since 2004, therefore, Costco's interest expenses decreased by $24 million. Costco pays its suppliers immediately and procures its supplies at cheap prices.

Atypical, too, to its competitors (certainly in contrast to Sam's Club) is the competitive prices that Costco pays its laborers and the highly motivating conditions its supplies them with. Competitive benefits and salaries are offered, with employee turnover being low and employees many times staying on until retirement.

Problems:

Although Costco sells products that span into 5 product categories, its percentage of sale per category has been decreasing. It has attempted too to go into other markets in order to strengthen its competition, but these have failed.

Costco may be able to effectively manage internal factors, but external factors may be, occasionally, beyond its control. Take the years 2005 to 2006, for instance, although the company attempts to predict ahead by having a high turnover of inventory, the company lost significant net income during that year with growth being slightly over 3% compared to the previous 20% of former years. Part of the reason was due to the 33% increase in income taxes paid in 2006, as well as increase in total revenues by 10% during the last years. Increasing taxes and overhead caused Costco to lose during those years, a situation aggravated by its investments in its furniture business that eventually had to fold on 2009. Costco too has had problems with its fluctuating cash flow that increased by only 3% in 2006, but fell by 15% in 2005 (Fortune., 2010.). This fluctuation discomfits its shareholders.

Business model evolution

I will take an advantage- relationship-based approach to evaluating changes for Costco's performance. This combined approach will consider (I) how Costco can gain an advantage over its competitors and, (2) how it can change its business model.

Loyal to its employees with a strong cultural model, Costco's managers prefer to develop their talent / employee labor from within their organization rather than bringing in new people. A Harvard gradate, therefore, looking for a job in Costco has to start at the very bottom rung working his way up until he reaches managerial level. Although admirable in some ways, this also prevents Costco from benefiting from experienced business personnel (hired from other companies), and from innovative ways of thinking that may work for the benefit oft its company. Altogether, the company's locked-in demeanor deters it from seeing things in a fresh new way that may move it ahead of its competitors. Jim Senegal, clinging to Costco's traditional values at all costs and rejecting extern, or contradictory opinions, may be putting the company at risk especially during periods when it may most need to hear an alternate perspective.

Hiring graduate students at higher levels -- offering them a fast-track program - may help Costco capitalize from the theoretical training of these graduates. Although it may be true that business experience precedes all and that Costco's employees prove their loyalty through many years of hard work gaining an advantage and familiarity with the business that no recent university graduate (howsoever specializes his or her university) can introduce, theoretical insights may bring a new level of originality to the company.

Similarly, too, outsiders from other fields can also help by expanding the company's perspectives, or helping them see in other ways.

This problem also leads to a similar one where the company, allegedly eager to please its customers, only features products that sell quickly, therefore refusing to stock certain products. Although this is positive in that the high inventory turnover allows the company to stabilize its assets, limited and constantly stable merchandise impels customers to turn to other warehouses, such as Sam's Club and BJ's Warehouse (which carries 7,500 products), for a greater selection.

It is this inflexibility to its philosophy and approach that precedes that of customer's needs and requirements that may also corrupt some f the customer loyalty to the store. Customers seek the store out for its low prices. Inflexibility in product change, however, may cause some consumers to seek newer pastures or, at least, procure some of their products elsewhere leading them then to employ competitive stores more often.

By featuring as little as an additional 50 different items, Costco will have a greater diversity than Sam's Club and will keep satisfied customers coming back fro more. This should not prove too expensive for Costco and it can always spend some inexpensive research (such as observing or browsing amongst customers, interviewing them for their reaction to new products and assessing their reaction with the introduced product) in order to prevent risk from occurring to its company. Cautious and gradual introduction of new products with frequent turnover of these items may even be able to provide Costco with uniquely profitable items that will benefit the company in a peak manner. Doing so will not only bring interest into the company, but will also stimulate consumers to return in the hope of finding something new.

As net income continues to fall, though ahead of its competitors, Costco will benefit by relaxation of its locked-in traditional thinking by breaching in at least two ways: (1) by introducing new blood at higher positions and from diverse ways of thinking in its company (b) by diversifying the products on its shelves.

Role of IT

In order to implement and evaluate the recommendation suggested in section 5, Costco is recommended to develop a computer an information system that will track introduced products and new employees over time and place. This will enable me to see whether introducing diversification in items and putting graduates and others with a fresh approach through a fast-track program actually introduces improvement to Costco.