Costco's strategic direction and business model analysis

International Strategic Management

Costco business entity is one of the global wholesales focusing on quality and low prices towards the provision of services and products to the consumers. The organization adopts a 25-year plan with the aim of becoming an international leader within the industry of operation. In order to understand the strategy of the organization, it is essential to implement tools such as SWOT and PEST analysis in the evaluation of the conditions. This research exercise will focus on the evaluation of the strategic direction of Costco Company, key strategic issues, elements of the strategy, and factors affecting change within the industry.

Evaluate the strategic direction of the company, Costco's Market strategic vision, mission, and its motto and business model. In your judgment, how well is the company living up to its vision, mission and motto?

The main objective of the organization is to become the fourth largest retailer in the United States and eighth largest retailer organization across the globe. The organization set to achieve this vision through a 25-year plan or continuous process towards the achievement of the objective. The organization's mission in the membership warehouse was to offer a continuous set of quality products and services to the targeted consumers at the lowest possible costs or prices. The strategy model was essential in the essence of providing high sales volumes and rapid inventory turnover through implementation of the lowest prices for the products and services. The organization focused on the achievement of various factors with the aim of achieving profitable operations at significantly lower gross margins in comparison to supermarkets, supercenters, mass merchandise, and traditional wholesalers (Thompson 2008, p. 32).

These factors according to the management include rapid inventory, volume purchasing efficiencies, effective and efficient distribution, reduction in the handling of the merchandise in no-frills, and provision of self-service warehouse facilities. Through this business model, the organization has the opportunity to sell and obtain cash for the inventory prior to paying for the merchandise vendors. The payment to the merchandise vendors was on time with the aim of maximizing the advantage of discounts in relation to early payments. The organization was also capable of financing big percentage of the merchandise inventory with reference to the terms and conditions of the vendors rather than the maintenance of the sizable working capital. This refers to avoidance of the concept of the current assets less current liabilities in order to facilitate the payment of the suppliers of the merchandise. According to my judgment, the organization is living effectively and efficiently towards the realization of the goals and objectives (Thompson 2008, p. 32).

This relates to the vision of becoming fourth and eighth in the United States and across the globe respectively. This is through adoption and implementation of an effective and efficient strategy towards the achievement of the mission. In order to illustrate the success of the organization in relation to the realization of the vision, it is vital to focus on the turnover volumes in 2008. The organization had the opportunity to realize a total turnover of about $71 billion within the context of 544 warehouses in 40 states, United Kingdom, Canada, Korea, Taiwan, Japan, and Puerto Rico. It also essential to note that more than 50 of the warehouses of the organization generated a turnover of about $200 million within the financial year thus the essence of achievement of the vision (Thompson 2008, p. 33).

Two warehouses performed exceptionally in relation to generation of more than $300 million within the financial year thus enhancing the opportunity for the success of the model. The organization also had the opportunity to record an average turnover of about $130 for the warehouses. This was an achievement and reflection of competitive advantage over the chief competitor within the industry in the form of Sam's Club. The average turnover was 75% more than the volume at the competitor, thus an effective and efficient step towards the realization of the vision and mission of the organization (Thompson 2008, p. 33).

Identify and discuss the chief elements of Costco Market strategy.

Costco's market strategy focuses on the illustration of chief elements such as low pricing mechanism, limited product line, limited product selection, treasure, and 'treasure hunt' shopping environment. Other elements include webs site sales, growth strategy, and marketing/advertisement.

Pricing

The organization focuses on the differentiation of the pricing system with the aim of achieving competitive advantage within the industry. This is through provision of consistent national and global prices for the quality products and services in comparison to the traditional wholesale or retail outlets. In order to achieve this differentiation, the organization focused on the stocking of products that could be priced at bargain levels thus the opportunity to the members to enhance their saving costs. This strategy was essential in capping the margins of the brand-name merchandise at about 14% in comparison to 20 to 50%-margins by supermarkets. Another objective of the low prices for the quality products was to increase the consumer base by wowing customers with minimum or significant saving costs. This is a reflection of the achievement of competitive advantage with the aim of eliminating or driving away competitors through implementation of crazy pricing mechanisms. According to this price mechanism, the organization purports to offer value to its members. The pricing mechanisms or ultra-low pricing system was essential in the development of an organization aiming to offer quality services and consistent prices to its members for the long-term basis (Thompson 2008, p. 34).

Product Selection

The organization's merchandise strategy was vital in the provision of selection of about 4,000 products to its members. This compares to supermarkets' 40,000 items and Wal-Mart's 150,000 items for the consumer selection. The product range of the organization covers a broad spectrum. Some of the products by the organization include fresh flowers, digital cameras, ceiling fans, prescription drugs, detergents, canned goods, and soft drinks in bigger containers. The organization focuses on the inclusion of commercial and professional models because of the small businesses as members of Costco business entity (Thompson 2008, p. 35).

Treasure-Hunt Merchandising

The organization practices transformation of the product selection. This is through a reflection of evolutionary quarter of the product selection. This indicates that the consumers or members of the organization were on the constant lookout for the standout products with the ability to sell quickly. The main objective of this element was to entice buyers through provision of irresistible deals in relation to luxury products. In the process of fulfilling this aspect, the organization sought to source luxury items legally from the gray market and other wholesalers/retailers aiming to erode excess and slow-selling inventories. Some of the treasure-hunt products include espresso machines, expensive jewelries and diamond rings, Italian-made Hathaway shirts, and Movado watches (Thompson 2008, p. 35).

Marketing and Advertising

Low costs and concept of treasure hunt were essential in the application and implementation of extensive marketing/advertisement or sales campaigns. The organization focused on the execution of advertisements of new warehouse openings, occasional direct mail marketing for capturing new buyers, and essential regular mail marketing for the existing consumers. The main objective behind the adoption and implementation of the direct mail marketing was to keep marketing expenses at minimum in comparison to the costs by the supermarkets and typical retailers (Thompson 2008, p. 36).

Growth Strategy

The growth element in relation to sales and profits focuses on the implementation of three components. These components include opening of more new workshops, building of a large and fierce consumer or loyal membership base, and application of effective and efficient membership techniques to enhance operations of the organization. In order to achieve this element, the organization focused on the opening of 127 new warehouses between 2005 and 2008. In the process of attracting more members, the organization implements three components. The first component focuses on the provision of facilities to purchase supplies of practical, business, and household commodities. The second component focuses on the implementation of the critical aspects to entice consumers to shop at Costco. This is through making the process rewarding and interesting thus the opportunity to spot appealing products by consumers. The final component was the opportunity to acclimatize members on the available merits in relation to shopping at the warehouses of the organization (Thompson 2008, p. 37).

What are the Key Strategic Issues (KSIs)?

There are various strategic issues emanating from the marketing strategy by Costco business entity in the pursuit of objectives, mission, and vision. One of the essential strategic issues is the identification of the various opportunities for the maximization of the sales and profit levels. This enables the organization to provide variety of products to the consumers in relation to the needs and preferences of the loyal members. The organization also has the opportunity to focus on the provision of alternative methods for the procurement process. Identification of opportunities enables the organization to enhance effectiveness and efficiency of the products, services, manufacturing, and distribution process. Another key strategic issue is evaluation and understanding of the initiatives.

This is through understanding of the role of technology, components, and aspects of the business model, mission, and vision. This is vital for the realization of the goals and objectives of the organization within the context of the 25-year plan to become fourth and eighth in the United States and across the globe respectively. Another key strategic issue is the implementation of the plan. The organization has the obligation and function of ensuring quality and effective implementation of the plan to realize the vital goals. This is through developing an essential strategy to focus on the provision of various sale volumes and profit levels. The fourth key strategic issue is the implementation of a new program or element. For instance, the organization focuses on the creation of more new warehouses to enhance procurement opportunities for the consumers. This is vital towards the realization of the goals and objectives of the organization. The fifth strategic issue is the aspect of progressing or achievement of forward leap. This is vital for the enhancement of manufacturing and distribution effectiveness and efficiencies.

Key Drivers for Change in the industry

There are various drivers for change within the retailing or warehousing industry. One of the essential drivers for change within the industry is the pricing system. Pricing system has the opportunity for the achievement of competitive advantage. This is through realization of the increase in the consumer base. Pricing mechanism is also vital in the development and enhancement of the reputation and image of the organization. Another key driver for change within the industry is the aspect of marketing or advertisement. This mainly focuses on the reach of the target audiences with the aim of ensuring effective and efficient implementation of the growth and development plan.

The third key driver for change within the industry is the production selection. It is essential for the organizations to select fast-moving products in order to enhance their growth and development through increase in the volume of profits and revenues levels. Another key value is the adoption and implementation of technology towards enhancing effectiveness and efficiency in the manufacturing and distribution process within marketing. Other key drivers for change within the industry include developments in compensation, ethical values, mission, vision, business models, and consumer services or issues' management.

Critically evaluate the strategy by the industry in the case study.

PEST Analysis

In the execution of the industry analysis in relation to the implementation of the strategy in the case study, it is essential to focus on the political, economic, social, and technological factors affecting the realization of the goals and objectives of the organization.

Political Factors

Regulations and legislations play critical role in the realization of the goals and objectives of the business models. This is through variation of the number of players and entities by implementing regulative measures for the legal operations. Political stability in the areas of operations is vital for the execution of the business models and values. Variation of taxations by political authorities affects realization of the objectives and goals of the organization. This is through influencing the volume of profits and revenues by affecting the cost of supplies. Some of the political factors that might change and affect the operations within the industry include shift of power, transformation of taxation system, and corporate laws/regulations governing the operation of the companies.

Economic Factors

The 2008 recession affected the operations of the companies operating within the industry in relation to the case study. This is through limiting the operations of the organization. The state of the economy affects the performance of the industry. Prior to the economic recession, the key exchange rates were stable thus facilitating global and internal business transactions within the industry. The state of the economy indicates that it is expensive to hire unskilled labor towards implementation of growth strategy within the industry. Businesses within the industry also have the opportunity to access credit from the financial institution for the boosting of the operations of the companies. Globalization has the ability to enhance operations and revenues levels of the organizations within the industry within the case study.

Social Factors

Increase in the population growth rate in the United States and across the globe is an essential factor towards the increase in the profits and revenues of the organizations within the industry. This is through increasing the consumer base thus expansion of the marketing and advertisement towards reaching the target market. The industry provides services and products to cater for the needs and preferences of the diverse lifestyles across the demographic representation. There are different age groups and consumers within the context of the industry. These include professional, business, and household buyers thus diversity of the products and services within the industry.

Technology

The industry has the ability implement new technologies with the aim of enhancing effectiveness and efficiencies in manufacturing and distribution of the products. For example, the industry implements the concept of the RFID to monitor and track commodities or products within the warehouses. Such technologies are vital in enhancing the ability of the consumers in the identification of the products. The organizations within the industry also have the opportunity to implement such technologies to minimize the cost of operations while increasing the volume of profits and revenues. There is stiff competition in relation to the adoption and implementation of the new developments or technological advancements. The organization has the ability to achieve competitive advantage within the industry through effective and efficient implementation of the technologies in the manufacturing and distribution of products and services. Technology is applicable in the marketing or advertisement practices of the organizations within the industry with reference to the case study.

Porter's Five Forces Analysis

Threat of new entrants to a market

There is minimal threat of new entrants to the market. This is because of high investment costs and capital requirements for the equal competition of the small entities against larger organizations. Product differentiation and branding makes it difficult for the new entities to participate within the market. Limited access to the suppliers makes it difficult for the new organizations within the industry to compete against the main players. Pricing mechanism is also another factor contributing to minimal threat of new entrants into the industry.

Bargaining power of suppliers

The bargaining power of the consumer is relatively low because of several factors occurring within the context of the industry. These factors numerous large suppliers of the products, available products for supply, minimal cost of switching to alternative suppliers, large and significant customer base, and relevant substitute resources at the disposal of the entities within the industry.

Bargaining power of customer (buyers)

Powerful customers have the ability to exert pressure in driving down prices and increasing the quality of products for relative prices thus reducing profits within an industry. There are various customers in the market or industry thus reduction in the power of the buyers. The cost of switching to different suppliers' products is very high thus limiting the power of the buyers within the industry. Customer power within the industry depends on the number of the supplying firms and the size of the orders of the various organizations.

Threat of substitute products

The threat of substitute products is minimal in the industry with reference to the case study. This relates to the extent of the price and performance of the substitute, willingness of the consumers to switch to relative substitutes, and loyalty of the customers in addition to switching costs.

Degree of competitive rivalry

There is a stiff competition within the industry focusing on various factors such as price mechanisms, merchandize quality, and location of the warehouse, member service, and product selection. In the context of the United States, Brazil, Canada, China, Puerto Rico, and Mexico, there are three critical players including Costco, Sam's Club, and BJ's wholesale. The organizations within the industry focus on the achievement of effective market share for the development of the quality and distribution of the products (Galanti 2010, p. 50).

Porter's Generic Strategies Analysis

The strategy adopted by Costco focuses on the integration of the three generic strategies analysis. The organization focuses on the integration of product selection to emphasize on the valued products by the consumers (focus strategy). The organization also focuses on the distribution of quality products at lower prices in comparison to the rivals or competitors (cost leadership strategy). The organization also focuses on the differentiation of its products, service and products delivery, and technology (Company Spotlight, 2009, p. 102) to achieve competitive advantage (differentiation strategy).

SWOT Analysis ('Costco Wholesale Corporation SWOT Analysis' 2012, p. 1-9)

Strengths

Low pricing mechanisms to attract more consumers thus increase in the volume of profits and revenues

Quality reputation and image by Costco to focus on the achievement of competitive advantage within the industry

Large scale distribution to minimize the cost of operations and increase the volume of profits

Dedicated workforce to enhance performance of the organization in the industry

Adequate technological development to meet the needs and preferences of the consumers

Weaknesses

Inability of the small entities to compete at the level of entities such as Wal-Mart because of economies of scale

Minimal volume of products to compete effectively and effciently

Opportunities

Expansion of the consumer base through development of new warehouses

Implementation of technology to facilitate production and distribution of goods within the market

Reduction of prices while enhancing quality to attract new consumers

Threats

Political insecurity or regulations

Economic recessions or uncertainties such as inflation and inconsistent exchange rate

Stiff competition thus minimal market share

Porter's Value Chain

According to the analysis by the influence of the Porter's Value Chain, there is a close relationship between support and primary activities. This is an indication of quality implementation of human resource management, firm infrastructure, procurement, and technological advancements (support activities) in enhancing provision of goods and services to the consumers. The organization also integrates services, marketing/sales, and operations, outbound and inbound logistics (primary activities) in the improvement of effective and efficient services to the consumers. This relationship is essential in the improvement and increase of the revenues and profit levels.

Ansoff Matrix

Market Penetration

Costco focuses on the penetration of the market through its business model and strategy. This is through implementation of the pricing mechanisms and quality products to appeal to the loyal members while attracting new customers. Within the competitive market, Costco enjoys about 53% of the market share in comparison to main competitors such as Sam's Club wholesale.

Market development

The strategy in the case study focuses on the development of the new markets in the form of warehouses in different locations. This is essential in the provision of new markets and distribution channels for the growth and development of the organization.

Product development

The organization focuses on the transformation of a quarter of the existing product selection with the aim of providing unique and essential products in the market. This is essential for the increase in the profits and revenues within the financial year.

Diversification

The organization focuses on the creation of new more warehouses to enhance interaction with the consumers within the industry. The strategy also focuses on the product selection and diversification thus presentation of the business, professional, and household products. This aims at serving diversity of the consumer base.

BCG Matrix Analysis

According to the BCG matrix analysis, the organization (Costco) falls under the aspect of stars. This is a representation of units with substantial market share within the context of fast growing industry. The organization has the ability to generate financial resources through implementation of the business model. In order to maintain this development, the organization requires to inject huge investments thus development of the plan.

Balanced Scorecard

Learning & growth perspective

The organization focuses on the training and improvement of the performance of the employees to increase the output levels. The organization also implements an effective and appropriate environment for realization of the goals and objectives. This is through values and motivational aspects towards the achievement of the vision, mission, and model of the business organization.

Business process perspective

There is a critical relationship between the structures, systems, and strategies of the organization and the need or preferences of the consumers. Consumers are satisfied with the services and products of the organization thus the increase in the number of customers and volume of revenues. The main objective of business entity is to increase its revenues and profits while minimizing the cost of production and distribution.

Customer perspective

The organization notes the role and influence of the consumers in the achievement of the goals and objectives. This is evident through tailoring of the business model to focus on quality and pricing mechanisms as ways of attracting and retaining consumers. This is an essential component towards the realization of the vision of the 25-year plan.

Financial perspective

The organization had the opportunity to realize a total turnover of about $71 billion within the context of 544 warehouses in 40 states, United Kingdom, Canada, Korea, Taiwan, Japan, and Puerto Rico. It also essential to note that more than 50 of the warehouses of the organization generated a turnover of about $200 million within the financial year thus facilitating the road towards achievement of the goals and objectives of the 25-year plan. This is a reflection that strong financial position of the organization.

Financial Analysis

The organization has strong financial gain through increase in the rate of turnover and revenues. The organization had the opportunity to realize a total turnover of about $71 billion within the context of 544 warehouses in 40 states, United Kingdom, Canada, Korea, Taiwan, Japan, and Puerto Rico. It also essential to note that more than 50 of the warehouses of the organization generated a turnover of about $200 million within the financial year thus the essence of achievement of the vision.

VMOST Analysis

Vision

The organization focuses on the being fourth and eighth largest in the United States and across the globe respectively. All employees, stakeholders, and shareholders operate towards the achievement of this vision.

Mission

The organization's mission in the membership warehouse was to offer a continuous set of quality products and services to the targeted consumers at the lowest possible costs or prices.

Objectives

The main objective of the organization is to become the fourth largest retailer in the United States and eighth largest retailer organization across the globe.

Strategy

The organization set to achieve this vision through a 25-year plan or continuous process towards the achievement of the objective.

Tactics

In order to execute this strategy, the organization focuses on reduction of prices in comparison to other competitors within the industry. The organization also focuses on the aspect of quality and product selection to increase the volume of sales and number of consumers.

Industry Life Cycle

Introduction Stage

This industry focuses on the aspect of development of new products to address the goals and objectives of the consumers. In the illustration of this concept, Costco adopts an innovative idea to address the issues of the consumers through the 25-year plan. Competitors within the industry focus on the improvement of quality of the products and services.

Growth Stage

This stage focuses on the success of the new products and innovative plans. The organizations within the industry recognize the profits and revenues increase like in the case of Costco. Wholesale industry has the opportunity to attract new firms because of success of the introductory phase. This is essential for the increase in the levels of competition.

Maturity Stage

The wholesale and retail industry focuses on the implementation of standards to govern quality and price mechanisms in relation to products available at the disposal of the consumers. Under this stage, Costco illustrates established manufacturing and distribution channels in the maximization of the revenues and profits.

Decline State

In addressing this phase of decline within the industry, the organization focuses on adoption of new product channels and selections. This is evident in the strategy by Costco in the provision of new products to suppress variation of preferences and needs of the consumers.

FIMO Analysis (1= least effective, 10= most effective)

Finance

Item

Rating

Turnover (sales value, number of units sold)

7

Gross profit margin

8

Net profit margin

8

Liquidity ratios

7

The number of days it takes for debtors to pay you

6

Gearing/interest cover ratio (your earnings divided by your interest expense)

6

Marketing

Item

Rating

Selling effectiveness

8

Response to new promotions

8

New accounts won

7

Repeat business

6

New products

5

Brand perception (by competition)

5

Brand perception (by customers)

6

Market position

6

Operations

Item

Rating

Output per worker

9

Output per machine

9

Age of equipment

5

Set up time

6

Absenteeism

2

Staff turnover

8

Staff training

8

Performance advantages

9

McKinsey 7S Analysis

Strategy

Organizations within the industry focus on the development of the strategies for the achievement of the goals and objectives. Costco aligns its resources towards the achievement of the 25-year plan. This is through focusing on the quality and reduced prices for the goals and objectives of the plan.

Structure

Costco is under the management of the Chief Executive Officer as the head of the operations. He has the duty of monitoring daily operations of the organization. The organization also has various departments to facilitate IT, marketing, advertisement, financial, and relations. This is essential to facilitate efficiency in the service delivery.

Systems

The organization focuses on the application of direct mail marketing to interact with the consumers and other stakeholders and shareholders effectively and efficiently. This is an essential implementation of communication systems to address financial gaps in relation to revenues and profits.

Shared Values

The organization focuses on the shared vision of becoming fourth and eighth in the context of the United States and across the globe respectively. Other essential values enhancing the performance of the organization include business model, mission, compensation, and policies.

Skills

The performance of the business entity illustrates adequate skills in the provision of services and products to the consumers. The strategy is effective in the improving of performance of the business entity within the 25 years program.

Style

The Chief Executive Officer adopts a casual interaction with the employees with the aim of creating an effective atmosphere and culture for the pursuit of goals and objectives. This generates free and transparent interaction favorable for the motivation of the employees towards the achievement of the goals and objectives.

Staff

The organization notes the importance of the employees through organization and implementation of effective training plans for the realization of the goals and objectives. Other aspects of motivation include compensation, motivation, and equal treatment in the pursuit of the objectives of the 25-year plan.

Keys success factors

Costco illustrates three key success factors towards the realization of the goals and objectives of the 25-year plan. One of the essential success factors is the quality management of the cash or financial resources. This is a reflection of the strong financial statement. Another essential success factor is effective product development and selection by the entity to offer consumers variety of products at their disposal. The third key success factor in the case study is the aspect of retaining consumers while attracting new stakeholders for the development and growth of the organization. Effective management and technological advancements aid the realization of the goals and objectives of the three success factors.