Costco's competitive advantage through globalization and e-commerce strategy

Strategic Management and Strategic Competitiveness

Costco Wholesale Corporation is a membership-based retailer offering private label as well as branded products in a range of merchandise categories including meat, deli, bakery, and produce; home furnishings, house wares, domestics; institutionally packaged as well as dry foods; motor vehicle and related products, seasonal items, toys, sports merchandise and items, beauty aids, and electronic products; food items, alcoholic and non-alcoholic beverages, and candy, to name but a few. The company additionally operates travel businesses, hearing aids centers, one-hour photo centers, optical dispensing centers, food courts, pharmacies, and gas stations in various local and international locations. With a total of 652 warehouses, 463 of them in the U.S., and the rest scattered across Australia, Korea, Taiwan, Japan, the UK, Mexico, and Canada; Costco is America's third largest retailer, and the largest membership-based warehouse entity in the world. The company faces fierce competition from BJ's Wholesale Club and Sam's club, but still manages to attract affluent and loyal customers, who return repeatedly - thanks to the thrill brought about by the constantly-changing inventory, and the discount-chic allure also referred to as the 'Costco effect'.

The Effect of Globalization and Technology Changes

Globalization translates to a higher number of both producers and consumers, increased diversity issues, higher trade volumes, a wider product variety, and of course, more intense competition. To thrive in the global market, therefore, managers have to devise ways and strategies that would enable them meet the unique interests, needs, and expectations of the different markets (Hitt, Ireland & Hoskisson, 2008). In a competitive marketplace, "only companies capable of meeting, if not exceeding, global standards typically have the capability to earn above average returns" (Hitt, Ireland & Hoskisson, 2008, p. 10).

One of the most significant benefits of the globalization of markets is reduced cost of marketing ("Global Business Environment," n.d.). To this end, a company "can make identical products for the global market and then simply design different packaging to account for the language spoken in each market" ("Global Business Environment," n.d., p. 28). Costco has employed this cost-saving strategy in its food service segment; the company's quarter pound hotdog takes the same design in all its food courts, but unlike in America, Canada, and the UK, where the hotdog is 100% beef; Australia, Mexico, and the Asian countries have theirs made of pork. This kind of saving, coupled with the fact that the company does not advertise its products have been responsible for the ever-increasing budget savings, which are a key source of competitive advantage for the company.

Like many other companies operating on a global scale, Costco uses its international sales to level uneven streams of domestic income, thereby eliminating "wide variations in sales between seasons," and subsequently steadying cash flows ("Global Business Environment," n.d., p. 29).

E-commerce is perhaps the most significant product of technology, more so for a company such as Costco, which has online sales contributing approximately 30% of collected revenue ("Global Business Environment," n.d.). In 2012, for instance, Costco collected $2 billion in revenues from its B2B online shopping site at costco.com only; and with the concept of web marketing rapidly expanding, and the internet becoming more commonplace, e-commerce will soon be the way to go. In 2005, Costco signed a deal with PhotoChannel Networks, whereby the former could offer online photo printing to its members through the PNI Digital Media Platform ("Global Business Environment," n.d.).

The company has, however, not had a smooth run in regard to technological advancement and technology changes. The same technology has been to blame for some of the highest losses the company has had to incur, with the most recent case involving a loophole that made it possible for shoppers to skirt membership fees by paying with a gift card. Differences in business regulations across countries have also posed a challenge for the company. Costco has to comply with regulations set by each of the countries it chooses to trade in; Australia, for instance, has one of the most liberal alcohol licensing policies, permitting the sale of the same on shelves within the store; Japan, on the other hand, has very strict laws governing the sale and trade of alcoholic drinks ("Global Business Environment," n.d.).

Value-Creation

The Industrial Organization Model of Above-Average Returns

The I/O model supports the long-held belief that the external environment happens to be the chief determinant of the business strategy a company selects (Hitt, Ireland & Hoskisson, 2008). The model specifies that a firm's performance depends more on the features of the industry within which it operates, than on the internal choices and decisions made by managers (Hitt, Ireland & Hoskisson, 2008). To this end, a firm has to locate the industry that presents the most attractive platforms for it to compete. Porter's five-force model describes the forces that determine the level, and nature of an industry's competition, and by extension, its level of attractiveness. Porter holds that an industry' profitability depends on the ease of entry; the nature of interactions among suppliers, as well as among buyers; the degree of rivalry between existing firms; and the availability of substitutes (Hitt, Ireland & Hoskisson, 2008). .

The Resource-Based Model of Above-Average Returns

This model specifies that a firm's strategy selection depends primarily on the pool of resources and capabilities it possesses, and not on the structural organization of the industry within which it operates (Hitt, Ireland & Hoskisson, 2008). To this end, a firm can make above-average returns by selecting a strategy that effectively uses of "its resources and capabilities to exploit opportunities in the external environment" (Hitt, Ireland & Hoskisson, 2008). In other words, the strategies selected should enable the firm to use its unique resources to gain competitive advantage over other industry players. Resources are termed unique if they are valuable, non-substitutable, and costly to imitate (Hitt, Ireland & Hoskisson, 2008).

A SWOT analysis on Costco reveals that the company has significant strengths, including high membership retention rates; relatively low prices; strong brand, great reputation; and high employee retention. Costco, unlike Wal-Mart, which owns and runs Sam's Club, gives some of the highest paychecks and medical insurance to its employees. For this reason, Costco has one of the lowest employee turnover rates in the U.S., and has been described as one of the best places to work in. This happy-employee base is a strong resource and a fundamental source of competitive advantage for the company. The company's managers could build marketing strategies that make use of employees. The company could involve unions in its marketing procedures to demonstrate to the public just how much it values its employees. It would be costly for Sam's Club to imitate such strategies because Wal-Mart's reputation in regard to employee treatment is far from perfect.

Stakeholder Categories and Their Contribution to Overall Success

The term stakeholder refers to organizations, groups, or individuals "who can affect the firm's vision and mission, are affected by the strategic outcomes achieved, and have enforceable claims on the firm's performance" (Hitt, Ireland & Hoskisson, 2008, p. 19). If managed effectively, stakeholder relations can be a source of competitive advantage (Hitt, Ireland & Hoskisson, 2008, p. 19). Costco's stakeholders are captured in the company's mission statement and code of ethics. The company's mission is to continually provide members with quality products at the lowest possible prices; a mission that it seeks to achieve by conducting business with four codes of ethics in mind -- obedience for the law; caring for members; caring for employees; and respecting suppliers. Stakeholders can be categorized into three; "capital market stakeholders; product market stakeholders; and organizational stakeholders" (Hitt, Ireland & Hoskisson, 2008, p. 19).

Capital Market Stakeholders: these include lenders and shareholders, and are considered the most important stakeholders (Hitt, Ireland & Hoskisson, 2008, p. 19). Lenders contribute capital to the firm and continually monitor its performance so as to determine its solvency, and hence, its qualification/disqualification for subsequent borrowing. By keeping its lenders satisfied, a firm increases its chances of obtaining leverage when the need for growth arises. Shareholders, on the other hand, are the owners of the firm, having invested their finances and time. If shareholders are kept satisfied, the firm's stock performs well on the exchange market; but if the opposite is the case, stockholders dispose off their investments, the share price falls, and the company performs dismally (Hitt, Ireland & Hoskisson, 2008).

Product Market Stakeholders: this category includes unions, host communities, suppliers, and customers (Hitt, Ireland & Hoskisson, 2008). Product market stakeholders gain significantly when companies engage in competitive battles; for instance, intra-industry battles and the tendency of firms to undercut each other could see customers benefit from increasingly low prices; and at the same time, have suppliers benefit from higher supplier prices (Hitt, Ireland & Hoskisson, 2008). However, customers can be considered the most important of the four, because without them, the rest are of little significance. To this end, firms must strive to always meet the needs and expectations of customers, who will more often than not "demand reliable products at the lowest possible prices" (Hitt, Ireland & Hoskisson, 2008, p. 21). Suppliers will always opt for firms that "are willing to pay the highest sustainable prices for the goods and services they receive" (Hitt, Ireland & Hoskisson, 2008, p. 21). Host communities will always expect a firm to behave responsibly, and give back to the community; and unions will expect it to provide suitable working conditions for represented employees (Hitt, Ireland & Hoskisson, 2008). In the end, success for a firm such as Costco depends upon its ability to address the needs interests, and expectations of all these groups.

Organizational Stakeholders: this group comprises of employees, managers, and non-managers (Hitt, Ireland & Hoskisson, 2008). A firm's employees are its ambassadors who play a critical role in marketing it to customers and potential stockholders (Hitt, Ireland & Hoskisson, 2008). A firm that treats its employees right is able to reap their capabilities more than one that does not value its employees. Happy employees would often be motivated to improve their company, even as they seek to achieve their individual goals. Managers are responsible for the day-to-day running of the firm, as well as strategy formulation, and play a fundamental role in its success (Hitt, Ireland & Hoskisson, 2008). They ought to be kept satisfied and appeased, failure to which the agency problem would be inevitable.

Conclusion

Strategic management has to do with the identification of opportunities and the formulation of strategies through which the firm can capitalize on the identified opportunities. Globalization and technology changes affect a firm's strategy in both positive and negative ways -- meaning that, to reap the benefits of such developments, managers have to maximize on the positives, while minimizing the damage caused by the negatives.