Costco Business Model And Elements Of Costcos Strategy, Management

1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?
2. What are the chief elements of Costco’s strategy? How good is the strategy?
Posted by Alena | Posted Date: 8/7/2011 12:03:45 PM

1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?

Business Model is used to exemplify the methods and ways which we used to generate planned revenue. The Costco’s business model is to generate high sales volume and rapid inventory turnover by offering low prices on limited selection of national branded and select private-label products in wide range of merchandise categories. Costco’s offers these products to their members who are of two types’ business members and gold star members.
This business model is tempting because it gives a test to Costco’s management to continue to devise strategies and methods through which they can keep hold of existing members and catch the attention of new members. Otherwise they will suffer failure because there will be a risk that discontented members will not renew their membership. This business model takes company towards total quality management.

2. What are the chief elements of Costco’s strategy? How good is the strategy?

Strategy is the organization’s pre selected means or approach to gaining its goals or objectives, while keeping in view current and future external conditions. Costco’s strategy’s elements are:
• Low prices
• Limited product lines and selection
• Treasure hunt shopping environment
By keeping low prices Costco’s is following cost leadership strategy which is good because on this base they can compete with their competitors. By limited product lines and limited selection they are offering limited 4000 items which are less as compared to its competitors. Costco’s is adopted market development strategy by capturing new markets for existing products. By treasure hunt shopping environment they provides such product at low prices to its members which they believe will not be available in next visit. This works as an incentive and members try to take maximum advantage and therefore Costco’s sales volume increases. At Costco’s warehouse products are not offered in every size. The strategy they followed is that by offering every size their efficiency will decrease therefore it is said intelligent loss of sales.
Posted by Zita Mac. | Posted Date: 8/7/2011 12:04:29 PM
3. Do you think Jim Sinegal is an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support can you offer for these grades?

Yes, I think Jim Sinegal is an effective CEO. He has a vision and proper plans that where Costco’s is and where it will be in long term time period. He plays an active role in overall strategy formulation, implementation and execution. He acts as producer, director and knowledgeable critic. He cut to the chase quickly, exhibiting passionate intent to detail and pricing. He used to firing a stream of questions at store managers about sales volumes and stock levels of particular items. He used to regularly analyze position of certain products in stores and give his comments on any aspect of store operations that caught his eyes. Jim Sinegal lead its team by front and the position where Costco’s wholesale stand is proof that he is and effective CEO.

4. How well Costco’s performing from financial prospective? How does the company compare to Sam’s Club and BJ’s wholesale?

Financial performance of Costco’s wholesale can be measured with the help of financial ratio analysis. Financial ratio analysis is the calculation & comparison of ratios which are derived from the company's financial statements. According to given data current ratio of Costco’s wholesale is 1.07 which shows that it can meet it current liabilities on time. Profitability ratios shows return on sales, as it is 1.8% in 2008 it shows low profit margin on sales which is result of company’s policies of offering low prices. Return on Assets in 6% which shows that company is utilizing its assets in good way. Asset turnover ratio is 3% which shows company’s is efficient in utilizing its assets. This shows that overall financial position of Costco’s is strong.
The Costco’s hold major share of 53% of wholesale club sales across the USA and Canada, Sam’s club having roughly 37% and BJ’s wholesale and several small competitors have 10% shares. Asset turnover ratio of Sam’s club and BJ’s wholesale is better in 2007 as compared to Costco’s club because of low prices offered by Costco’s club. Costco’s has low profit margin as compared to its competitors but its sales volume and membership base in strong.

5. Does the data in case exhibit 2 indicate that Costco’s expansion outside that United States is financially successful? Why or Why not?

The data in case exhibit 2 indicates that Costco’s expansion outside the United Stated is financially successful. Because over years it shows a steady growth over years in sales and operating income of Costco’s warehouses which are outside United States. And data shows a Constant and significant share of operating income of warehouses which are outside of United States in total Costco’s Warehouse operating income. Revenue to number of warehouse ration is also increasing over period of time.
Posted by Zita Mac. | Posted Date: 8/7/2011 12:04:54 PM
6. Perform a SWOT analysis and complete a strategic group map for Costco. What do these tell you about the company’s strategy and performance? How well is Costco performing from strategic prospective? Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’s wholesale?

SWOT stands for strength, weaknesses, opportunities and threats. It is a situational analysis in which internal strength and weaknesses of an organization, and external opportunities and threats faced by it are analyzed to devise a strategy. Analysis of Costco’s Wholesale is as follows;
• Largest market share
• Lowest prices
• Low overhead expenses
• Strong reputation of providing greater value
• Satisfied and talented human resource
• Difficulty in bringing changes because of large scale
• Continuously changing business and competitive business conditions
• New potential markets
• Online shopping
• Strong competition
• Wide scope of wholesale items

The company’s current strategy is effective because it is using its strengths for exploring opportunities, minimizing its weaknesses and avoiding threats. Because of its effective strategy its market share is continuously increasing and Costco’s wholesale enjoy a good reputation of providing greater value to its customers. Costco’s has maintained a strong loyal member’s base and it is continuously working for increasing its members.
Costco’s enjoys a competitive advantage because of its low prices, greater market share and reputation of proving greater value to its customers over Sam’s Club and Bj’s wholesale.

7. Does Costco’s pay its employee’s too much? Does it make sense for Costco to compensate its employees so much better than the employees at Wal-Mart or Sam’s Club? Why or Why not?

Costco’s compensation packages for its employees are much better that its competitors. It is one of the principals of Costco’s business philosophy and values, to take care of their employees. Due to good compensation packages for employees and low compensation packages for executive Costco’s enjoys a strong image of responsible corporate citizen. It makes sense to offer such packages because due to this the employee’s turnover rate is very low in Costco. And employees and given opportunities where they can make good career by performing well in Costco’s. This gives Costco’s a competitive advantage over its competitors.

8. What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take to sustain the company’s growth and improve its financial performance?

Jim Sinegal is an effective CEO, who plays an active role in company’s strategic management. Costco’s management should takes further steps to expand it market share by exploring untapped market in United States and outside the United States. They should maintain their good reputation of providing greater value to its customers. They should also provide online shopping opportunities to their customers who are outside from United States and Canada. And finally they should continue their effective strategies like high compensation to employees, low prices and reliable quality products etc.
Posted by Zita Mac. | Posted Date: 8/7/2011 12:05:16 PM

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