The Innovative Concept of the Costco Wholesale Corporation - Case Study Example

“Costco" Five Forces Analysis Summary Introduction Costco Wholesale Corporation (CWC) operates a series of ‘cash & carry membership warehouses’ that trade high-quality, domestically branded as well as privately labeled merchandises at a low price range. It sells the products to businesses that purchase for the purpose of commercial use and also to the individuals as selected member groups. The business of the company is depended on the attainment of high sales volume along with inventory turnover by providing various ranges of products at low price (Costco.co.uk, n.d.). Costco Wholesale Corporation receives bulk purchase based enquiries from domestic as well as international markets in large volumes. Costco Wholesale Corporation possesses widespread worldwide buying power and it endeavors to satisfy any specific item related requirements beyond its everyday assortment (Costco.co.uk, n.d.). The innovative concept regarding warehouse retail has enabled the Costco Wholesale Corporation (CWC) to make vertical integration and provide the products from manufacturers towards consumers (George et. al., 2004, pp. 8). In the study, the five forces analysis of the company has been evaluated in order to determine its competitive advantage within the market. 2.0 Porter’s Five Forces Analysis Porter Five Forces analysis facilitates to establish the strength of competition, profitability as well as attractiveness of a company in the marketplace where it is operating. The five competitive forces that generate the framework of market and industry are ‘bargaining power of supplier’, ‘bargaining power of customers’, ‘threats of new entrants’, ‘threat of substitutes’ and ‘competitive rivalry between existing players’ (Racklies, 2001). Competitive Rivalry between Existing Players Costco Wholesale Corporation (CWC) primarily competes in the extremely fractionalized as well as competitive retail market along with the wholesale market. There are a number of key issues present in the market that creates global internal rivalry in the wholesale market. One of such issues is the warehouse cost-structure which generally focuses on volume. By means of vertical space utilization and high rate of inventory turnover along with shelving strategies, the store focuses on the exploitation of the warehouse related ability. The other significant issue is the extreme focus related to capital, as type of inventories as well as warehouse facilities make it difficult for a firm to exist. Another noteworthy issue is that the retailers of warehouse strive to maintain brand loyalty and this effort is unique in comparison to usual customer loyalty based campaigns. In this aspect, Costco has captured the lead by means of proliferation related to tangible products as well as services (George et. al., 2004, pp. 8). Threat of New Entrants The threat of new entrants is low as there is high obstruction of entry in the market due to intense competition of Costco and its competitors. The new entrants may face enormous cost due to the inbuilt capital strength of the company. Costco already has developed good affiliation with suppliers as well as customers thus it would be a challenge for a new company to operate in the new market. Therefore, for Costco new entries are not a matter of great concern. The new entry may be important for two reasons: if the existing store in the market launches a product with greater expediency and low cost and if the competitors such as Target or Wal-Mart introduce warehouse retail chain with their capital resources. However, such situations have not occurred, as a result, for Costco the threat of new entrants has not become a major issue (George et. al., 2004, pp. 8). Threat of Substitute Products The threat of substitute of new products is considered to be low because the substitute of Costco’s multi product offerings is not available in the market. There is presence of substitutes of the products of Costco when there is disaggregation of the products across sub-industry parts. The mattress division of the company competes against discount mattresses and the media section of Costco competes with Tower Records as well as similar other firms. One of most noteworthy strategic issues related to substitution has been the ability of Costco to make expansion of revenue in relation to food as well as liquor. The membership and products of the company are connected to the usual movement of economy. The food items of the company such as the sales of Borders Cafe increase with book sales, the sales of Costco fast food window enhance with regard to membership enrollments as well as times of visits of each customer (George et. al., 2004, pp. 8). Bargaining Power of Buyers The bargaining power of buyers is low as the company provides quality products with a lower price in large quantity. The company offers membership data as a result it has large group of customer base. The demand for price elasticity is also regarded as an issue in relation to buyers because the company is quite price sensitive regarding its membership price as well as products along with service prices (George et. al., 2004, pp. 8). Bargaining Power of Suppliers The bargaining power of suppliers is also low as there is good relationship between suppliers and the company. The prime concern with regards to supply for Costco is labor. In order to maintain relationship with its labor force, Costco has willingly provided significant importance to the laborers. In the company, there have been no union or non-union related strikes. The company has developed its generosity which is considered as its core value and might not get transformed. The association with suppliers will not alter as empowerment is developed (George et. al., 2004, pp. 8). In the context of inventory, the company controls its buyer power and the power of supplier is also a nominal issue. A good relation can be established with a small number of suppliers. A significant fact that has given rise to the conflicting view between the company and the suppliers is that the company strives to stock the preferred brand names with them and in the meantime, the suppliers have an aspiration to attain the biggest share of their market (George et. al., 2004, pp. 8). 3.0 Conclusion With reference to the above discussion, it has been observed that Costco is highly competitive in the market and the products are high on demand due to low price and efficient quality. Through the analysis of Porter’s five forces, the competitive advantage of the company has been determined. ‘The threat of new entrants’ within the market of CWC is found to be low. It is observed that there is high competition in the market from existing competitors and low bargaining power of suppliers as well as buyers. Also, there is minimum chance of substitute products to be launched in the market. Thus, it can be concluded that the company has huge demand in the market and to maintain its leading presence, Costco should develop effective strategies often to stay ahead of its competitors. 4.0 References Costco.co.uk. (No Date). Export. Retrieved July 12, 2011, from http://www.costco.co.uk/Export/export.htm Costco.co.uk. (No Date). What is Costco. Retrieved July 12, 2011, from http://www.costco.co.uk/what_is_costco/what_is_costco.htm George, E., Glick, S. & Glowalla, A. (2004). Porter’s five-forces analysis. Retrieved July 12, 2011, from http://economics-files.pomona.edu/jlikens/SeniorSeminars/PAC2004/Drafts/costco.pdf Racklies, D. (2001). Porter’s five forces. Retrieved July 12, 2011, from http://www.themanager.org/pdf/p5f.pdf Read More