Chief Elements of Costcos Strategy - Case Study Example

Running Head MBA - COSTCO WHOLESALE CORPORATION - CASE MBA - COSTCO WHOLESALE CORPORATION - CASE Costco Sales Model Costco is a leading wholesale retailer in the world with revenue about $64.4 billion. Costco follows a low price sales model. This model differs from other retailers because the company proposes high volumes of its products for Costco members only. "Costco was also the world's largest seller of fine wines ($385 million out of total 2006 fine wine sales of $805 million).4 tires, housewares, luggage, appliances, clothing, and detergent-were designed to be of equal or better quality than national brands" (Thompson p 2008, p. C5). The growth of this type of retailing has continued; it is clearly the most dynamically changing force in retailing today. Its effect is seen not only in the continued rapid establishment of stores following this new pattern, but also in operational changes being adopted by traditional retailers (see Appendix 3,6). Though less readily measurable, it is apparently accompanied by a shrinking of activities for the few remaining general merchandising wholesalers and a loss of sales for small stores carrying women's and children's apparel, particularly in low and medium-quality lines. Costco is a closed-door store which allows only "members" access to the store through membership eligibility as defined by rather broad classifications of government employees, teachers, union members, or employees of government contractors (see Appendix 4). The chain carries a wide range of soft goods and apparel, but also gives major attention to furniture, appliances, food, and automotive supplies. Several of the closed door operations have recently opened their doors to the general public. "Examples of Costco's incredible annual sales volumes included 96,000 carats of diamonds (2006), 1.5 million televisions, $300 million worth of digital cameras, 28 million rotisserie chickens (over 500,000 weekly), 40 percent of the Tuscan olive oil bought in the United States, $16 million worth of pumpkin pies during the fall holiday season, $3 billion worth of gasoline, 21 million prescriptions, and 52 million $1.50 hot dog/soda pop combinations" (Thompson p. 2008, p. C5). Low operating margins achieved through volume sales and limited service expenditures for clerks, delivery, credit, and so on have allowed prices which average about 15% below those of the department stores and specialty shops with which discount stores compete in the sale of soft goods. Full-size food supermarkets are being established within many of the new large discount stores. Because of consumers' long experience in comparing food values between stores and because of the frequency of food store visits by the average family, these food departments are attractive to the soft-goods stores as traffic builders, and are frequently operated with planned narrow margins (or even planned losses) to maximize their drawing power (Costco Home Page 2008). Chief Elements of the Costco's strategy The uniqueness of Costco strategy is that it proposes advantages and benefits to its members only, except gasoline and beverage products. The closed-door stores depend primarily on word of mouth and on mail promotion to their members to publicize the attractive values offered. Costco does not make extensive use of advertising media to give publicity to the low prices and special values which they offer. Major retail innovations involve an "invention" of new means of performing the retailing function. They are dependent on concomitant developments in products, in physical handling technology, and in organization at the wholesale supply level; but, most important of all, they are dependent on changes in the income, location, and style of life of consumers (Drejer 2002). In contrast to other retailers, Costco proposes wide product rage: "Whereas typical supermarkets stocked about 40,000 items and a Wal-Mart Supercenter or a SuperTarget might have as many as 150,000 items for shoppers to choose from, Costco's merchandising strategy was to provide members with a selection of only about 4,000 items" (Thompson p. C6). Along with the improvement of store characteristics, locations, and merchandise, there has been an upgrading in the type of customer drawn into the store. The early stores were planned to appeal mainly to the working-class family. More recently, the self-service operations in soft goods have become established I local communities with different income. these communities involve both low, middle and high income customer groups. the uniqueness of Costco is that it perceives relationship as it operates within culture, since questions and expectations of retailing are very largely determined by that same culture. As a part of this culture, Costco established treasure-Hunt Merchandising strategy. Costco sells brand name and high quality products at low prices (Costco Home Page 2008). No advertising strategy allows Costco to save about 15% of its budget usually spend on promotion. This view depends on the notion of independently determined consumer wants. In such a world one could with some reason defend the doctrine that the consumer, as a voter, makes an independent choice between public and private goods (Drejer 2002). But given the dependence effect -given that consumer wants are created by the process by which they are satisfied and by which customers make their choice. in contrast to other retailers, Costco does not subject to the forces of advertising and emulation by which production creates its own demand. Internet sales support Costco and allow it to reach wider target audience. For instance, "Costco's e-commerce sales totaled $534 million in fiscal 2005 and $376 million in fiscal 2004. (Data for fiscal 2006 e-commerce sales were not available" (Thompson 2008, p. C7). Competitors' Analysis For Costco, the effective operation of a competitive system assumes, of course, that other social goals, such as the overall level of income and employment and the pattern of income distribution, are simultaneously achieved. For Costco, the establishment of uniform prices throughout an industry through price leadership, the "subsidization" of new market entrants by major suppliers, and the establishment of price structures that clearly favor one group of firms at the expense of another raise are the main success factors. The main competitors of Costco are m's Club (671 warehouses in six countries-the United States, Canada, Brazil, Mexico, China, and Puerto Rico), and B1's Wholesale Club (165 locations in 16 states) (Thompson 2008, p. C 14). Management today is forced to assess activities continuously in an economic environment characterized by keen competition, an explosive development of usable knowledge, and rapid and wide-spread change. In particular, students and practitioners concerned with the marketing aspects of business are confronted with the major responsibility of understanding and managing change (Costco Annual Report. 2007). Marketing is the dynamic area of business which is perhaps most directly confronted with change. It is the area most immediately concerned with competition and competitive strategies. It is the area which reflects the vitality of business organizations as they attempt to deal with shifting external market parameters. Financial results presented in exhibits 1 and 3 show that Costco has better financial results and growth rates than two competitors. In 2006, Costco received $58,963 in sales while Sam's Clun received $41, 582. Total revenue of BJ's was $8,480 while Costco received $60, 151. Thus, three companies show a stable annual growth and increased market share (Drejer 2002, see Appendix 1,2). Global Expansion of Costco With increasing abilities to communicate quickly and accurately, lowered trade barriers and the establishment of world trading blocs, business-and hence channel management-is a truly global enterprise. The result of increased global presence of major retail players is greater competitiveness in markets that once were local enclaves of protected indigenous retailers (Costco Annual Report. 2007). Local retailers that do not respond either go out of business or are acquired. Exhibit 2 shows hat global expansion of Costco is successful because it allows the company to expand its business and increase annual sales. Canadian and other international operations are comparatively low thus they help the company to sustain a strong brand image and penetrate other countries. For instance, total revenue in the USA are $48, 468, in Canada - $8, 122 and in other countries are $3,564. Globalization has an impact not just on the channel partners that actually establish operations across national borders, but also on all of the other channel members that help provide products and services to the worldwide consumers thus served. Further, from a competitive point of view, it is no longer possible to argue that one's business is local, even if the company's operations lie entirely within one country's boundaries. Foreign entrants increasingly impinge on local retailers as well as suppliers, so that the entire supply chain in effect globalizes (Dobson and Starkey, 2004). The sash flow statements and financial suggest that Costco has required resources to expend it activities and invest in new locations outside the USA (see appendix 3,5, 6). Strategic Perspectives and Competitive Advantage of Costco Costco has a competitive advantage over Sam's Club and BJ's Wholesale because it attracts largest target audience and proposes better service and product range. The thoughts, memories, and feelings that people have about a brand are, at an individual level, the essence of brand equity. This process of creating and maintaining brand equity simultaneously enriches consumers' lives and the company's bottom line (Pittengrew et al 2006). For Costco, competitive advantage arises from satisfying customers better, faster, or more cheaply than rivals. As markets evolve more rapidly, however, buyers face a growing array of novel products-home robots, digital organizers, Internet service providers-about which they know little. In response, individuals draw on their experience and observations to learn about what they want. Their experience and observations, however, are heavily dependent on the strategies brands advance. Thus, rather than giving customers what they want, competitive strategies are increasingly designed to help buyers learn what they want. Costco has a better strategic position because it owns the majority o its stores. In financial terms, this strategy is reflected in increased annual sales and large market share. "Costco had close to a 55 percent share of warehouse club sales across the United States and Canada, with Sam's Club (a division of Wal-Mart) having roughly a 36 percent share and B1's Wholesale Club and several small warehouse club competitors about a 9 percent share" (Thompson 2008, p. C 14). Although consumer learning is most obvious in rapidly advancing markets, careful observation suggests that every consumer learns in every market, no matter how fast technology advances. Consider the evolution of a buyer over his or her life. At some point, he or she will have no knowledge of how to be a buyer-no perceptions of any product, no preferences, and no experience making choices (Pittengrew et al 2006). Buyer knowledge-more specifically, perceptions, preferences, and logics for choosing among brands-define the essential rules of the competitive advantage. Every competitor must understand and play by these rules. If buyers learn, the rules of the game evolve, depending on the strategies brands advance. Costco's competitive strategies drive the evolution of the rules of the competitive game. Hence, the term market-driving strategies. In contrast, traditional customer-focused strategies assume that buyers know what they want, which implies that the rules of the competitive game are established by buyers and remain unchanged as brands compete (Costco Annual Report. 2007). The objective of competitive strategy is to give buyers what they want, and at competitive advantage-faster, more effectively, or for less than rivals. Market-driving strategies, however, create competitive advantage in an entirely different way (Pittengrew et al 2006). Recommendations The Costco example shows that competitive strategies play a central role in the buyer learning process. The competitive strategies brands pursue create the buyer experience and, based on this experience, buyers learn three key things-how to perceive brands, how to value the differences among brands, and how to make a choice among the alternatives. These perceptions, preferences, and choice strategies become the essential rules of the competitive rivalry (Costco Home Page. 2008). Those rules are continually updated as buyers continue to learn. In contrast, under the conventional view of buyers-that they know what they want-the rules of the game remain fixed, or at least they are beyond the influence of competitors' strategies. The rules are clearly established, beyond the control of the players. Competitive strategies are crafted subject to those rules. Competitive advantage, in that case, arises from playing by the rules that buyers establish and creating unique value in the minds of buyers (Thompson 2008). Differentiated membership can help Costco to improve its brand perceptions which influence the thoughts, feelings, and ideas customers associate with a brand. Initially, buyers have no perceptions of any brands. All brands are at some point novel to us, and all the brand perceptions buyers have are learned. Differentiated membership will help buyers base their perceptions on many different factors; they perceive differences in product features, different associations are created through advertising or product design; different uses lead us to draw different conclusions about a brand. A brand value network provides a simple yet clear summary of the value buyers derive from the perceptions they observe. It shows importantly that buyers seek multiple goals in making a purchase. It is these multiple goals that often times make being a buyer so difficult. Different membership, being perceived differently, will contribute to a largely dissimilar set of goals beyond basic functionality, making functionally comparable products, in fact, largely incomparable in terms of value. A special attention should be paid to low income families who cannot afford annual fee of $50. also, Costco should appraise those buyers who purchase regularly at Costco. In many situations, buyers abandon that systematic process in favor of simpler choice strategies. Consumers are adaptive. People select brands using a whole variety of strategies. The decision rules buyers adopt depend on the strategies brands pursue and have significant impact on the nature of competition. References 1. Costco Home Page. (2008). Available at: www.costco.com 2. Costco Annual Report. (2007). Available at: www.costco.com 3. Drejer, A. (2002). Strategic Management and Core Competencies: Theory and Application. Quorum Books. 4. Dobson, P., Starkey, K. (2004). The Strategic Management: Issues and Cases. Blackwell Publishing. 5. Pittengrew, A. M., Thomas, H. Whittington, R. (2006). Handbook of Strategy and Management. Sage Publications. 6. Thompson, A. (2008). Costco Corporation Case 1.in Thompson, Arthur, Strickland, A.J. and Gamble, John. Crafting and Executing Strategy: The Quest for Competitive Advantage, Concept and cases, 16th Edition. McGraw-Hill Irwin. Boston, MA. pp. C1-C17. Appendixes 1. Costco's Financial Statements 2. Sam's Club and BJ's Wholesales Operations 3. Costco's Financial Data 4. Costco's Membership 5. Costco's Fiscal Operations in 2007. 6Cash Flows Read More