Costco Wholesale Corp. in 2016 - Mission, Business Model, and Strategy

1. What is Costco’s business model?  Costco’s business model, in a generic fashion, is to be the low price provider of high quality national brands and private label products to its membership holding customers.  Contained in this stance is the superior customer service that exceeds all others, inventory turnover that is out the door with the customer before it is time to even pay the bill and above all else achieving the high ethical standards that are ingrained in the top management of the company.  With providing all of the above products and services, Costco is able to charge a membership fee and generate high sales, low costs from the operating side of the business and still maintain a very efficient handling and distribution model.

Is the company’s business model appealing?  Why or why not?  This business model is appealing to the consumer due to them receiving the upscale merchandise that they desire at a low price and all they had to do was buy a membership to shop and of course pay the products and services that they select for themselves.  

1. What are the chief elements of Costco’s strategy?  Cost Leadership is at the forefront of the strategy for this company.  There are other factors that also contribute to this success but number one items is cost so as to pass this down to its members as a benefit.  Costco has five basic principles: pricing that are extremely low to benefit their customers, product selection, which includes Costco’s own private label and also the well-known leading products, treasure hunt items, internal low cost emphasis and growth strategy for the company.  

How good is the strategy?  With the pricing, Costco had a vision from the start to provide great quality products at fantastic prices for the people that have chosen to get on board and join this wholesale provider.  They make deals with vendors to get pricing that other business establishments cannot even touch and then pass on these savings to its consumers to add value to the membership.  As far as product selection goes, Costco is emphatic about carrying items that provide value for its members, which equates to limiting the selection by still providing a good product variety with sometimes different sizes and amounts to differentiate themselves form their competitors.  

Within the limited product line, there are what Costco deemed as “Treasure-Hunt Merchandise”.  These are one-time items that are purchased from various sources, not just the vendor, at a super price that the members cannot find anywhere else this low.  They are in stock now but when they sell out, they are gone and probably will never be seen again.  Costco strategized to keep the operating costs low as well for added benefits to its members.  They set themselves up in prime areas but built the business as a no frills entity.  They don’t have the fancy displays like a normal retailer and even have concrete floors.  All of this simple side of the business cuts down on the expenses so as to be able to provide the outstanding prices to its members.  

The growth strategy that was put into place has presented itself well for the company.  They looked for at least a 5 percent growth in terms of sales and have far exceeded this strategy.  Costco most definitely has developed a great strategy that shows its value day in and day out.

1. Do you think Jim Sinegal was an effective CEO?  In my analysis, Jim Sinegal was very effective as a leader and CEO.  He put much emphasis on one of his most important assets in the company, his people.  Sometimes to the dismay of the board of directors, stockholder and of course the enemy, Sinegal takes great care of the people that take care of him and the business that he adores so much.  He realized that if he took care of his people, they were much happy and whereby provided better customer service and greater buy in on the vision of the company.  (Ruggeri, 2009)  Sinegal made a point to listen to his people and remember that he is just like them.  He never acted like he was above them and actively listened to the suggestions of his people.  This added to the success of the leader.

What grades would you give him in leading the process of crafting and executing Costco’s strategy?    With the approach that he took in terms of the low cost leader, he deserved and A+.

What support can you offer for these grades?  Costco from the onset has grown significantly and outperformed the competition, whereby still keeping the prices and costs low for both the consumers and the company as a whole.  He laid a great foundation for his successor to be able to come in and continue the success that he received in his time as CEO.  Costco has grown so much that they have expanded outside of the continental United States.  

How well is Craig Jelinek performing as Sinegal’s successor?  Refer to Figure 2.1 in Chapter 2 in developing your answers.   In referencing Figure 2.1 in Chapter 2, Jelinek has continued the basic strategic vision, mission and core values of Sinegal.  He set objective that he felt were important, which fell in line with the beginning basic objectives of Sinegal and continued with the crafting of the vision, implementing a strategy and then effectively tweaking the objective as needed.  He is not a person that is going to go with the status quo.  He wants to continue the vision of the company and move it forward with increased sales and growth.

1. What core values or business principles did Jim Sinegal stress at Costco?  From the beginning, Sinegal made it very clear that the company will obey the law.  It did not matter what type of law, the company would obey all laws whether they agreed with them or not.  Members were of great value and as a whole, the company would make sure to take extra care of those that paid to shop or accompanied those members to Costco.  This included; 100% satisfaction on purchases, ecologically sensitive to the product offering within the clubs and top products in the industry, to name a few.  Sinegal believed in his people and felt that they were the center of the business.  He knew that if he took care of them, the company had no limits in where it could go.  Suppliers were of great value to the company, due to the extent that there was a partnership.  It was like the old days when men shook hands and that meant that there was a deal.  Lastly, take care of the shareholders that believed in the company and should be awarded accordingly.

1. (In the event you have covered Chapter 3)  What is competition like in the North American wholesale club industry?  Everyone is always looking for the bigger, better deal.  Competition is great within this industry.  The fluctuations in the economic conditions in the past 10 years has made companies rethink stance on various components within the macro-environment of the company.  Population demographics which fall in the sociocultural forces, the environment in which we live, the political and regulatory influences and also technological influences have all played roles in the various aspects of the wholesale industry competitive market.  

Which of the five competitive forces is strongest and why?  History shows that competition between the competing sellers is tough within this industry.  They are all trying to come up with the fresh idea that will draw more members to their club.  The leaders, Costco and Sam’s competition shop each other to see what they have to offer that the other does not and what the price points are for the perspective companies products.

Use the information in Figures 3.4, 3.5, 3.6, 3.7, and 3.8 (and the related discussion in Chapter 3) to do a complete five-forces analysis of competition in the North American wholesale club industry.