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Costco Company’s Philosophy Term Paper

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Updated: Apr 30th, 2020

Costco’s vision and mission

Costco generated almost $60 billion in revenues in its last survey making it the third leading retailer in the United States today. It has approximately 57 million members worldwide with hundreds of warehouses spread in different countries. Costco is a global company that sells various kinds of merchandise, from sports to home needs and appliances, to jewelry and seasonal products. It is a major competitor in the world market, competing with retail giants like Wal-Mart and Sam’s Club. Costco sells its goods and branded merchandize to members only who are mostly retail stores.

The business thrust that has become a trend nowadays is ethics. Costco’s aims and vision emphasize ethical standards in business. The company aims for quality products and services for its customers and it says it has to maintain low priced products for its millions of members (Costco, 2014, para. 1). The company’s philosophy of respect and care for its employees is unique in the sense that this is emphasized in the company policies and HRM practices. The Costco code of ethics promotes that employees must be law-abiding, take care of the members, and honor suppliers. Mr. Jim Sinegal, the CEO, asked the employees to help promote this business ethics.

Costco’s HR related issue

While other retail giants provide low wages for their employees so they can sell low-cost products, Costco rewards its employees with high salaries, bonuses and other benefits and, at the same time, sell low-priced goods and branded merchandize. It is unique in the annals of marketing and management in the sense that it is “selfless” management. Costco’s strategic human resource management (SHRM) provides best practice by motivating employees so they can perform better and give their best shot for the company. Motivating and giving benefits to employees to improve their performance is considered best practice in the industry (Gandolfi, 2013, p. 44).

Costco’s case is unique but has its consequences. Costco’s employee management is in contrast to Wal-Mart’s although both sell low-cost products. The difference is in the implementation, the objective and the effects. Costco pays its employees an average of $17 per hour (although the starting salary can be $10 per hour till it rises to $17 or $18), an amount higher than its biggest competitor, Sam’s Club, which is owned by Wal-Mart (Gandolfi, 2013, p. 43). Costco employees have health benefits paid at 8 percent when sales rise to 25 percent, and the company also provides mid-year and year-end bonuses (Cascio, 2006, p. 28).

Analysts argue that Costco provides more benefits to its employees than Wal-Mart, but Wall Street analysts criticize Costco for its generosity to its employees, citing a misalignment between strategy and human resource management. However, this so-called misalignment has caused Costco’s shares prices to go up in about 12 months, with Wal-Mart’s stock prices decreasing by 5 percent, which meant that Costco’s strategy was effective (Lepak & Colakoglu, p. 38). The shares prices continue to grow while the strategy is being implemented.

Costco’s strategy involves meeting the needs of customers and employees all at the same time, i.e. the company sells low-priced products and provides high salaries and benefits to employees. Mr. Sinegal confirms that this is being done and has been proven very possible and effective for a global company like Costco. However, giving higher wages and more benefits for employees can have consequences, according to analysts.

This HR strategy has been bombarded with a lot of negative comments from Wall Street analysts and commentators who argue that providing more than what is normal for employees can drain the company’s coffers. Bill Dreher (Zimmerman, 2004 as cited in Cascio, 2006, p. 29), an analyst from Wall Street, argues that Costco feels like it is a private company in giving benefits to its employees, and that this is detrimental to the shareholders who have voiced concerns that profit margins were now lower than before.

Another analyst, Ian Gordon (as cited in Cascio, 2006, p. 29) noted that Costco’s prices are too low at the expense of the shareholders (Shapiro, 2004 as cited in Cascio, 2006, p. 29). Mr. Sinegal responded to this criticism, saying that Costco’s strategy is good for the company and that they have been doing this not to acquire more profits but to promote company strategy.

Costco’s aims will enable the company to stay until 50 to 60 years from now and this has been demonstrated and proven with the company’s accomplishments and performance as per revenue generated and higher shares prices. Mr. Sinegal further argues that what is beneficial for the employees is also beneficial for the company. He has demonstrated that low prices for Costco’s merchandize and branded items combined with higher salaries and more benefits for employees have stimulated Costco’s shares to rise (Hu & Chuang, 2009, p. 130).

With regard to competition, Costco has demonstrated that it is a valuable competitor. Price reduction in merchandize, especially branded items, is a common strategy for giant retailers to vie with unbranded ones, or the so-called generic products which, if manufactured with quality, can compete with branded products and sold at low prices in supermarkets. By lowering prices, products can seize “market share from manufacturer brands and have higher yields” (Cascio, 2006, p. 31).

SWOT analysis for Costco

Strength

Costco targets the upper-middle-class consumers, providing its warehouses with low-priced but limited selection of different types of branded products which create high sales and quick inventory of goods. This upper-middle-class segment usually accounts for about $74,000 annual income, but approximately 31 percent of this sector earns more than $100,000.00 (Cascio, 2006, p. 27). The company is first of all a leading retailer for conservative stores (Courtemanche & Carden, 2014, p. 560); leading, which means it is topmost in market shares wherein almost half of the shares in the entire industry belong to this company.

Costco and other warehouse clubs typically provide their customers products in bulk with little variation for every product category and limited brand, compared to other retailers and grocery stores. Costco has about 14,000 categories of branded products compared to Walmart’s 100,000 items (Courtemanche & Carden, 2014, p. 560), which is typical of giant retailers. Limiting the options to customers enlarges the sales for each item, according to Costco management. Costco’s membership programs offer a host of many benefits to members. Its Executive Program provides benefit in the form of savings.

Weakness

Wall Street analysts have criticized Costco for being too charitable to its employees but leaves behind its shareholders who need higher dividends for their money. Benefits, in the form of high salary and bonuses given to employees, can harm the shareholders’ interest in the form of lower dividends or return of investment (Shapiro, 2004 as cited in Cascio, 2006, p. 29).

In other words, employees are happy while shareholders are frustrated. This can be considered a sign of weakness since overspending for the operating expenses is dangerous for the company’s financial status. It cannot however be said whether this weakness is temporary, considering that there are signs that Costco’s performance in the stock market is quite remarkable.

Opportunity

Treating employees fairly has benefited the organization. This has given them advantage in the financial standing compared to Wal-Mart. For example, Costco’s stock price rose by 55 percent by May 1, 2006 and shares trading had been high at 24.8 times the usual one. Wal-Mart only attained 17.4 times. The reason for this, according to Dreher (as cited in Cascio, 2006, p. 29), is that Costco is loved by its customers. In other words, Costco’s HRM practices are beneficial for the company as shares prices have gone up while others are going down.

Threats

Sam’s Clubs are being supported by discount sales of Wal-Mart and other supercenters which Costco does not have. Metro, which is based in Germany, is another threat because of its vast volumes of items. However, Metro is a threat to Wal-Mart than Costco, considering that both are large retailers while Costco is a membership club which sells branded merchandize items. Retailers are a threat since they have low-priced goods. Costco’s prices are lower than Wal-Mart’s and Mr. Sinegal has boasted that their competitors cannot compete with Costco’s low, low prices.

Another threat is Costco’s suppliers. Costco has to cope with supply and demand and identify beforehand possible problems if demand goes up. There might be changes in the supply chain, for example availability of new technology which might push for higher prices. Technological changes may cause a ripple effect in the supply chain and eventually in the product prices.

HR objectives and strategies that will address the issue

Costco’s HR issues are not negative issues that the company should be worried about. The close cooperation of top management and the workforce provides positive gains for the company. This situation allows easy implementation of policies. It is already a proven fact that Costco’s strategy is providing high-quality but low-cost products for its millions of customers.

This is a club-membership shopping with branded merchandize at customers’ easy reach. Costco has committed for good performance, efficient service, and high-quality goods. Without this commitment it would easily lose patronage because of the stiff competition in the retail industry. Customers have also proven their commitment and loyalty to Costco. Year in and year out, customers renew their membership without falter, which means they approve of Costco’s strategy and innovation.

This is also true with the company’s commitment to its thousands of employees. We cannot change Costco’s HR policies; in fact, we have to recommend that these policies should be continued. No low- and middle-level employees and managers would dislike Costco’s HR policies. This is what employees have been dreaming for. Nobody wants to continually worry about paying bills for basic necessities and health insurance. These policies are a model for organizations throughout the corporate world. When employees feel the company’s commitment, they will also commit themselves for the organization. That is logical and should be the case in a capitalist society. Costco has provided a pleasant work-life balance for its employees and managers by making them happy and worry-free. The repercussion is the creation of a favorable organizational behavior.

Policies and procedures to roll out plan

First, management has to explain to the shareholders the logic and legitimacy of pursuing HR policies that benefit the employees: contented employees produce contented customers. Costco must be able to appease its shareholders by focusing on increasing dividends, but not to the extent of fooling the shareholders about the facts in their income statement. Critics of Costco’s policies will remain critics, but it has to be that way. There will come a time that they will realize their mistake if they see Costco years from now still doing well in the stock market and in the eyes of its members and the community.

Costco’s employee care should continue because this has provided strength for the company. However, it must not leave the customers behind, meaning the company should endeavor more to serve and meet customer specifications. Improving product quality is one of the recommendations here as this has not been given focus by Costco. It must endeavor to provide more quality products and stimulate customers to accept private brands.

In a study of private and manufacturer brands, it was found that “private brands market share were greatest where its quality compared to manufacturer brands was competitive” (Hoch & Banerji, 1993 as cited in Hu & Chuang, 2009, p. 130). Retailers fail in the economies of scale in employing perfect R&D employees, so they try to imitate the successful products being sold by manufacturers (Steiner, 2002, as cited in Hu & Chuang, 2009, p. 130). This should not be the case for Costco.

Pfeffer (as cited in Gandolfi, 2013, p. 45) expounded on seven best practices for employees to perform better in their jobs. These best practices are standards that can give Costco the needed innovation that will support the existing HR policies of the company. First is security, an HRM element that allows employees to commit to their company because of the security they feel for their job. In this benchmark, there is a give-and-take situation and both parties support each other. If the employees feel that they are secured in their job, they would reciprocate this and work hard for the firm.

Another best practice is “selective hiring,” wherein the company must have the capability to hire employees who have the necessary traits and characteristics to become committed employees. This particular standard is practiced by highly accomplished organizations which look for employees who have the right attitude and can be trained for specialized skills. Furthermore, the firm wants to align the prospective employee’s traits to the organization’s culture. Another benchmark is “extensive training,” which organizations provide with a lot of time and resources in order to produce talented employees who can guide the firm to success.

Firms also provide resources to train and develop their best employees. Pfeffer (as cited in Gandolfi, 2013, p. 45) outlined an effective communication as another best practice which should allow companies to produce positive results. Effective communication amongst the different departments guarantees that personnel are updated with important matters, particularly operational facets. Team working is another best practice that Costco should implement and continually observe. Independent teams who are well-versed in creative work and operational features necessary for the organization can clear the road for success.

Summary

Most of Costco’s customers are retail stores since Costco’s strategy is selling wholesale. In 2009, it generated approximately $60 billion in revenues and every year thereafter. Costco’s code of ethics is a no-nonsense ethical standard, and the company encourages its employees to follow it to the letter, i.e. the practice of obedience, employee care, and honoring of suppliers.

Human resource policies became an issue for Costco’s critics although the company’s top management, represented by the CEO, Mr. Sinegal, has always defended their HR policy, and faithfully implemented it because of the belief that what is good for the employees is good for the company and the customers. Costco provides high salaries and benefits for its employees, at the same time sells low-priced branded merchandize.

While other companies have dreamed of doing this, Costco’s critics who come from Wall Street really do not want them implemented. Costco’s competitors cannot simply vie for low-priced merchandize because Costco’s prices are believed the lowest, and Costco is doing it without sacrificing the welfare of their employees. Wal-Mart sells low-cost products while providing low wages and little benefits for its employees.

Costco’s HRM strategies have been questioned by critics and its competitors. Good deeds are always questioned. When critics said that these policies would not do any good for the company, Costco’s shares prices went up, which meant critics were wrong. Competitors wanted Costco’s policies to change because they were at a loss. All in all, Costco is going on the right track and we can see that it will still be on top 50 to 60 years from now like the way management has envisioned it to be.

References

Cascio, W. (2006). ““: A comparison of Costco to Wal-Mart’s Sam’s Club.

. (2014).

Courtemanche, C. & Carden, A. (2014). Competing with Costco and Sam’s Club: Warehouse club entry and grocery prices. Southern Economic Journal, 90(3), 565-585. doi: 10.4284/0038-4038-2012.135

Gandolfi, F. (2013). Marshaling firm resources in order to be a successful competitor. In T. Wilkinson & V. Kannan (Eds.), Strategic management in the 21st century (pp. 29-54). United States of America: ABC-CLIO.

Hu, F. & Chuang, C. (2009). How can different brand strategies lead to retailers’ success? Comparing manufacturers brand for Costco. The Journal of Global Business Issues, 3(1), 129-135.

Lepak, D. & Colakoglu, S. (2006). Ethics and strategic human resource management. In J. Deckop (Ed.), Human resources management ethics, (pp. 37-45). United States of America: Information Age Publishing Inc.

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