Identification
A case study, Costco Wholesale in 2012: Mission, Business Model, and Strategy, provides a comprehensive overview of a retail company Costco Wholesale. The author covers many aspects of Costco Wholesale operations from its business model and corporate philosophy to compensation strategy and warehouse management. In addition, the case study includes a brief overview of Costco’s competitors.
Costco Wholesale Corporation is an American retail company that operates through membership warehouse concept. The selection of goods at Costco’s warehouses is limited to approximately 3,600 items, which is ten times less than the selection of items in a typical supermarket (Thompson 11). The business model of Costco is focused on generating high sales volumes of a limited number of brands at low prices (Thompson 9). While this does mean that the selection of items at Costco is smaller than in other warehouse chains, it also means that prices can be kept low due to the fact that an individual item can be bought in large volumes.
The major challenge faced by the company’s management is the competition. Warehouse segment of the retail business is a ferociously competitive environment, dominated by several large companies, some of which use the same subscription model (Dougherty par. 2).
Analysis and Evaluation
Costco’s mission is “to continually provide [their] members with quality goods and services at the lowest possible prices” (“Mission Statement and Code of Ethics” par. 1). As such, Costco’s strategy is focused on maintaining ultra-low prices. With 14 percent markup on brand-name products, the company is operating at low gross margins. Rapid inventory turnover and high volumes of goods sold allowed the company to finance its operations without large capital, “through the payment terms provided by vendors” (Thompson 9).
The company’s business’ processes are designed to minimize operating costs are heavily influenced by lean thinking philosophy. The philosophy of lean thinking implies achieving greater efficiency by eliminating waste, i.e. such practices or activities which negatively affect business performance, and use lean principles to create better customer value (Radnor & Johnston 905; Fullerton, Kennedy & Widener 415). Costco removes non-essential activities, avoids expensive real estate sites, and maximizes warehouse space usage, thereby eliminating waste. Costco’s membership model also allowed it to keep low prices and achieve a level of profitability since only members and their guests can make purchases at Costco’s stores (Thompson 11).
While Costco has successfully used its low-cost, lean practices to achieve success, the major challenge is the competition. Costco is known for its poor customer service, strict credit card policies, and tax scams. In such a competitive environment, as warehouse retail business, customers can quickly switch to another warehouse chain if they do not like the quality of customer service at Costco.
Recommendations
The competitive nature of warehouse retail business requires Costco to continuously keep its prices below market average and provide excellent customer service to reduce customer turnover. The company should establish quality objectives and carefully monitor customer service quality.
Customer satisfaction would increase if customers’ problems were addressed by competent customer service representatives in a timely manner. Higher customer satisfaction means that fewer customers would discontinue their membership. At the same time, membership base would likely increase due to the positive word-of-the-mouth, which is an influential marketing tool (Sutter par. 2). Increased membership base would result in higher profits and allow the company to expand to foreign markets to facilitate growth. As such, improving customer service quality will allow Costco to remain competitive.
Works Cited
Dougherty, Tom. Retail Market Study. A study of the retail space. n.d. Web.
Fullerton, Rosemary, Frances Kennedy and Sally Widener. “Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices.” Journal of Operations Management 32.7 (2014), 414-428. Print.
Mission Statement and Code of Ethics 2010. Web.
Radnor, Zoe and Robert Johnston. “Lean in UK Government: internal efficiency or customer service?” Production Planning & Control, 24.10 (2013): 903-915. Print.
Sutter, Brian.5 Ways to Maximize Word-of-Mouth Marketing. 2015. Web.
Thompson, Arthur. “Costco Whlesale in 2012: Mission, Business Model, and Strategy.” Crafting & Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases. Ed. Thompson Arthur, Margaret Peteraf, John Gamble and A.J. Strickland III. New York: McGraw-Hill Education, 2015. 7-25. Print.