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sustainable_solutions_paper2.pdf
Sustainable Solutions Paper: Several Strategic Analyses of Costco Wholesale Corporation
Sustainable Solutions Paper: Several Strategic Analyses of Costco Wholesale Corporation
by
J. A. Spencer-McDaniel, Sr.
Doctoral degree in Business Administration (DBA): Business Strategy & Innovation
(Senior Level Program Course: DDBA-8160-11)
School of Management, Walden University
Professor Peter Anthony, Ph.D.
November 19, 2012
The purpose of this paper is to identify a competitive firm in a competitive industry, and
proposition for a sustainable solutions paper. The sustainable solutions paper (SSP) focuses to
cover (a) corporate strategic thinking, (b) systems thinking, (c) a complexity analysis, and (d) a
sustainability analysis (Walden, 2012a). The problem to be addressed in this SSP is the gap
between Costco’s ability to create and implement sustainable value creation strategies for
increasing profitability and maximizing shareholder value.
Costco is one of four leading global retailers providing customers a variety of merchandise,
ranging from private label to well known brands (Corona, 2012). Costco began operations in
1983, operates as a low cost leader, and offers a no frills warehouse business model (Costco,
2012). Today, Costco competes intensely for customers and profits with Target Corporation’s
department store model, and Wal-Mart’s Sam’s Club warehouse model. Applying the tools of
the sustainable solutions paper provides Costco detailed analyses for transforming business
activities relative to industry rivals, in order to create profits and maximize shareholder
value.
I. Executive Summary
This paper includes (a) Part I & II: Applying Traditional Strategic Thinking, (b) Applying
Complexity Analyses, and (c) Applying Systems and Sustainability Analyses. These tools capture
the bigger picture of challenges surrounding Costco’s future operations and profitability.
Applying these tools provides Costco detailed analyses for creating long-term viability and
future success.
Applying Traditional Strategic Thinking Part I includes conducting (a) Stakeholder
Identification and Value Analysis, (b) General Force Analysis, (c) Porter’s Five Force
Analysis, (d) Detailed Value Chain Analysis, (e) Detailed SWOT/ SCOT Analysis, and (f) Key
Success Factor Matrix. The results from the Stakeholder Identification and Value
Analysis suggest Costco exemplifies a utilitarian strategy by maximizing benefits for all
stakeholders, but Costco willingly neglects stockholders for other stakeholder groups. According
to the classification framework by Meznar, Chrisman, and Carroll, 1990), Costco’s mission,
values, strategies, and competences suggests Costco employs a broad enterprise strategy.
Costco’s value proposition fits feasibly within the currently accepted societal framework, and
operates at Level 3 maximizing good.
The results from the General Force Analysis reveal the top threats include (a) increasing labor
and healthcare costs, stems from the General Force Analysis (GFA) subsection Government/
military/legal. The second top threat (b) fluctuations in foreign exchange rate, stems from GFA
subsection Economic. The third top threat (c) low growth in mature markets and heavy reliance
on US operations, stems from GFA subsection Economic. The top three threats pose the most
harm to future profitability. The top three opportunities in online sales, growing demand for
private label brands, and strong growth in Asian markets stems from GFA subsection Economic.
The top three opportunities align with Costco’s competences, skills, and capabilities to increase
potential profitability.
The results from Porter’s Five Forces identify threats to global barriers to entry are low and the
threat of new entrants is high with a negative impact on profitability. Buyer power, rivalry, and
substitutes present the most potential for strong negative impacts to profitability. The
opportunities include domestic barriers to entry are high and the threat of new entrants is low
positively impacting potential profitability. Supplier power presents opportunities positively
impacting potential profitability.
The results from the Detailed Value Chain Analysis reveal Costco’s value chain is successful at
exploiting strengths, skills, and capabilities to leverage against weaknesses. Costco’s top three
strengths include firm infrastructure, HRM, and Support Services. Costco’s major weakness is
consistently low operating profit margins. Costco maintains operational effectiveness and better
positioning than industry averages. Costco receives cost advantages from business (value adding)
activities, and focuses to differentiate core competencies (skills) successfully outperforming
competitor’s capabilities and achieving higher than industry averages across business activities.
Costco lacks significant strategic innovations, and continues to follow down the inevitable path
of coping and competing with Wal-Mart and Target, whom do not require a membership fee to
shop for great deals, and offer the shopper enhanced experiences.
The results from the Detailed SWOT/ SCOT Analysis reveal possible strategies and action plans
that position Costco’s strengths, skills, and capabilities to leverage opportunities, mitigate
weaknesses and guard against threats. The results from the Key Success Factor Matrix reveal 10
key success factors are critical for Costco because of their affect on future profitability. (1) Value
propositions must be high and prices low, (2) sufficient management support, (3) hiring and
training excellent employees, (4) keeping current customers happy, (5) opening new stores, (6)
supplier partnerships, (7) extending customer base, (8) enhance brand image and loyalty, (9)
manage financial ratios, and (10) reducing energy costs and wastage.
Applying Traditional Strategic Thinking Part II includes analyzing (a) the Company Strategy
Type, (b) Strategy Moves, (c) Alignment & Goals Analysis, and (d) Action Plan Analysis.
Costco’s current Strategy Types emerge from the original company mission and early
foundations. Costco pursues elements of three of the four generic strategy types (a) low cost
leadership, (b) differentiation and (c) customer relationship strategy, which exposes their
strategic intent thinking to attain global leadership. Costco must revamp strategic efforts for
business activities competing in the global marketplace, and closely align planning and strategic
intent for future success. Costco’s current Strategic Moves embody the six additional methods
amongst the generic strategies to globally compete. Costco’s strategy to create and dominate new
markets seems stagnate to ineffective, other large retailers such as Target, Wal-Mart, Sears, or
Home Depot usually operate nearby. The results from the Alignment and Goals Analysis reveal
the employees at Costco have the necessary skills to make the strategy work, support the
strategy, maintain attitudes that align with the strategy, and have the resources needed to achieve
success. The results from the Action Plan Analysis have financial implications that can increase
gross profit margin to 18.4%, and operating profit margin to 9.42% by year-end 2017 (see
Appendix 1).
Applying Complexity Analysis includes conducting (a) Fitness Landscape Translation Analysis,
(b) Boid Analysis, and (c) Industry Evolution Modeling. The results from the Fitness Landscape
Translation Analysis reveal the current shape of the retail industry, for the scope of this analysis
includes “Big box” retailers comprising a different strategic category. Costco is climbing out of a
recessionary valley toward a promising peak in the fitness landscape for the Discount, Variety
stores industry. Wal-Mart seems to also heavily shape the patterns of the fitness landscape for the
entire Retail stores industry, but not as much in the Discount, Variety stores industry. Some
retailers reported expanding operations, but others reported downsizing and closures. Closures
were due to shifts in consumer spending and shopping trends. Approximately, 33 companies
comprise the majority of this industry, but Costco, Wal-Mart, and Target comprise 97.3% of the
total industry market capitalization, which totaled $5.31 trillion in 2012 (Yahoo.com, 2012a).
The current peaks and valleys provide profound uncertainty due to a changing technological
environment, cultural shifts, and resource depletion. Large retailers are dynamic, automated, can
create different promotions and pricing hourly, no longer require the traditional sales
representatives to showcase products, and can provide more information at purchasing touch
points (Goel, 2011). During the 1990s, firm’s employing brick-n-mortar models began closures
because of online shopping retailers, this trend continues because of the recession in 2009, but
those remaining have an opportunity to enhance shopping experiences beyond convenience.
The Boid Analysis results identify the three simple rules governing the retail industry and
Costco’s behaviors. The first rule is to maintain customer driven focus by adding value to the
merchandise mix. The second rule is to match pricing or promotion by creating flexible pricing
and promotion structures. The third rule is to move towards adopting global cultural changes by
shaping and adapting to customer preference changes, specific and according to each culture or
country that has operating units.
The Industry Evolution Modeling results reveal Costco’s efforts to continuously evolve to match
and shape the industry, simultaneously. Costco can improve on industry association positioning
and strive for RILA’s Premier membership. Costco seems to forego short-term profit
maximization for long-term viability and shareholder satisfaction. Costco seems slow to adopt
new technologies that capture customers attention and can improve on research and development
initiatives.
Applying Systems and Sustainability Analyses includes conducting (a) Life Cycle
Assessment, (b) Compliance to Innovation Analysis, and (c) Sustainable Value Framework
Analysis. The Life Cycle Assessment results reveal Costco understands the bigger picture and
works to minimize downstream and upstream risks and environmental impacts caused by
warehouse operations. The measures governing Costco’s processes for sales and services do not
take the traditional approach, and Costco seems to strive for continual improvements that provide
methods that reach the goal to go beyond. Costco monitors and reports on four greenhouse gases,
(a) carbon dioxide, (b) methane, (c) nitrous oxide, and (d) hydro fluorocarbons (Costco, 2009).
The Compliance to Innovation Analysis results reveal Costco goes above and beyond the average
large retailer by operating at Stage 5, and integrates measures strategically. Costco is compliant
with all laws, but also abides by strict ethical codes for suppliers and partners at the business
strategy level. Costco and partners work together to enhance overall product safety for
consumers.
The Sustainable Value Framework Analysis results reveal Costco’s overall basic corporate social
responsibility (CSR) rating ranks higher than the global average (CSRHub, 2012). Costco’s
approach to organizational behavior, CSR and Total Quality Management when comparing to
industry peers is mostly measureable for employees and partners, and through corporate
governance. Costco finds pride in providing a friendly work environment with highly motivated
and knowledgeable employees.
Summary Focus
Applying Traditional Strategic Thinking Part I suggests Costco’s value adding activities provide
high quality products and services in a low cost business model, and qualifies Costco’s use of a
broad accommodative enterprise strategy. Threats and weaknesses can be overcome with current
skills, strengths, and capabilities. Applying Traditional Strategic Thinking Part II suggests
Costco employs generic strategies, moves according to multiple principles, and achieves
successful alignment for effective strategy implementation. Applying Complexity
Analysis suggests Costco operates according to industry behavioral rules, and maintains fitness
strong enough to survive and change the changing landscape. Applying Systems and
Sustainability Analyses suggests Costco understands Life Cycle Assessments, the need for
innovation, and currently employs methods to promote sustainability and future profitability.
Key Takeaways
The Key Takeaways from the results of each analysis suggest Costco’s current strategic efforts
align with the theories and frameworks discussed in this paper. The level of success ranges from
low to high. Costco has a high level of success aligning strategy, except for medium levels of
success for the General Force Analysis, Porter’s Five Forces Industry Analysis, and the Key
Success Factors: Integrating the Analysis (see Table 1). Improving in these areas can
dramatically improve short-term profitability and future viability.
Table 1
Key Takeaway Matrix
Name of Analysis or Assessment Costco’s results indicate current strategy
aligns with theory (YES or NO)? How
successful is alignment (Low, Medium,
or High level)
Stakeholder Identification and Value
Analysis
YES. High level of success.
General Force Analysis YES. Medium level of success.
Porter’s Five Forces Industry Analysis YES. Medium level of success.
Detailed Value Chain Analysis YES. High level of success.
Key Success Factors: Integrating the
Analysis
YES. Medium level of success.
Analyzing the Company Strategy Type YES. High level of success.
Analyzing the Company Strategy Moves YES. High level of success.
Alignment & Goals Analysis YES. High level of success.
Fitness Landscape Translation Analysis YES. High level of success.
Boid Analysis YES. High level of success.
Industry Evolution Modeling YES. High level of success.
Life- Cycle Assessment (LCA) YES. High level of success.
Compliance to Innovation Analysis YES. High level of success.
Sustainable Value Framework Synthesis:
Detailed Driver Analysis
YES. High level of success.
Integration of Concepts
The theoretical concepts in this and the next paragraphs provide support for Part I: Applying
Traditional Strategic Thinking. Strategic planning is a corporate mechanism striving to
understand and cope with the many problematic competitive forces impacting the future (Porter,
2008). The goal of strategic planning is to create competitive advantages aligning a firm’s
existing business activities and resources, and seeks to identify the internal and external structure
of the firm based on the firm’s goals to achieve the mission. According to Mintzberg and
Hunsicker (1988), “ a superior strategy is much more than a simple step beyond an accurate
description of the problem” (p. 71). A strategy is a senior management tool and framework to
isolate existing resources (financial, human, and technical) and search for the most critical
strengths and opportunities, in order to mitigate internal weaknesses and guard against outside
threats, also known as conducting a SWOT analysis. From the SWOT analysis, the next
challenge is creating alternative action plans and implementing measures for success. The final
step evaluation and feedback determine results of performance. From performance results the
process of creating a strategy starts over.
Conventional strategy focuses on creating sustainable competitive advantages by managing the
level of fit between a firm’s existing resources and business activities, in order to leverage
capabilities for capitalizing on opportunities and increasing shareholder value (Hamal and
Prahalad, 2005). Strategic fit aims for consistency, reinforcement or optimization of business
activities. Firms heavily rely on strategic management tools, such as operational effectiveness
(OE) for managing business activities, but adversely confuse the tool’s purpose with strategy. To
enhance strategic positioning, OE is necessary, but in today’s global competitive environment
OE will not sustain competitive advantage overtime. Therefore, management must aim to choose
“to perform [well and integrated] activities differently or to perform different [well and
integrated] activities than rivals” (Porter, 1996). Maintaining a sustainable strategic position
requires trade-offs between business activities, which creates barriers to imitators and straddlers.
Leadership plays a vital role in developing, communicating, and helping to implement a clear
strategy, which includes explaining to subordinates the differences in achieving both the strategy
and OE. According to Kaplan and Norton (2008), there are 5 steps to close the loop between
strategic and operational planning; (step 1) develop the strategy, (step 2) translate the strategy,
(step 3) plan operations, (step 4) monitor and learn, and (step 5) test and adapt the strategy (p.
65).
Traditional strategic models attempt to achieve the firm’s goal for an optimal sustainable
competitive advantage in order to, increase shareholder value and maximize profits (Porter,
2008). Strategic choice theories encompass the various tools and methods management employs
to formulate and implement traditional strategic models (Harvard Business Review, 2005).
Management’s goal is to employ strategies that exploit internal strengths while mitigating
weaknesses, searching for external opportunities, and guarding against threats (Porter, 2008).
Strategic choice theory identifies human self-regulation or human ability to control as cybernetic
systems capable of autonomy, independence, and able to achieve harmonious equilibrium
(Stacey, 2011). A typical strategic choice is to develop a well thought out long-term strategic
plan for a firm’s human, technical, and financial resources; formulated by top management and
implemented by all employees at the business and enterprise levels (Harvard Business Review,
2005). Unfortunately, when strategies fail, management is to blame, and usually for
incompetence.
The theoretical concepts in this and the next paragraphs provide support for Part II: Applying
Traditional Strategic Thinking. Strategic intent seeks long-term innovative methods for a firm to
reach audacious goals of global leadership. Hamal and Prahalad (2005) argue innovation is
necessary to enable sustainable growth, global leadership, competitive revitalization, and avoid
imitating competitors. The authors argue that withering competitiveness is brought on by
management’s overuse of (a) broad strategic concepts, (b) three generic strategies, and (c) the
strategy process (Hamal and Prahalad, 2005). Strategic intent focuses to win by thinking outside
the box, remains stable over time, and requires a personal effort and commitment to achieve
results. Examples of strategic intent include four techniques exhibited in Japanese companies; (a)
reducing risks by deepening advantages, such as pursuing multiple generic strategies; (b)
searching for uncontested market share peripheral to the industry leader; (c) changing industry
boundaries and redefining customer segments; and (d) increase organizational learning via
collaborations with competitors (Hamal and Prahalad, 2005).
Strategic choice theories strive to maintain strategic positioning and represent management’s
attempt to adapt to the ongoing changes occurring in the firm’s internal and external
environments by analyzing quantitative data relative to industry rivals (Stacey, 2011). The
limitations of strategic choice theory include (a) assumptions about the given reality or the
fitness landscape, (b) the accuracy of management’s predictions, (c) the failure for cybernetic
systems to account for human spontaneity or innovation, and (d) decision-making by other
organizations (Stacey, 2011). Strategic choice theory makes contradictory assumptions about
individuals (cybernetic systems) existing within an organizational cybernetic system; the paradox
occurs when organizations exhibit control while individuals remain autonomous. Strategic
choice theories define the dominant practical and literary perspectives in strategic management
despite criticism and limitations. To minimize limitations, theorists suggest firms become
learning organizations and shift to dynamic systems thinking to create competitive advantages
(Stacey, 2011). Some theorists argue hyper competition amongst industry rivals inhibits the
possibility of a sustainable competitive advantage; instead firms must utilize temporary
competitive advantages and take aggressive competitive actions (Stacey, 2011).
The theoretical concepts in this and the next paragraphs provide support for Applying Complexity
Analyses. Organizations are instruments of order and change, but one person cannot control an
organization, and one organization cannot predictably change an industry. Crafting sustainable
strategies, adapting to unpredictable change, and lack of control requires an understanding of
how complexity sciences can determine patterns resulting in organizations and within an
industry. Traditional strategic management tools rely on predictability and control to manage
uncertainty and achieve long-term stability. Long-term predictability remains difficult, if not
impossible, and control is problematic. The systemic thinking involved in long-term strategic
planning, in the scope of complexity analysis or sciences, includes Mathematical
Chaos theory, Dissipative Structure theory and complex adaptive systems. Chaotic patterns are
not random, but exhibit paradoxical states of predictability and unpredictability, simultaneously,
which makes short term planning feasible and long-term predictability impossible (Stacey,
2011). In a dissipative system, the structure is hard to maintain and easy to change. Dissipative
patterns are problematic for future decision-making and emerge as intrinsic uncertainty and
regular irregularities (Stacey, 2011). These forecasting limitations render control impossible. An
organization is commonly referred to as the whole and is a sum of its various parts. Complex
adaptive systems examine behavioral patterns of the interacting parts (Stacey, 2011). The simple
rules that govern these organisms create the possibility for evolution. Evolution is not formed
randomly; both, co-operative and competitive strategies emerge and become the driving force
(Stacey, 2011).
In business, chaos theory and complex adaptive systems seek to explain industry and
organizational behavior from the emergent interactions within an industry, which is an
organization’s landscape at the macro level and describe the organization on a micro level
through the individuals that make up the organization. For global success, diversity or
heterogeneity within organizations, seems to provide more opportunities for creativity,
successful evolution, and tends to dominate over homogenous organizations.
The theoretical concepts in this paragraph and the next paragraphs provide support for Applying
Systems and Sustainability Analyses. The Industrial Age continues to significantly change the
world as it has during the last two centuries, but mankind’s short-term profiteering and planning
avoids the larger picture of the interconnectedness of the global environment. The upcoming
result is unsustainable and detrimental to mankind’s posterity. Non-renewable resources and
accumulating waste is the current business problem global organizations must consider
downstream and upstream in the value chain when extracting materials and the waste resulting
during various uses by various users through the product’s life cycle (Senge, Smith, Kruschwitz,
Laur, & Schley, 2010).
The fundamental problems delineate from assumptions in “mainstream organizational theory,”
Western history, and academia (Stacey, 2011, p. 199). The assumptions include (a) individuals
always remain autonomous regardless of rational decision-making, (b) separation of thinking
organizational systems influence and differ from the individuals forming them, (c) individual
decision making is subject to rationalist causality and formative causality, (d) objective observer
can model and influence organizational or mental systems, and (e) strategic planning builds on
past history or emerges spontaneously.
Senge et al. (2010) suggests the solution to avoid an unsustainable future is for businesses to
incorporate living systems thinking into strategic business models, becoming a learning
organization, meaning planning strategies according to the circular patterns occurring between
natural living systems and organizational systems. Stacey (2011) suggests five alternative
solutions to think more sustainably; (a) utilize interactive and participative planning, Soft-
Systems Methodology (SSM), and systems thinking; (b) incorporate social constructivist theories
that shift away from control and efficiencies; (c) build learning communities within a joint
enterprise to enhance personal identities of the participants; (d) focus more on control factors and
pay less attention to predictability; (e) abandon systems thinking in order to determine the
relationships of control between managers and subordinates.
Sustainability is about creating a socially, economically and environmentally viable future that
can and will sustain the present generation, future generations, and the many generations to
come. The Industrial Age continues to develop difficulties for easy solutions to fix the problems
of globalization. The problems remain complex for any one company or country to solve; but
sustainability is possible through technological innovations and empowering employees to shift
away from mainstream systemic thinking and strategic planning theories. As the global
environment continues to evolve, addressing environmental and social changes pose the greatest
challenges for organizations.
To address these challenges, global organizations must focus on changing internal decision-
making behavior (mental models), adjust to external cultural differences, and maintain positive
work attitudes. More opportunities for innovations come into existence as information
technology advances the ability to analyze data. Firms must take advantage of a creative mindset,
find and remove both barriers and constraints to a sustainable process, and engage in CSR
initiatives. As the Industrial Age ends, motivation for social change and CSR initiatives comes
from the irreversible effects of the unhealthy way the environment is treated. Motivation is found
within the vision to create a sustainably profitable future for the organization and the planet.
Firms must encourage healthy living within strategic initiatives. Some companies do as little as
comply with laws, while others strive for the highest LEED certifications, but globally we all
recognize the need for change. Unlocking the will to change means internally engaging others
for commitment and overcoming opposition, while searching externally for emerging best
practice models.
According to Kanani (2012), Stephen Jordan suggests corporate philanthropy is no longer
synonymous with corporate citizenship, but is incorporated into strategic planning. This means
organizations get the bigger picture. Analyzing large data sets is difficult, costly, and subject to
bias, while organizational learning is still in its infancy, but we must strive for growth (George &
Jones, 2012). Organizational learning models seek to enhance subordinates decision-making
capabilities and increase operational effectiveness through efficiencies. Firms conducting global
operations receive more opportunities to engage in organizational learning, which increases their
effective crisis management capabilities and minimizes the impacts brought on by natural
disasters (George & Jones, 2012). Crisis management includes (a) rapid decision-making skills,
(b) chain of command procedures that mobilize a fast response, (c) hiring, selecting, and
retaining employees capable of performing well within teams, and (d) conflict resolution and
management skills (George & Jones, 2012).
In closing, there is a substantial amount of literature providing theoretical support grounded in
practice for (a) Part I & II: Applying Traditional Strategic Thinking, (b) Applying Complexity
Analyses, and (c) Applying Systems and Sustainability Analyses. The goal of providing support
for these analyses is to model best practices, while seeking ways to overcome the limitations.
Overcoming the limitations is key for successful planning.
II. Stakeholder Identification and Value Analysis-Part I
Historically, enterprise level strategy referred to five broad corporate strategies, but the current
definition restricts strategy to social-legitimacy efforts (Meznar, Chrisman, and Carroll, 1990).
Meznar et al. (1990) build on linkages between strategic management and stakeholder
classification theories creating additional framework that meets scientific classification criteria to
more accurately define enterprise strategy. Meznar et al. (1990) classification framework
identifies general types of benefits (values) for different stakeholders and ranges between firms
employing the classical economic only enterprise strategy to those employing a non-profit firm
strategy. The main components of enterprise level strategy identify all stakeholders (social or
economic) and the scope of benefits (economic or non-economic value) a firm provides to those
stakeholders. Conflicting values typically emerge between stakeholder groups requiring
management to continually match the organization’s mission, vision, values, and goals with
those of stakeholders for long-term viability.
Enterprise Level Strategy
Costco’s enterprise level strategy is broad and accommodative. Costco’s mission is to provide
customers with high quality products and services at competitively low prices. Costco’s vision is
to deliver the best value, build a company that will be around for 50-60 years, and treat everyone
with respect (Greenhouse, 2005). Superior performing firms add economic and non-economic
value to all stakeholders (Meznar et al., 1990). Costco exemplifies a utilitarian strategy by
maximizing benefits for all stakeholders. Costco willingly neglects stockholders for other
stakeholder groups, however. The scope of a firm’s social and economic stakeholders includes
individuals or groups- affecting or subject to firm behavior. Costco’s social stakeholders include
governing agencies and local communities for Costco’s 600 warehouse operations in the US and
Puerto Rico, Mexico, Canada, Australia, the UK, Japan, South Korea, and Taiwan. Economic
stakeholders include (a) 174,000 global employees; (b) 14 board members, 37 senior executives,
and 92 vice presidents; (c) 67 million (member cardholders) customers; (d) merchandise
suppliers and partners for 4000 products, and (e) 8,198 stockholders (Costco, 2012).
Costco’s governing agencies value GDP growth, job creation, reducing energy problems,
reducing poverty, increasing public (product) safety, and minimizing greenhouse gas emissions.
Local communities typically value local law compliance, public safety, reducing local
environmental impacts, local job creation, and reducing local poverty. Therefore, Costco adheres
to strict ethical codes for vendors, and implements product safety guidelines. Costco strives to
reduce their carbon footprint, minimize or avoid impacts on ecosystems, and encourage suppliers
to do the same. Costco created a framework and reduction program for greenhouse gases which
include warehouse construction using 80% to 100% recycled steel, locally made products, roof
designs reducing heat transfer, reclaimed heat for heating warehouse water, and other arrays of
efficiency measures that promote conservation. The company values innovation and adapting to
technology. Costco built a LEED certified building, redesigned lighting systems to increase time
between changes by 50%. Costco reduces emissions and creates fuel efficiencies through a
custom set of fleet trucks for deliveries within 100 miles in any direction (Costco, 2009).
Costco’s uses innovative technology to create sustainable packaging for more private label,
Kirkland Signature products, and since 1983 has placed a strong emphasis on recycling and
diverting trash from landfills (Costco, 2009).
Costco’s employees value job security, wages, healthcare and retirement benefits, meaningful
work, social welfare, and advancement opportunities. Therefore, Costco strives to promote from
within, provide training, keep employee turnover low, maintain benefits, and give support/
provide employees opportunities to join local charitable causes (Costco, 2012). Senior executives
at Costco value customer and employee loyalty, meaningful teamwork, social welfare,
compensation, and cost/ pricing leadership. Therefore, Costco’s strong culture supports and
strives for corporate citizenship, growing future leaders, and a cohesive management team.
Costco’s loyal cardholder’s value on time delivery, low pricing, quality products and services,
availability, convenience and shopping experience. Therefore, Costco primarily focuses on
developing and maintaining customer loyalty via consistent quality products and services,
competitive prices, and availability (Costco, 2012). Suppliers value consistency and large orders.
Therefore, Costco partners with brand name merchandise suppliers, and engage in co-branding
(Costco, 2012). Stockholders value dividends and higher stock prices, and in 2012, Costco
increased the cash dividend 14.5%.
According to the classification framework by Meznar et al. (1990), Costco’s mission, values,
strategies, and competences suggests Costco employs a broad enterprise strategy aiming to
reward shareholders (economic value) by maintaining a strict code of ethics, to obey the law,
take care of members and employees, and respect vendors (Costco, 2009). Emphasis on social
responsibility and community commitment also emerges from Costco’s mission statement for
community relations, including Costco’s Backpack Program and Scholarship Fund. Costco’s
philanthropic views focus on educational, social and human services, as well as serve to increase
accessibility and quality of healthcare for children by assisting Children’s Hospitals
through Children’s Miracle Network: Hospitals Helping Local Kids (Costco, 2009).
Costco’s Corporate Sustainability and Energy Group serve under the following mission
statement: “To conduct Costco’s business operations in an environmentally and socially
responsible and sustainable manner; to reduce Costco’s use of resources and generation of waste;
to comply with environmental laws and regulations; and to lead by example” (Costco, 2009).
Culture Type
Wheeler, Colbert, and Freeman (2003) developed a navigation tool to distinguish the three levels
of corporate culture ranging from doing the least amount of harm to contributing the most
amount of good; (Level 1) describes compliance with laws and norms to avoid losing value,
(Level 2) describes trade-offs in relationship management, and (Level 3) describes a sustainable
organization integrating at all levels and focusing to maximize value (p.11). Costco’s stated
philosophies, ecological, social, and economic business activities demonstrate Level 3
characteristics to create maximum good, maximum value, and sustainability. Costco rewards,
recognizes and maintains a fundamental understanding of each stakeholder.
Costco manages selling, general, and administrative (SG&A) expenses roughly 9.5% of sales for
a three year low (Costco, 2012). Costco generates more efficiencies and profitability from
SG&A activities than Wal-Mart (Corona, 2005). Costco employs a no advertising strategy
adding 2% back to the annual bottom line, and a pricing strategy that includes low mark-ups at
maximum 15% (Greenhouse, 2005). Wal-Mart, Target, and Costco compose the largest sub
segment in the retailer industry similarly managing customer needs and resources, (Corona,
2012). Employee turnover is lower than industry average around 17% or compared to Wal-
Mart’s 44% (Cascio, 2006). Employee pay remains above industry average and was 72% higher
than Wal-Mart’s Sam’s Club (Cascio, 2006). Costco grants employee healthcare benefits sooner
than Wal-Mart and Target, and strives to keep membership prices steady and employee benefits
from decreasing (Greenhouse, 2005).
The Retail Industry culture is remarkably different than Costco’s utilitarian stakeholder
approach. Competitive rivalry is high in the retail industry and forces competition to focus on
short-term economic performance. The retail industry includes markups at 25% for
supermarkets, and 50% or more for other retailers (Greenhouse, 2005).
Integrated Concepts from Readings
Meznar et al. (1990) suggest value is historically measured by economic performance and the
overall benefits contributed to society (social responsibility). Results from other studies, suggest
a lack of consistent relationships between economic performance and social responsibility, and
adequately matching social performance to a firm’s activities, strategies, competences, and
stakeholders enriches the concept of enterprise strategy (Meznar et al., 1990). Firms, some
more than others, create both social good and social costs via business activities, and most
typically seek to outweigh the social costs. Costco seems unique compared to Target and Wal-
Mart for balancing social benefits while maximizing profits. Wal-Mart and Target fail to
incorporate all stakeholders and closely follow a narrow accommodative strategy focusing on
stockholders to determine how much value is added, which suggests purely economic
measurements of performance, and does not sufficiently account for addressing all stakeholders
simultaneously. The value added approach incorporates social good and costs, and seeks to
maximize the net social benefit by reducing social costs, increasing social good, or a
combination of both. Identifying social costs or social goods pose difficultly due to a lack of
clear definitions (Meznar et al., 1990). Enterprise strategy seeks to legitimize a firm’s existence
for long-term corporate survival. In addition, theorists suggest firms that incorporate social
responsibility effectively into strategic management and increase social benefits ensure long-
term profitability. Unfortunately, short-term measures force management to focus on economic
performance and/ or inadvertently neglect other stakeholders.
Evidence and Implications
Costco’s value adding activities provide high quality products and services in a low cost business
model, and qualify Costco’s use of a broad accommodative enterprise strategy which aligns with
their missions for environmental sustainable and community relations. Furthermore, other
evidence of Costco’s broad and accommodative strategic efforts rests in their ability to increase
profitability, improve global social conditions, and reduce harmful environmental by-products.
Costco’s value proposition fits feasibly within the currently accepted societal framework, and
operates at Level 3 maximizing good. The value proposition continuously gains stakeholder
cooperation and support, as well as strives to avoid excessive trade-offs and create synergistic
outcomes. The value proposition is supported by the company culture and capabilities, maintains
sustainability in the short-term, and has proven sustainable in the long-term. Firms failing to
meet these concerns also fail to create long-term value (Wheeler et al., 2003).
III. General Force Analysis: External- Remote Environment
The purpose of this analysis is to distinguish threats and opportunities affecting Costco
Wholesale Corporation’s profitability by assessing the general forces (macroenvironment
factors) in Costco’s external environment. The general external forces include analyzing (a)
political/ legal/ government/ military, (b) economic, (c) social/ demographic/ cultural, (d)
physical environment, and (e) technology factors (Walden University, 2012b). This analysis
searches for trends or forecasts containing critical relevance to Costco’s business activities.
Trends and forecasts represent variables developed over time from the past and future,
respectively.
General Force Matrix Analysis
Costco operates retail warehouses in the US and Puerto Rico, Mexico, Canada, the UK,
Australia, Japan, Taiwan, and Korea (Costco, 2012). The company headquarters is in
Washington, and currently relies heavily on US operations, primarily in California for
profitability (MarketLine, 2012). Costco provides global customers with merchandise ranging
from private label to well established brands.
Economic. Global e-commerce sales are expected to exceed $1.25 trillion by 2013, however
another study suggests $1 trillion by 2014 (PRWeb.com, 2012). In June 2012, US e-commerce
reached $54.84billion in sales, roughly 33.4% increase over the past two years (YCharts.com,
2012). This presents an immediate opportunity for Costco to enhance online presence and mobile
applications for consumers shopping online.
Increase demand for private label products are of critical importance and the time frame is
immediate. From 2008 to 2011, private label sales have increased 21% compared to 3% for name
brands. Consumer perceptions of high quality brands to private label brands also increased 33%
in 2008 to 38% in 2011 (MarketLine, 2012). Retail sales in the US have also increased beyond
forecasts to roughly 16.8% in the past two years. This presents an opportunity for Costco to
increase sales position for Costco’s private label Kirkland Signature products, which compose
25% of total sales (Datamonitor, 2012).
Low growth rates and consumer savings trends in the US and the UK markets have an
immediate negative impact on profitability. The US personal savings rate has slowly decreased
from 5.5% in January 2011, to 3.7% in January 2012, to 3.3% in September 2012 (YCharts.com,
2012). The US personal consumption rate has slowly increased roughly 6.3% from August 2008
to September 2012, but roughly a 1% increase from January 2012 to September 2012
(YCharts.com, 2012). The slow decrease in savings and slow increases in spending indicates a
threat for Costco that consumers remain concerned with saving.
Strong growth predicted in South Korea and Taiwan markets present an immediate opportunity
for Costco to develop additional operations and increase consumer base. According to
MarketLine (2011), South Korea’s economy grew 3.6%, and expected to grow 3.5% in 2013 and
4.2% in 2014. However, the growth rate in Q3 2012 is only 1.6% (Trading Economics, 2012). In
2010, Taiwan’s GDP increased roughly 10%, and grew by 4% in 2011 (Datamonitor, 2012). In
Q3 2012, Taiwan’s GDP grew1.02%, and is predicted to reach a maximum of 1.94% growth (Su,
2012). The importance of establishing operations in these markets is less critical than in previous
years, however emerging markets present the most growth opportunities over mature markets.
Technology. Multichannel retailing is evolving at a fast pace. The opportunity is of critical
importance and the time frame is beyond two years. Other technological innovations impacting
future operations can be found in the Fitness Landscape Translation Analysis.
Demographics/ social/ culture. As of June 2012, 2.4 billion global Internet users exist
(Miniwatts Marketing Group). In 2013, global Internet users are expected to grow to
approximately 3.5 billion users. According to Internet World Stats (2012), 78.1% of the US
population and 84.1% of the UK population uses the Internet. In 2011, BBC News reported
nearly 50% of UK Internet users accessing the web via mobile phone devices. The opportunities
are similar to those identified in e-commerce sales.
Government/ legal/ military. Increases in US healthcare costs and coverage for Costco’s
160,000 plus employees are important and 107,000 US employees possess a negative impact for
an indefinite time frame to profitability. The increase to US worker’s minimum wage is of on-
going importance. US unit labor costs increased roughly 3% in the past 2 years (YCharts.com,
2012). In addition, Costco does not minimize employee benefits and widely recognized for
paying higher than industry average wages to employees (Greenhouse, 2005). The trends
adversely affect operating margins.
Physical environment. Unpredictable natural disasters such as Hurricane Sandy in 2012 create
immediate sales opportunities and pose physical threats to operations. According to USA
Today (2012), the sales opportunities exist in beginning to ending stages of a disaster, from when
consumers buy in bulk for preparation, to when consumers purchase items to restore damages
caused by the disaster. The physical threats pose harm to profitability within warehouse
operations, such as black outs and roadblocks during a disaster.
Implications of General Forces
The results reveal the top threats include (a) increasing labor and healthcare costs, (b)
fluctuations in foreign exchange rate, and (c) low growth in mature markets and heavy reliance
on US operations. Other threats include disasters in the physical environment. The top
opportunities include online sales opportunities, growing demand for private label brands, and
strong growth in Asian markets. Other opportunities include multi-channel retailing, and an
increasing global mobile device user base.
Threats. The top threat (a) increasing labor and healthcare costs, stems from the
previous General Force Analysis (GFA) subsection Government/ military/legal. The second top
threat (b) fluctuations in foreign exchange rate, stems from GFA subsection Economic. The third
top threat (c) low growth in mature markets and heavy reliance on US operations, stems from
GFA subsection Economic. The top three threats pose the most harm to future profitability.
Opportunities. The top three opportunities in online sales, growing demand for private label
brands, and strong growth in Asian markets stems from GFA subsection Economic. The top three
opportunities align with Costco’s competences, skills, and capabilities to increase potential
profitability.
IV. Porter’s Five Forces Industry Analysis: External-Industry Environment
This analysis applies Porter’s (2008) forces (microenvironment factors) to broaden the scope of
competition shaping the retail industry. Porter’s (2008) five competitive forces include (a) rivalry
among direct competitors, (b) bargaining power of buyers, (c) bargaining power of suppliers, (d)
threat of substitutes (products or services), and (e) threat of new entrants (p. 79). This analysis
searches for trends or forecasts for potential threats or opportunities. This analysis will use the
Impact Rating Scale to measure profitability. A score of zero to three signifies strong negative
impacts on potential profitability. A score of four to six signifies neutral impacts, and seven to
ten signifies a strong positive impact on potential profitability.
Five Forces Matrix Analysis
Costco’s profitability is driven through current industry structure and competitive landscape, and
according to Porter (2008), “understanding industry structure is also essential to effective
strategic positioning” (p. 80). Costco’s strategy focuses on long-term goals and avoids
maximizing on short term pricing. In order for products and services to remain competitively
priced, Costco willingly undertakes negative impacts to gross margins.
Barriers to Entry. The threat of new entrants is low, and an opportunity in domestic operations,
because barriers to entry are high. Due to intense rivalry with domestic competition Impact
Rating Scale (IRS) suggests 8/10 for potentially positive impacts to profitability. The threat of
new entrants is high, and a threat in global markets, because barriers to entry are low. The IRS
suggests 3/10 for potentially negative impacts on profitability.
Substitutes. The threat of substitutes (products or services) is high, and a threat, because Costco
provides a limited selection of products and services compared to other large retailers. Large
retailers such as grocery chains provide everyday goods and not in bulk. The IRS suggests 2/10
for potentially negative impacts to profitability.
Bargaining power of suppliers. The bargaining power of suppliers is low, and an opportunity.
Costco creates partnerships with merchandisers, purchases products directly from a variety of
manufactures, maintains authority, and abilities to switch supplier in the event of untimely
delivery. The IRS suggests 9/10 for potentially strong positive impacts on potential profitability.
Bargaining power of buyers. The bargaining power of buyers is high, and a threat, because of
intense industry rivalry and direct competitors. In addition, Costco operates member only, no
frills warehouses creating barriers to consumers. Consumers also consider shopping experience
next to price when deciding to make a purchase (McKinsey & Company, 2012). The IRS
suggests 0/10 for very strong negative impacts on potential profitability.
Competitive rivalry. Rivalry among direct competitors is high. Direct competitors Wal-Mart’s
Sam’s Club, Target Corporation, and Sears maintain strong positioning in the industry. Costco
carries a limited selection of high quality goods some consumers cannot afford. Unlike Wal-Mart
and Target, Costco does not supply many smaller household items. The IRS suggests 1/10 for
potentially negative impacts on profitability.
Implications of Five Forces
Threats. Global barriers to entry are low and the threat of new entrants is high with a negative
impact on profitability. Buyer power, rivalry, and substitutes present the most potential for strong
negative impacts to profitability.
Opportunities. Domestic barriers to entry are high and the threat of new entrants is low
positively impacting potential profitability. Supplier power presents opportunities positively
impacting potential profitability.
V. Detailed Value Chain Analysis: Internal Environment
The purpose of this analysis is to examine the strategic significance of the value chain for Costco
Wholesale Corporation. Porter & Millar (1985) suggest conducting a value chain analysis, a tool
to disaggregate a firm’s cost driven structure into divisional business activities, in order to
identify internal strengths and weaknesses of the firm’s performance relative to industry rivals.
The value chain also identifies external opportunities and threats within a larger value system,
including supplier value chains adding value upstream; and channel and consumer value chains
adding value downstream (Porter & Millar, 1985). In addition, the value chain establishes the
relative impacts of each business activity to identify linkages and cost reduction opportunities.
The primary activities receive support from the firm’s infrastructure, human resource
management, technology research and development, and procurement (see Table 2); each
activity serves to increase efficiency and effectiveness of the entire firm (Porter & Millar, 1985).
Costco’s primary activities include (a) inbound logistics, (b) operations, (c) outbound logistics,
(d) marketing and sales, and (e) service and support (see Table 2). The value chain model also
examines interrelationships and linkages between business activities impacting Costco’s long-
term growth. The goal is to identify competitive core competencies and reduce the negative
impact a business process imposes on another business process within Costco’s value chain or
value system (NetMBA.com, 2010).
Customized Value Chain of Activities in Table Form
Conducting a value chain analysis provides a snapshot for identifying a firm’s relative
competitive performance, core competencies, and for focusing on customer centric activities.
Costco’s customer driven focus allows primary and support business activities to work in unity
creating a stronger competitive advantage and thereby increasing profitability. Profitability and
shareholder value rely on coordination of both sets of business activities to create a firm’s
competitive advantage (NetMBA.com, 2010). Determining performance relative to industry
rivals requires a rating scale. A score between zero and three describes poor relative
performance; four to six describes relatively equal performance to industry averages. A score
between seven and ten describes outperforming industry averages to an exemplar of best
practices.
Costco’s infrastructure skills and capabilities supports operations for achieving low cost global
leadership in warehouse retail sales and scores 9/10 for better than industry average. Costco’s
culture strives to provide a wide variety of merchandise goods ranging from private label to well
established brands. Costco’s value chain provides a diversified product base to a large globally
diverse consumer base. Costco is industry leader to Target, and sometimes loses positioning to
Wal-Mart’s Sam’s Club. Costco’s culture type is at Level 3, and positions the company for short-
term and long-term success (see Table 2).
Table 2
Value Chain Analysis
Business Process Costco Wal-Mart’s Sam’s
Club
Target
Firm Infrastructure Organizational
structure is aligned
with Level 3 Culture
Type (9/10)
Weakness Weakness
R&D Pursues innovative
technologies and
private label to create
value (7/10)
Weakness Weakness
Human Resource
Management (HRM)
Pursues best practices
in the industry for
hiring, training, and
compensation (9/10)
Weakness Weakness
Procurement Large single order
purchases and
partners with
suppliers for 4000
select products (8/10)
Weakness Weakness
Inbound logistics Depots and Custom
Fleet delivering
merchandise within
24hrs. (8/10)
Equal Equal
Operations Limited product
storage on sales floor
(7/10)
Equal Weakness
Outbound logistics Daily warehouse
management, rapid
inventory turnover-
12.6x industry avg.
(8/10)
Strength (but,
sometimes equal)
Weakness
Marketing & Sales Minimal SG&A
expenses; no
advertising policy
(7/10)
Equal Weakness
Support Services Extended warranty
services, and special
services for members
(9/10)
Weakness Weakness
10yr. Avg. Gross
Profit Margin
Lowest gross margin
amongst competitors
(3/10)
Strength Strength
Note. Adapted from “DDBA 8160: Sustainable Solutions Paper Template,” by Walden
University, 2012. Copyright 2012 by Walden University. Adapted with permission.
Costco’s operations, outbound logistics, marketing and sales, and support services perform
activities within the same function to gain cost advantages for interlocking skills and capabilities.
Costco’s skills and capabilities in these business activities outperform much of the industry and
direct competition. Costco achieves operational effectiveness in 617 warehouses; such as
efficiencies arising from floor plan designs that handle daily warehouse sales, support
merchandise, inventory, and support services for customers concerned with high quality and low
cost (Costco, 2012). Unlike most retailers, Costco receives financing terms from suppliers and
does not need to use working capital to fund sales increases (Costco, 2012).
Costco’s human, technical, and financial skills and capabilities integrate to enhance efficiencies
in procurement, such as high volume purchasing skills from single vendors, and for developing
an efficient method for inbound logistics capable of delivering freight to designated warehouses
within 24 hours (Costco, 2012). Costco’s warehouse capabilities effectively reduce losses
resulting from theft, produce higher sales, and achieve faster inventory turnover. Costco’s
Inventory turnover in 2012 was 12.6 times the industry average, and Accounts Receivables
turnover is almost 1600 times the industry average (Bloomberg Business Week, 2012a). For
Wal-Mart, inventory turnover is 7.6 times the industry average and accounts receivables turnover
is 90 times the industry average (Bloomberg Business Week, 2012b).
Costco’s human resource skills are well supported to implement strategy. For example,
employees receive higher than average benefits and compensation levels remain constant even
during bad economic times. This provides management with the motivation to make essential
daily choices toward accomplishing Costco’s goals. In 2012, Costco’s financial resources has
seen an 11.5% increase in net sales and a 16.9% increase in net income, but this is due to
consolidating operations in
Mexico. Costco’s strong technical
capabilities has recently adapted to the fast past trends for consumer purchases via the Internet
and mobile communication devices. The relative industry rating is 7/10 for better than industry
average.
Company Skills/ Capabilities
Identifying skills and capabilities is important for mapping future investments. A skill is
typically associated with individual people and resides in functionality; and a capability derives
from physical resources or assets (Walden University, 2012b). Acquiring skills and capabilities
is a traditional value chain activity (NetMBA.com, 2010).
Implications of Competitive Analysis
Costco’s value chain successfully exploits strengths, skills, and capabilities to leverage
against weaknesses. When comparing industry rivals to a firm’s strengths, skills, capabilities and
weaknesses vulnerabilities and areas needing improvement may arise from the assessment.
Further focus on marginal profitability is needed to maintain a competitive advantage
(NetMBA.com, 2010).
Strengths. Costco’s top three strengths include firm infrastructure, HRM, and Support Services.
Costco’s second tier of strengths maintains competitive advantage in procurement, inbound
logistics, and outbound logistics. The third tier of strengths includes R&D, operations, and
marketing and sales activities. Strengths in these areas create global leadership via strong brand
loyalty with 67 million cardholders, providing excellent customer services, and warehouse
operational efficiencies. Costco’s financial position is strong, and stems from efficiencies in
operational effectiveness.
Weaknesses. Costco’s major weakness is a 10-year average low profit margin (Corona, 2012).
Other weaknesses include (a) a heavy reliance on US operations to support global operations, (b)
heavy reliance on quality supplier products, (c) maintaining overall profitability, (d) membership
requirements, and (e) securing member information (Costco, 2012). Costco’s value chain
strategy to expand into larger warehouses potentially cannibalizes smaller warehouse operations,
and is inhibited by slow global economic growth trends in the US and the UK (Costco, 2012). As
a low cost leader, Costco’s weakness to engage in price slashing to remain competitive with
other retailers reduces profitability.
Skills. Costco receives cost advantages from business (value adding) activities, and focuses to
differentiate core competencies (skills) successfully outperforming competitor’s capabilities and
achieving higher than industry averages across business activities. Costco’s skills include a
company culture that quickly adapts to customer needs, low employee turnover, rapid inventory
turnover for a selection of 4000 high quality low cost products and services, global warehouse
retail management skills in eight countries, and self-service gas stations in the US and Canada
(Costco, 2012). In addition, Costco’s marketing and sales efforts (SG&A expenses) continue for
a three-year low; and Costco is successful in eliminating the costs of frills and advertising
(Costco, 2012). Costco maintains operational effectiveness and better positioning than industry
averages for (a) return on capital was higher, 11.97%; (b) SG&A expenses was lower, 9.6%; (c)
total assets turnover, 3.7 times higher; accounts receivable turnover, 1,599 times higher; (d)
inventory turnover, 12.6 times higher; (e) fixed assets turnover, 7.8 times higher; (f) current
ratio, 1.1 times higher; (g) quick ratio, 0.5 times higher; (h) total debt/ equity ratio, 12.5 times
lower; (i) total liabilities/ total assets, 53.9 times lower; (j) total inventory was lower, 6.9%; and
(k) Costco’s gross profit margin is 10.18%, better than industry average, but lowest amongst
direct rivals.
Capabilities. Costco’s supply chain capabilities receive cost and competitive advantages from
large purchases with single vendors. Costco’s technical capabilities contribute to the
development of innovative packaging for increasing consumer safety. Costco lacks significant
strategic innovations, and continues to follow down the inevitable path of coping and competing
with Wal-Mart and Target, whom do not require a membership fee to shop for great deals, and
offer the shopper enhanced experiences. Costco’s capabilities also include low overhead
operations, 24-hour distribution centers, 617 global warehouses averaging 143,000 square feet in
size, and limited manufacturing businesses to produce low cost high quality goods and
services (Costco, 2012). These capabilities enhance Costco’s operational effectiveness in the
short term, but easily open to imitation by rivals in the future.
VI. Detailed SWOT Analysis
Conducting a SWOT analysis is a senior management strategic tool and framework to isolate
existing resources (financial, human, and technical) and search for the most critical strengths and
opportunities, in order to mitigate internal weaknesses and guard against outside threats.
According to Mintzberg and Hunsicker (1988), “ a superior strategy is much more than a simple
step beyond an accurate description of the problem” (p. 71). From the SWOT analysis, the next
challenge is creating alternative action plans and implementing measures for success. The final
step requires evaluation and feedback to determine results of performance. From performance
results the process of creating a strategy starts over.
SWOT Factor Matrix
Conducting a SWOT Factor Matrix analyzes strengths (S) in order to mitigate
weaknesses (W), take advantage of opportunities (O), and guard against threats (T). Strengths
and weaknesses reside in the Value Chain Analysis (VCA). Opportunities and threats reside in
the General Force Analysis (GFA) and the Five Force Analysis (FFA). SO strategies assess
strengths to leverage opportunities. ST strategies seek to minimize threats. WO strategies
manage weaknesses and leverage opportunities. WT strategies seek to minimize weaknesses and
threats.
SO strategies. Strengths include strong brand loyalty, operational effectiveness, strong financial
position, and a customer driven focus. The opportunities include growing demand for private
label goods and growing GDP in Asian markets. A potential action plan is to use the strong
financial position to open new stores in Asian markets and increase operational effectiveness
ratios in domestic operations to support growth overseas and strengthen overall financial
positioning.
ST strategies. The threats include increasing labor costs, foreign exchange rate fluctuations, low
growth in mature markets and low barriers to entry in global markets, buyer power, direct
rivalry, and substitutes. The action plan to defend against threats is to strengthen financial
position via operational effectiveness, secure acceptable foreign exchange spot rates, refine
product selection techniques to match current market trends, and expand overall membership
base.
WO strategies. Costco’s weaknesses include price slashing, low gross profit margins, a heavy
reliance on US operations and high quality suppliers, membership requirements, and securing
information. The opportunities to mitigate weaknesses include low barriers to entry in global
markets, low supplier power, and online sales. The action plan is to leverage supplier power and
low barriers to entry to enter Asian markets while creating new websites to handle each
countries’ online sales.
WT strategies. Moving quickly to establish new stores overseas can minimize Costco’s
weaknesses and threats. The action plan consists of creating joint ventures in Asian markets and
increasing gross profit margins toward the industry average and reduce reliance on US
operations.
SCOT Factor Matrix
Conducting a SCOT Factor Matrix analyzes skills (S) and capabilities (C) in order to, take
advantage of opportunities (O), and leverage against threats (T). Skills and capabilities reside in
the Value Chain Analysis (VCA). Opportunities and threats reside in the General Force
Analysis (GFA) and the Five Force Analysis (FFA). SO strategies exploit skills to leverage
opportunities, and ST strategies seek to minimize threats. CO strategies exploit capabilities to
leverage opportunities, and CT strategies seek to minimize threats.
SO strategies. Costco’s skills include maintaining operational effectiveness to achieve better
than industry average ratios and can be leveraged to exploit overseas opportunities and increase
gross profit margins in domestic operations. Other skills include effective warehouse
management and sales. The action plan is to use Costco’s skills to increase gross margin to 25%,
return on equity to 22%, in order to match Wal-Mart’s ratio.
ST strategies. Costco’s skills can be used to minimize threats identified in the Five Force
Analysis. Maintaining or increasing accounts receivables turnover ratio continually lowers
supplier power, and enables Costco to reduce buyer power, direct rivalry, and substitutes.
Costco’s skills create economies of scale barriers to entry for smaller or weaker firms. Increasing
innovations in packaging also reduces rivalry and substitutes from eroding profitability.
CO strategies. Costco’s capabilities include (a) distribution centers and depots making
deliveries to warehouses within 24 hours, (b) limited manufacturing for private label Kirkland
signature products, (c) 608 warehouses averaging 143,000 square feet, (d) offering 4000 high
quality products, and (e) treasure hunt shopping. Costco can leverage warehouse management
capabilities to exploit opportunities in growing demand for private label goods. In addition,
Costco can leverage their limited product selection to raise profit margins, and while other large
retailers stock 40,000 to 150,000 products, which limit their purchasing capabilities, Costco
achieves deeper discounts. The action plan is to decrease distribution time to less than 20 hours,
increase inventory turnover ratio, and increase frequencies of customer visits and purchases by
20%.
CT strategies. Costco’s capabilities can be used to avert or defend against threats. Costco’s
warehouse capabilities to move merchandise on and off the sales floor, create a treasure hunt
shopping experience, and reduce energy costs are in position to defend against direct rivals and
substitutes. The action plan is to increase inventory turnover by increasing the percentage of
rotating and changing inventory.
Key Success Factor Matrix
The Key Success Factor Matrix provides a tool to ensure skills and capabilities remain
viable for future profitability. The areas of shortages and weakness need to be addressed first,
while marinating alignment between company culture and strategic decision-making. Costco is
heavily reliant on operational effectiveness to ensure profitability. In 2012, Costco’s
performance was heavily reliant on US and Canadian marketplaces and account for 88% of
consolidated net sales and 83% of operating income (Costco, 2012). Additionally, growth in
Taiwan and South Korea are not meeting expectations. Costco’s strategic intent does not seem to
manifest globally as for domestic operations.
The following 10 key success factors are critical for Costco because of their affect on future
profitability. (1) Value propositions must be high and prices low, (2) sufficient management
support, (3) hiring and training excellent employees, (4) keeping current customers happy, (5)
opening new stores, (6) supplier partnerships, (7) extending customer base, (8) enhance brand
image and loyalty, (9) manage financial ratios, and (10) reducing energy costs and wastage.
Implications of Analysis
Costco’s primary and support business activities such as operating a no-frills warehouse
and zero advertising (other than minor marketing of warehouses and direct mail to members) are
strategically fit with the company’s skills and capabilities. Costco’s operating model is the same
across all four different geographical segments (Costco, 2012). This type of model at the large
retail level creates substantial argument to focus on operational efficiencies, but OE is not
strategy and does not sustain competitive advantage, because the method is not elusive enough to
deter imitating competitors.
VII. Analyzing the Company Strategy Type –Part II
This section explores Costco’s company strategy type in four separate analyses. The four
analyses include (a) generic strategy type, (b) relevant strategy moves, (c) an assessment of how
well Costco’s strategy aligns to achieve goals, and (d) an action plan. These analyses explore
traditional strategic thinking tools based on reading Strategy: Create and Implement the Best
Strategy for Your Business (Harvard Business Review, 2005).
Strategy Type
Costco pursues elements of three of the four generic strategies (a) low cost leadership, (b)
differentiation and (c) customer relationship strategy, which exposes their strategic intent
thinking to attain global leadership. Low cost strategy requires continuously improving
operational efficiencies, exploiting experience, a unique supply chain, and redesigning products
(Harvard Business Review, 2005). Differentiation strategy requires doing a set of different
activities or doing activities differently than competitors that customer’s value (Harvard Business
Review, 2005). Customer relationship strategy requires creating value by adding convenience to
customers’ lives, provides continuous benefits and learning, personalizes service, contact, and
solutions (Harvard Business Review).
Supporting Argument
Costco’s 26 years in retail, supply chain management style, private label goods, and
redesigned packaging exemplify requirements to achieve a low cost business model. Costco’s
differentiation strategy rests in the amount and types of quality services and products. Costco’s
customer relationship strategy resides in customizable extended services, an unbeatable return
policy, a knowledgeable sales team, and rewards customers for purchases.
Costco’s current strategy types emerge from the original company mission and early foundations
that aim to provide high quality goods and services at significantly lower prices than
competitors. Costco’s founder, Jim Sinegal embodies Costco’s strategic intent and established
the company’s culture, which consistently achieves to communicate to customers a low cost
business model. This authority is in conflict with business operations and negatively impacts
profit maximization, however. Costco absorbs the costs of cutting prices causing gross margins
to decrease, but this trade-off is necessary to maintain current strategic positioning. Costco must
revamp strategic efforts for business activities competing in the global marketplace, and closely
align planning and strategic intent for future success.
VIII. Analyzing the Company Strategy Moves
Relevant Strategy Moves
Strategic moves embody the six additional methods amongst the generic strategies to
globally compete. These methods include (a) occupying contested market space by gaining a
beachhead, differentiation, or through mergers, acquisitions, or joint ventures (b) overcoming
barriers to entry through market innovations, (c) judo strategy principles, (d) and creating
additional markets to dominate. Each method provides benefits, but limitations do exist including
rivals employing similar strategies; judo strategy is most effective against larger stronger;
customers must value differentiation; and joint ventures often fail.
Supporting Argument
Costco’s potential strategic moves include striking competitor’s weaknesses using a
beachhead market strategy. Unlike many large retailers, Costco focuses on stakeholder needs
above shareholder needs, such as covering a higher percentage of employee healthcare costs and
maintaining compensation. This strategy is attractive to countries with high or growing GDP
(Costco, 2012). Costco’s beachhead strategies remain limited in scope and seem to replicate
Wal-Mart’s strategy to establish stores in underserved markets, such as small towns. Costco’s
joint ventures in Mexico recently consolidated under the parent company, which positively
affected profitability. Costco developed joint ventures in Taiwan and South Korea, which
continue to show signs of growth. Costco’s unique mix of low cost brand name and private label
products and services effectively differentiates Costco from other rivals in the industry. Costco
works with suppliers to enhance food safety and packaging for customers using process
innovations. Costco warehouses are innovatively designed to produce energy efficiencies and
reduce wastage.
The three principles of judo strategy entail movement, balance, and leverage. Costco
maintains a strict code of ethics for employees and suppliers, which lack flexibility, but enforce
Costco’s capability to adopt new processes. In addition, Costco can move quickly to modify
warehouse sales floors and switch suppliers to match competitor promotions. Costco creates
balance by passing on the cost savings to customers in the form of low mark-ups, which arise
from large purchases with single vendors. Lastly, Costco leverages a limited product selection
(4,000 products) to achieve deeper savings comparing to Wal-Mart’s 100,000 plus product
selection. Costco’s strategy to create and dominate new markets seems stagnate to ineffective,
other large retailers such as Target, Wal-Mart, Sears, or Home Depot usually operate nearby.
IX. Alignment and Goals Analysis
Alignment Checklist and Unit Goals
This analysis discusses the components of the alignment checklist and unit goals, metrics, and
action plans. The alignment checklist is a framework to achieve strategic goals, and include five
implementation components: (a) people, (b) incentives, (c) firm structure, (d) support activities,
and (e) culture (Harvard Business Review, 2005). Implementation components failing to meet
alignment checklist exploit areas to seek improvement. The unit goals, metrics, and action plan
serves to transform strategic goals into specific, measurable goals at the business unit level
(Harvard Business Review, 2005). For the scope of this paper the business unit levels include
marketing, merchandising, manufacturing, and human resources. Action plans identify the
necessary time, steps, measurable milestones, and focuses resources in order to achieve strategic
goals.
Supporting Argument
The people at Costco have the necessary skills to make the strategy work, support the strategy,
maintain attitudes that align with the strategy, and have the resources needed to achieve success.
Costco’s incentives include rewarding members for purchases and paying higher than industry
average compensation to employees. Costco effectively links performance goals to align with
their low cost strategy. Costco’s business units are optimally organized to make the strategy
work. Costco’s support activities and culture align with the company’s customer driven
strategies. Costco achieves successful alignment for effective strategy implementation. The
following action plans reflect the current growth patterns exhibited by Costco, but may differ
from actual action plans employed at individual Costco warehouses.
Human Resources Unit: the goal is to keep employees and increase training. The action plan is to
provide new employees with training, provide current employees with continuous training every
six months, increase benefits and compensation 30% of the annual inflation increases and no
change for zero and below zero changes in inflation index. The performance measure is the
training schedule, consumer price index increases, reduce employee turnover rate to 16.5%
overall and 5.5% for employment after one year by Q4 2013; 16% overall and 5% for
employment after one year by Q4 2014; and 15.5% overall and 4.5% for employment after one
year by Q4 2015. Another performance measure is to reduce SG&A margin to 9.3% as a
percentage of sales by Q4 2013, 9.0% of sales by Q4 2014, and 8.7% of sales by Q4 2015.
Merchandising unit: (1) the goal is to maintain a low cost pricing strategy, the action plan
consists of purchasing in bulk, passing on savings, and strategizing to reduce price. The
performance measure is the percentage of product mark ups 15% or less; and raise inventory
turnover rate to 12.8 times the industry average by Q4 2013, 13.2 times the industry average by
Q4 2012, and 13.6 times the industry average by Q4 2015.
Merchandising/ manufacturing unit: the goal is to provide customers with high quality brand
name to private label goods and services. The action plan is to select roughly 4,000 products,
including Costco’s private label Kirkland signature. The performance measures consist of 4000
different types of high quality products, and 15% increase of Kirkland Signature products into
the sales mix by the end of 2015; 5% by Q4 2013, 10% by Q4 2014, and 15% by Q4 2015.
Marketing unit: (1) the goal is to operate no frills warehouses and zero advertising. The action
plan is to operate warehouses capable of providing basic sales and services to members. The
advertising action plan is zero advertising, except for direct mail to members and during new
store openings. The performance measures are reducing SG&A expenses to 9% as a percentage
of sales, 5% annual increase to member base, and 10-12 new store openings for the next 3 years.
(2) The goal is to entice customers to shop more frequently and make bigger purchases. The
action plan is to grow the membership base and open new stores. The performance measures
include 5% annual increases for new memberships, achieve 90% membership renewal rate, and
amount of new store openings each year for the next three years. (3) The goal is to exploit
treasure hunt merchandising tactics. The action plan is to purchase high quality goods directly
from manufactures to achieve deep discounts, and to continuously change the product sales mix
to create a limited time only availability. The performance measures are the percentage of sales
from the sales mix changing and the frequency of changes; 25% of sales mix rotated monthly for
three years. (4) The goal is to offer convenient methods for members to shop. The action plan is
to operate two websites, one in the US, and the other in Canada. The performance measures
include the number of members serviced online minus returns, and the amount and frequency of
purchases minus returns. Reduce returns and increase frequency by 10% before Q4 2013, 15%
before Q4 2014, and 20% before Q4 2015.
X. Action Plan Analysis
Relevant Action
Plan Action plans
formulate the steps necessary to implement a strategy, create milestones for success, and
performance measures to keep employees focused. The action plan is formulates goals at the
business unit level and links to individual and group goals (Harvard Business Review, 2005).
Creating time bound milestones and measuring performance requires agreement, financial
boundaries, must be realistic, achievable, and strive to incorporate employees implementing the
strategy (Harvard Business Review, 2005). The next stage in planning requires sub-steps in
addressing who will carry out the plan, what they must do, and when to have it complete; in
order to, allocate resources, identify substantial or potential interlocking interests. Interlocking
interests include searching for collaboration in the scope of, giving and receiving exchanges
between business units (Harvard Business Review, 2005). The final stage in planning includes a
projection on financial impacts, also known as pro forma cash flows statement (see Appendix 1).
Crafting an action plan requires simplicity, involvement, structure, detailed roles and
responsibilities, and flexibility.
Supporting Argument
For this action plan the goal is to maximize future profitability. The performance metrics include
reducing SG&A expenses to nine percent by the end of 2017, reducing Costs of Goods Sold by
one percent annually for the next five years, and earn 10% annual sales growth for five years (see
Appendix 1). Working Capital Required (WCR), WACC, and Tax Rate must remain steady for
five years (see Appendix 1). Sales and product selection team will refine the sales mix for five
years. The resources needed include existing manufacturing facilities and possible acquisition of
additional plant, property, or equipment, and deeper purchasing discounts. The product selection
team will implement the product mix and senior management will approve recommendations.
Warehouse employees, managers, R&D, and the product selection team will have to work
together, reciprocally to accomplish the goal. Product selection team works with R&D to
develop products and packaging. R&D works with manufacturing to achieve cost efficient
designs. In 2012, Costco acquired a new CEO, Craig Jelinek. Mr. Jelinek has been with the
company since 1984 and understands the key success factors behind Costco’s long-standing
strategy. According to Allison (2012), Mr. Jelinek patiently focuses on the long-term view of
margins, low prices, and employee treatment, similar to Jim Sinegal’s management style and
commitment. Mr. Jelinek’s role as leader is essential for upholding continual adherence to
Costco’s strategic intent thinking, developing clear pathways to achieve short-term success, and
creating challenges for employees to achieve organizational goals. In 2012, as percentages of
sales, the gross profit margin was 12.4%, and the operating profit margin was 2.78%. The
financial implications of this action plan increases gross profit margin to 18.4%, and operating
profit margin to 9.42% by year-end 2017 (see Appendix 1).
XI. Fitness Landscape Analysis
A fitness landscape metaphorically describes the network or pattern of connections currently and
historically shaping the evolution of an industry, in the form of valleys and peaks, which
determines the overall competitive environment (Stacey, 2011). Fitness determines survival of
the firm against competitors, while the fitness landscape is dynamic, because firms within an
industry simultaneously make decisions that increase their own fitness, which also evolves the
landscape. The goal is to move across the landscape logically, incrementally, and efficiently to
reach the highest peaks while avoiding valleys (Stacey, 2011). As the fitness landscape evolves,
many smaller firms and few larger firms face extinction; paradoxically, destruction is due to
conflicts and co-operation arising between individuals exercising autonomous and rational
decision-making, but this is necessary for an evolutionary process to occur (Stacey, 2011).
Description of Fitness Landscape and Analysis
Costco’s current Industry Classification is NAICS: 452910: Discount, Variety stores, but may
also classify within NAICS 44-45: Retail stores (U.S. Census Bureau, 2012). The Industry
Sector is Services and has reached $54.73 trillion market capitalization (Yahoo.com, 2012a). The
industry’s current top companies by market capitalization include Wal-Mart, Costco, Target,
Dollar General, and Controloadora Comercial Mexicana SAB De CV, respectively (Yahoo.com,
2012a). Approximately, 33 companies comprise the majority of this industry, but Costco, Wal-
Mart, and Target comprise 97.3% of the total industry market capitalization, which totaled $5.31
trillion in 2012 (Yahoo.com, 2012a). Wal-Mart $4.02 trillion, approximately 75.7% of total
industry market capitalization. Costco $617 billion, approximately 11% of total industry market
capitalization. Target $532 billion, approximately 10% (Yahoo.com, 2012a). The
industry Laggards includes Alco Stores, Tuesday Morning, Fred Meyer stores, Big Lots, Price
Smart, and other retailers providing similar goods include BJ’s Wholesale, Carrefour, Target,
Best Buy, Home Depot, Lowes, Sears Holding, and JC Penny (Yahoo.com, 2012).
In 2007 there were approximately 1.1 million total retail establishments in the US and a total of
14.2 billion square feet, equating to 46.6 square feet of retail space per capita compared to 1.5 in
Mexico, 23 in the UK, 13 in Canada, 6.5 in Australia (Farfan, 2012). In 2012, Costco reported 67
million members and operated 617 global warehouses averaging 143,000 square feet in size,
equating to an average of 1.3 square feet per member, which is well below the US average
(Costco, 2012). In 2007, there were 4,260 warehouse stores in the US, up 46% from 2002 and
approximately 1.2 million employees, up 49% from 2002 (U.S. Census Bureau, 2007). In 2012,
Costco operated 439 US warehouses with plans to open 12 new stores by year-end 2012, and
have 174,000 global employees (Costco, 2012). In 2011, the retail industry produced 4.7 trillion
in total net sales, 8% increase from 2010, and largest increase since 1999 (Farfan, 2012).
Costco’s net sales increased 14% from 2010 to 2011, and 11.5% from 2011 to 2012. In 2011,
Costco’s net sales equal $87.04 billion, approximately 1.85% of the retail industry’s total net
sales (Costco, 2012).
The current shape of the retail industry, for the scope of this analysis includes “Big box” retailers
comprising a different strategic category, as opposed to small independently operated businesses.
US retail industry currently provides almost 15 million jobs and pays the highest rates in
corporate taxes compared to other industries (Kennedy, 2012). In 2007 the top 20 companies in
the retail industry comprised almost 100% of U.S. total sales (Farfan, 2012). During 2011 to
2012, expansions occurred for most, but downsizing and closures for many others. Closures were
due to shifts in consumer spending and shopping trends. Store closures include, 5 BJ’s
Wholesale Club, 7 Dollar Tree, 172 Sears, 100 Gap, 180 Abercrombie and Fitch, 1 Home Depot,
50 Best Buy, 50 T.J. Maxx, and 1 Walgreens (Farfan, 2012).
The current peaks and valleys provide profound uncertainty due to a changing technological
environment, cultural shifts, and resource depletion. Larger retailers may respond slower than
smaller or faster moving competitors. Large retailers tend to focus on maximizing operational
effectiveness through efficiencies and strict value chain management. Consumers desire intimate,
personal shopping experiences and have more expectations (Goel, 2011). Therefore, large
grocery stores and some large retailers position merchandise into small categorical groupings,
such as grocery store islands or individual markets in department stores (Goel, 2011).
Multichannel retailing was a mountain now becoming a valley or obsolete due to touch point
capabilities of smartphones, tablets, and other Internet accessing devices (Walker, 2011). Large
retailers are dynamic, automated, can create different promotions and pricing hourly, no longer
require the traditional sales representatives to showcase products, and can provide more
information at purchasing touch points (Goel, 2011). Other technological innovations include:
Digital/RF mixed chip design, Firmware/Network Management/Systems/Enterprise Applications
Software, Mechanical/Industrial Designs, Display/Display Driver Technology, Operations and
Manufacturing, Retail Domain knowledge, Retail Relationships, Deployment and Customer
Support, and Marketing and Finance. For not providing an integrated solution would mean
throwing individual technology components over the wall at retailers and expecting them to
perform the arduous task of integration – and the job will not get done, the new challenges facing
retail will not be met and an opportunity will be lost. (Goel, 2011)
The Intel scientists has designed a high-tech mirror that shows how clothes look on a consumer
who simply stands in front of an LCD monitor. Parametric technology simulates body type and
how fabrics fit — based on weight, height and measurements…Think of it as a digital fitting
room. The concept is three to five years from fruition but could open the door for Intel in the
retail market. (Walker, 2012)
The convergence of smartphone technology, social-media data and futuristic technology such as
3-D printers is changing the face of retail in a way that experts across the industry say will upend
the bricks-and-mortar model in a matter of a few years…"The next five years will bring more
change to retail than the last 100 years," says Cyriac Roeding, CEO of Shopkick, a location-
based mobile shopping application available at Macy's, Target and other top retailers.
Big-box stores such as Office Depot, Old Navy and Best Buy will shrink to become test centers
for online purchases. Retail stores will be there for a "touch and feel" experience only, with no
actual sales. Stores won't stock any merchandise; it'll be shipped to you. This will help them stay
competitive with online-only retailers, Sterneckert says…Google trucks will deliver local
services. Clothing — even pharmaceuticals — will be produced in the home via affordable 3-D
printers. "Every waking moment is a shopping moment," says Steve Yankovich, head of eBay's
mobile business, which expects to handle $10 billion in transactions this year. "Anytime,
anywhere." Eventually, 3-D printers will let consumers produce their own towels, utensils and
clothes. While in their infancy, the devices have been used to print hearing aids, iPad cases and
model rockets, says Andy Filo, an expert on 3-D printers. The technology is several years away,
however, from being widely available and affordable, he says.
Software giant SAP's "clienteling" application, for instance, lets Burberry track and analyze
customers' buying and browsing patterns, giving sales reps the information they need to instantly
make specific recommendations tailored to that person's taste. For the first time, retailers can
offer consumers the same personalized experience in the store that they're used to when shopping
online…Digital billboards on every conceivable surface will do the trick…Thin, energy-efficient
LED displays are being tested to show video on everything from a curved wall at the NASCAR
Museum in Charlotte to subways and airports. China, home to some of the world's largest
buildings, is a prime candidate for even larger displays. (Swartz, 2012)
The historical peaks and valleys over the past 20 years include sales peaks occurring in 1999 and
2006, and a small spike toward the end of 2001. Major valleys occur during the tech bubble
crash in 2000, and the recessionary financial crisis during 2008 to 2009 (Short, 2012). During the
1990s, firm’s employing brick-n-mortar models began closures because of online shopping
retailers, this trend continues because of the recession in 2009, but those remaining have an
opportunity to enhance shopping experiences beyond convenience.
Implications of Analysis
Costco exhibits supreme fitness, but Wal-Mart seems to shape the landscape the most. Wal-Mart
has spent 67 years and Costco has spent 36 years operating retail stores. Costco operates roughly
617 global warehouses in about 8 countries and employs roughly 96,000 full time employees
(Costco, 2012). Wal-Mart operates over ten thousand stores in 27 countries and employees
roughly two million people (Yahoo.com, 2012a).
Technological innovations continue to shape the landscape for entering and established
competitors. Costco can use smartphone data to make personal suggestions and predict purchases
(Swartz, 2012). Online shopping has evolved from offering convenience to connecting socially
with customers via social media platforms. Costco continues to offer online shopping services as
a convenience for customers. Consumer privacy is at risk using smartphone data, and Costco
acknowledges this threat. Smartphones also diminish the use of cash, and combined with touch
screen technology makes shopping potentially available anywhere a screen is present (Swartz,
2012). Costco does not use touch screens at points of purchasing or on the sales floor. Data,
such as pricing labels and touch screen technology combined with Internet capabilities allow
retailers to offer dynamic pricing and promotions (Goel, 2012). Costco does not have the current
technology to explore dynamic pricing or promotions within warehouses, but does online.
XII. Boid Analysis
Costco operates in the Discount, Variety stores industry. The purpose of
this Boid Analysis is to creatively and conceptually develop three simple rules sufficient enough
to explain the Discount, Variety stores industry’s behavior. This analysis refers to Boids
as homogeneous agents, which are autonomous entities interacting with other agents to produce
an emerging whole system of patterns, for organizations this is known as the industry (Stacey,
2011). To maintain order within the industry, all agents engage in unplanned interactions with a
small number of other agents while following the same three basic, fundamental behavioral rules
(Stacey, 2011).
“Boid Analysis” Systems Description and Analysis
The Discount, Variety Stores Industry seems to follow these rules:
1. Maintain customer driven focus by adding value to the merchandise mix. Costco offers
treasure hunt shopping experience, luxury and high quality products, unbeatable return and
warranty policies, and member-only services such as insurance and financing. Other retailers
offer markets and islands to categorize offerings and employ knowledgeable sales
representatives to assist customers.
2. Match pricing or promotion by creating flexible pricing and promotion structures. Retailers
must know and adjust prices according to competition. Costco selects products at prices from
suppliers guaranteeing the product is exclusive to Costco or Costco is receiving the lowest price.
Some retailers can update pricing and promotion instantly to match or beat any competitor, such
as Amazon.com.
3. Move towards adopting global cultural changes by shaping and adapting to customer
preference changes, specific and according to each culture or country that has operating units. As
reported in the General Force Analysis, in the US, there are increases in online shopping trends,
an increase in demand for private label products, and a decline in brick and mortar shopping
trends. Costco offers convenience and unbeatable pricing for products not sold in warehouses for
members shopping online. Wal-Mart and Target also offer products not sold in stores for
unbeatably low prices, but do not require a membership. Costco promotes the private-label
Kirkland Signature, while Target promotes Up & Up, and Wal-Mart promotes Great Value.
Implications of Analysis
The Boid Analysis seeks to expand the traditional strategic framework of the corporate
structure. The theory suggests Costco is following the rules, but must continue to refine the
merchandise mix for customers, improve on pricing and promotion capabilities, and adapt to
cultural changes faster than competitors. This kind of uniformity between competitors is
detrimental to the capacity to achieve innovation, spontaneity, or evolution (Stacey, 2011).
Companies within the industry exhibiting these simple rules do demonstrate very complex,
dynamic behaviors (Stacey, 2011). These complex behaviors need an additional framework
addressing co-operation and competition between firms, which is covered in the next
section, Industry Evolution Modeling.
XIII. Industry Evolution Modeling
The Industry Evolution Modeling derives from “Rays Computer Experiment” and
“Allen’s Fishing Experiment” (Walden University, 2012b). “Ray’s Computer Experiment”
introduces the concept of industry evolution arising in the scope of heterogeneous agents,
autonomous entities that follow different sets of rules to compete and co-operatively evolve the
diversity of the whole system (Stacey, 2011, pp. 249-252). “Allen’s Fishing Experiment”
produces a model incorporating both optimal information usage and complex behaviors
exhibited by agents that is capable of maintaining sustainability of the whole system, but avoids
long-term strategies (Stacey, 2011, p. 271). The model prescribes management to focus on
overcoming life cycle behaviors rather than short-term profit maximization (Stacey, 2011). The
model also suggests culture, diversity, and risk taking become necessary for creativity and
sustainability to occur, but does not accurately account for actual human experiences (Stacey,
2011). The purpose of this analysis is to identify the patterns of both competition and
cooperation within the Discount, Variety stores industry that has led to the evolution of Costco
and the industry as a whole.
Industry Evolution Modeling Description and Analysis
Consumers, shareholders, and other stakeholders are increasingly expressing social and
environmental concerns for poverty, energy reduction, resource depletion, and accumulating
waste. Sustainability measures potentially reverse the devastating outcomes of the Industrial Age
and promote innovation and creativity, while also ensuring a viable future for the company. In
2009, Costco developed a sustainability group to oversee sustainability initiatives. In 2012, these
initiatives continue to provide cost savings from energy efficiencies and waste reduction, while
also aiming to increase public safety. Another form of co-operation and competition is Costco’s
membership in the Retail Industry Leaders Association (RILA). Competitors such as Wal-Mart,
Target, Sears Holding, Best Buy, Walgreens, Home Depot, Lowes, J.C. Penny’s, and Dollar
General comprise the Premier membership level. RILA represents over seventy US global
leading brands in retail, provides research to members, promotes fair market practices such as
governmental tax reform, and focuses to expand the retail industry’s problem solving capabilities
in asset protection, finance, human resources, public policy, supply chain, and sustainability
(Retail Industry Leaders Association, 2012).
Large retail companies seem to exhibit a pattern of employing diverse work forces, and
diversifying product/ services portfolios to reach more consumers. Costco is committed to
diversity by seeking minority businesses to support. Costco buys and sells high quality products
in bulk exclusively, at deeper discounted prices. Other companies may buy in bulk, but typically
stock more than fifty thousand items, and usually in different sizes and amounts. These retailers
and do not achieve the same discounts. Co-operation exists between buyers and suppliers to
ensure this practice is on going. Costco has a strict code of ethics for vendors and seeks
partnership with suppliers to reduce reliance on working capital required. Discount, Variety
stores exhibit patterns of outsourcing and engage in joint ventures overseas to remain
competitive. Co-operation patterns exist between organizations that develop relationships with
other countries to ensure fair market interactions. Costco’s operations in Mexico significantly
and positively impact profitability (Costco, 2012). Wal-Mart’s operations in Mexico seem to
produce similar results. Technological innovation patterns suggest tremendous amounts of
consumer data are becoming available, and retailers need to continuously discover new methods
for capturing and analyzing data in real time. Costco seems to capture consumer data via
purchasing points online and in warehouses.
Implications of Analysis
Costco aims for sustainability and employs action plans that address social and environmental
concerns, while maintain profitability, and ensuring future viability. Costco must continue to
make a commitment to diversity, cultivate and shape corporate culture to address social and
environmental concerns in the countries with operating units, and take additional risks to expand
operations through joint venturing in developing countries. Costco can improve on industry
association positioning and strive for Premier membership. Costco seems to forego short-term
profit maximization for long-term viability and shareholder satisfaction. Costco seems slow to
adopt new technologies that capture customers attention and can improve on research and
development. Costco seems to luckily found a high mountain to climb. Costco is climbing out of
a recessionary valley toward a promising peak in the fitness landscape for the Discount, Variety
stores industry. Wal-Mart seems to also heavily shape the patterns of the fitness landscape for the
entire Retail stores industry, but not as much in the Discount, Variety stores industry. The
evolution of Costco’s strategies, goals, plans, and operations seem to overcome short-term
quotas by focusing on cyclical behaviors, which seem to align with the insights of “Ray’s
Computer Experiment” and “Allen’s Fishing Experiment.” Focusing on cyclical behaviors is the
subject of the next section titled Life Cycle Assessment.
XIV. Life Cycle Assessment
A Life Cycle Assessment (LCA) is a strategic management tool to see the bigger picture
of complexity surrounding organizations. LCA analyzes the downstream risks and upstream
environmental impacts of a product, service, or organizational process from beginning to ending
stages, and beyond (Senge, et al., 2010). The goal is to go beyond, which requires recyclable and
sustainable end products to be made. According to Senge, Smith, Kruschwitz, Laur, & Schley
(2010) LCA includes comparing similar technologies and tracking technological breakthroughs,
in order to continue redesigning products, services, or organizational processes (Senge, et al.,
2010). LCA seeks to develop a synopsis of materials, while simultaneously creating a
perspective inclusive of multiple life cycle stages and the manifold of environmental concerns
(Senge, et al., 2010). Society continues to make demand for reductions in carbon footprints, and
LCA modeling can address these demands (Senge, et al., 2010). Seeing the bigger picture
requires looking at the value created and for whom. LCA modeling also identifies potential
waste as a resource, and the how efficiency in one area can lead to inefficiencies for others.
LCA Modeling Description and Analysis
The LCA Model tracks from left to right, downstream to upstream, searching for the
resources extracted, the byproducts created, how wastes are handled, and what materials are used
in services (Walden, 2012b). Costco operates warehouses around the world. The previous section
titled Value Chain Analysis describes Costco’s current upstream and downstream value adding
activities (see Table 2). These activities create the platform and process for sales and services.
This process remains valuable because Costco implements sustainable measures into every value
chain activity to benefit customers, employees, and other stakeholders. Downstream Costco
minimizes their operational environmental footprint and impact through building construction,
continues research into food safety and packaging, and forces suppliers to adhere to a code of
conduct. Upstream, Costco focuses on promoting and funding charitable causes within
communities with operating units, minimizing landfill trash by selling recyclable products, and
granting extended warranty services to members. Costco monitors and reports on four
greenhouse gases, (a) carbon dioxide, (b) methane, (c) nitrous oxide, and (d) hydro fluorocarbons
(Costco, 2009). The source of emissions is reported in two scopes, direct and indirect emission.
Costco has seven measures for direct emissions and one for indirect emissions (Costco, 2009).
Direct emission measures include (a) stationary equipment for heating, cooking, and HVAC
equipment; (b) generators for temporary power failures; (c) mobile equipment for scrubbing
floors; (d) other mobile equipment such as trucks, haulers, or trailers; (e) other mobile equipment
such as security carts; (f) other mobile equipment such as jets, and (g) fugitive emissions that
come from refrigeration, lighting, computers, etc. (Costco, 2009) Costco’s indirect measure
includes purchased electricity for the equipment previously mentioned.
Implications of Analysis
The LCA considers the future risks of natural resource inputs and searches beyond
current value chain activities to find solutions. Costco understands the bigger picture and works
to minimize downstream and upstream risks and environmental impacts. The measures
governing Costco’s processes for sales and services do not take the traditional approach, and
Costco seems to strive for continual improvements that provide methods that reach the goal to go
beyond.
XV. Compliance to Innovation Analysis
Compliance to innovation emerges in five stages; the first two stages are reactive, (stage 1) non-
compliance with laws or stakeholders, and (stage 2) compliance to regulations and stakeholder
pressure (Senge, Smith, Kruschwitz, Laur, & Schley, 2010). The next three stages are proactive,
(stage 3) reaching beyond compliance to strengthen reputation and social legitimacy, (stage 4)
integrating sustainable thinking into strategic planning, and (stage 5) aligning the company
mission and core values to focus on sustainability (Senge et al., 2010).
Compliance to Innovation Description and Analysis
Costco is compliant with all laws, but also abides by strict ethical codes for suppliers and
partners; and together work to enhance overall product safety for consumers. Costco promotes
reductions in their overall carbon footprint to diminish environmental impacts and encourages a
learning community amongst shareholders. Costco maintains a strategy to reduce greenhouse
gases by building warehouse facilities using recycled steel, locally made products, building
designs maximizing heat to warm air and water, and altered lighting systems to reduce bulb
consumption. Costco aims to minimize emissions through fuel-efficient delivery trucks.
Implications of Analysis
Competitively, Costco still earns some of the lowest gross margins. Costco is unlike most large
retailers for addressing concerns of shareholders over stakeholders, but Costco seems to
understand the big picture and strategically aligns policies and operations for the long-term.
Costco goes above and beyond the average large retailer by operating at Stage 5. Costco operates
roughly 617 global warehouses in about 8 countries and employs roughly 96,000 full time
employees (Costco, 2012). Wal-Mart operates over ten thousand stores in 27 countries and
employees roughly two million people (Yahoo.com, 2012b). Wal-Mart has about 67 years and
Costco has about 36 years in retail sales. Wal-Mart seems to capture and develop the bigger or
best picture of the Industrial Age, and seems capable of continuing to dominate the industry even
though Wal-Mart operates at Stage 4 by integrating innovation performance measures into a
long-term strategy. Wal-Mart cannot replicate Costco in the short-term or long-term, which
creates Costco’s current sustainable advantage?
XVI. Sustainable Value Framework Analysis
The long-term effect of social and environmental changes potentially creates an unsustainable
future for all mankind. Incorporating sustainability into strategic planning is preferable, because
value can be immediate (Senge, Smith, Kruschwitz, Laur, & Schley, 2010). Costco ranks as the
fifth largest US retailer, eighth largest global retailer, and twenty-ninth largest in Fortune 500
(Costco, 2009). The purpose of this analysis is to discuss Costco’s focus toward creating
sustainable value within a new kind of strategic framework set forth by Peter Senge.
The Sustainable Value Framework includes an internal and external focus for today and
tomorrow that roadmaps a strategy, its drivers for success, and the payoff (see Table 3, pg.
63). The internal sustainability focus for today includes preventing pollution, minimizing
material consumption, and reducing waste; and the payoffs include reducing business costs and
risks (Senge, et al., 2010). For tomorrow, the internal strategy must address reducing carbon
footprint, creating cleaner technology, and avoiding environmental disruptions; and the payoffs
include further innovation and competitive repositioning (Senge, et al., 2010). The external
sustainability focus for today includes integrating concerns of civil society, transparency, and
connectivity; and the payoffs include reputation and social legitimacy (Senge, et al., 2010). For
tomorrow, the external strategy must address climate change, resource depletion, and poverty;
and the payoffs include a trajectory for sustainable growth (Senge, et al., 2010).
Detailed Analysis of All Four Quadrants
The Sustainable Value Framework for Costco identifies strategies capable of ensuring a viable
future (see Table 3, pg. 62). Costco’s current internal strategy for pollution prevention includes
Costco’s energy program for efficiency, conservation and gas station management, trash
diversion and recycling programs. The payoffs include lower risks and costs associated with
warehouse facilities. Costco’s current external strategy for product stewardship includes
Costco’s sustainable packaging designs and materials, sustainably sourced products, and
increased transparency to shareholders and stakeholders. The payoffs include increases to their
positive reputation amongst large retailers, and establish legitimacy with shareholders. Costco’s
future internal strategy for clean technology includes Costco’s Building Construction Mission
and Silver LEED Certification. The payoffs include innovative buildings that strengthen
positioning for future viability. Costco’s future external strategy and Sustainability Vision
includes Costco’s code of ethics, vendor codes of conduct, community relations and commitment
mission, and a greenhouse gas reduction program. The payoffs include sustainable operations
providing long-term viability and growth.
Argument in Support of Conclusions
Costco’s focus on sustainability emerges from Costco’s focus on community relations and a
philanthropic focus toward education, societal and human services. Costco directly
funds Children’s Miracle Network: Hospitals Helping Local Kids and a scholarship fund.
Employees at all levels are given opportunities and encouraged to participate in local charities.
Table 3
Sustainable Value Framework
Tomorrow Today
External Strategy: Sustainability
vision- Costco’s Code of
Ethics, Vendor Code of
Conduct, Community
Relations and
Commitment Mission,
Greenhouse Gas
Reduction program,
Payoff: Sustainable
operations for long-term
viability and growth.
Strategy: Product
Stewardship-
Costco’s Sustainable
Packaging Designs
and Materials,
Sustainably Sourced
Products
Payoff: Increases
reputation amongst
large retailers, and
establishes
legitimacy with
shareholders.
Internal Strategy: Clean
technology- Costco’s
Building Construction
Mission, Silver LEED
Certification
Payoff: Innovative
buildings that
strengthens positioning
for future viability.
Strategy: Pollution
prevention- Costco’s
Energy program for
efficiency,
Conservation and
Gas station
management, Trash
diversion and
recycling programs
Payoff: Lower risks
and costs associated
with warehouse
facilities.
Note. Adapted from “DDBA 8160: Sustainable Solutions Paper Template,” by Walden
University, 2012. Copyright 2012 by Walden University. Adapted with permission.
In 2009, Costco formed the Corporate Sustainability and Energy Group which released their
first sustainability report and the mission is: “To conduct Costco’s business operations in an
environmentally and socially responsible and sustainable manner; to reduce Costco’s use of
resources and generation of waste; to comply with environmental laws and regulations; and to
lead by example” (Costco, 2009). Costco explores other innovative techno logies for sustainable
solutions for food safety, packaging, recycling, trash diversion, and attained a LEED
certification.
Similar to, but opposite of a vicious cycle promoting negative outcomes; CSR initiatives can
create a virtuous cycle of positive outcomes (Grgurich, 2012). CSR is becoming more relevant to
establishing trust within the retail industry. Prior to 2000, only a few companies focused on
sustainability, but today almost all companies generate reports (Kanani, 2012). Most large
retailers engage in some form of CSR initiatives. These initiatives involve large costs, heavy
commitment, and do not go according to plan.
Implications of Analysis
Costco’s approach to CSR and TQM when comparing to industry peers is mostly measurable for
employees. Costco finds pride in providing a friendly work environment with highly motivated
and knowledgeable employees. This approach creates a fun shopping experience for customers
and repeat visits. According to CSRHub (2012), Costco’s overall basic CSR rating ranks higher
than the global average. The global average consists of community, employees, environmental,
and governance initiatives (CSRHub, 2012). Costco’s corporate governance and environmental
initiatives substantiate Costco’s average, such as strict adherence to the law and corporate ethical
codes, and efforts to achieve a Silver LEED certification for a facility in New Jersey (Costco,
2012). Creating sustainable value is a social and environmental challenge for businesses seeking
a viable, profitable future. Costco’s long-term focus creates social, economic, and environmental
value for most of their shareholders and stakeholders, but the lack of profitability for employing
such measures may result in an unsustainable future when compared to competitors, notably
Wal-Mart.
XVII. Conclusion
Costco conceptually captures and precisely aligns the company’s vision and strategic planning to
meet performance goals. Costco achieves warehouse efficiencies and operational effectiveness.
Costco strives for a sustainable future and elects programs and measures to further progress.
Expanding overseas seems to drive future profitability. Costco’s expansion of global operations
seems limited by their specific interests in nations or countries with larger or growing GDP.
Costco also has a set of very strict code of ethics when establishing partnerships, and some
countries do not have the same laws protecting Costco's vision. Costco consistently sales high
quality discounted products and has an unbeatable return policy, with a reputation and credibility
to match. These factors contribute the most to potential warehouse markets. Wal-Mart and other
large retailers operate very different overseas, and do not maintain a strict code of ethics, which
seems to promote cutting corners to achieve short-term profitability that Costco simply does not
care about. Expansion is one of many strategies available to Costco, but Costco seems to hand
pick the customers they want to serve and serve them the best the can with an exemplary
workforce. Costco seems determined to focus on keeping these groups satisfied at any expense,
including eroding profit margins to maintain satisfaction. However, Costco’s future profitability
and overall strength relies heavily on Costco’s senior management’s ability to manage the
ongoing, unpredictable changes occurring in the economic, global, and political risk
environments. Lastly, if Costco can follow the Action Plan Analysis produced by the Author,
profitability will increase 1% per year for the next five years for a Gross Profit Margin of 18.4%
by year-end of FY2018 (see Appendix 1: Pro Forma Financial Analysis).
XVIII. Appendix 1: Pro Forma Financial Analysis
Note. Author performed all financial calculations using Microsoft Excel. Adapted from “Finance
for Executives” by Hawawini and Viallet, 2011 (4 th edition). Copyright 2011 by South-Western,
Cengage Learning. Adapted with permission.
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