Apply porter's value chain model to costco

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