What is Costco’s business model? Is the company’s business model appealing? Why or why not?

Answer) The business model of Costcois generating a high volume of sale and rapid turnover of inventory by offering low prices to members on selected private label and nationally branded items in a wide merchandise range. The business model of Costco is built on the membership of customers who renew annually or join newly. Hence the business model of Costco is great because customers are satisfied with the quality and they get their membership renewed annually.

1.      What are the chief elements of Costco’s strategy? How good is the strategy?

Answer) Strategy of Costcois built on a principle strategy of limited selection, low prices, and a treasure hunt environment for shopping. Kirkland is a brand of Costco used by the company that is designed to be better or at least equal quality of national brands. Merchandising of Costco is a treasure hunt that consists of an endless changing selection of luxurious goods. Buyers of Costco buy these goods from wholesalers of the company that enables them to offer discounts and packages for their customers.

2.      Do you think Jim Sinegal was an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support can you offer for these grades? How well is Craig Jelinek performing as Sinegal’s successor? Refer to Figure 2.1 in Chapter 2 in developing your answers.

Answer) Jim Sinegal, I believe, is really an effective CEO of Costco because he leads the company into strategic courses to prepare the company for future. Furthermore, he functions as director and producer as well as knowledgeable critic within Costco. He exhibits considerable attention to detail the pricing strategy and his roles in management are very active as CEO.

3.      What core values or business principles did Jim Sinegal stress at Costco?

Answer) From the words of Jim Sinegal, two core values or business principles seem to emerge. First, delivering high values to its customers by offering them low prices and secondly, using the best of the standards to treat its employees. The message of Sinegal in the case is very clear that he is highly dedicated to instilling these core values as a cultural part of Costco.

4.      (In the event you have covered Chapter 3) What is a competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why? Use the information in Figures 3.4, 3.5, 3.6, 3.7, and 3.8 (and the related discussions in Chapter 3) to do a complete five-forces analysis of competition in the North American wholesale club industry.

Answer) Competitive pressures linked with substitutes and rivalry are certainly the two of the strongest competitive forces. Competitive pressures are weak from the other three competitive forces. The competitive pressures, as a whole, are “reasonable”or“normal” that confront the wholesale clubs - not very much strong as to crimp profit margins excessively but strong enough to stop wholesale clubs from making more profits and attracting other businesses to enter the industry. The wholesale club’s competitive market success is a function of keeping its costs less, using “bargain prices” strategy, attract new entrants, and keep achieving acceptable profitability.

5.      How well is Costco performing from a financial perspective? Do some number-crunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 66-68) to help you diagnose Costco’s financial performance.

Answer) A current 1:05 ratio shows that current liabilities of Costco should be met. The 11.54 asset turnover shows that Costco keep the inventory for less than 12 days and this is one of the reasons for increasing profitability. Costco, utilizing measures for profitability, is financially doing well.  A profit margin of2% illustrates that pricing policies of Costco make ultra-low prices offer possible for the company. Furthermore, 6% assets return shows that assets of the company are well-used in making revenues. $0.13 of profit is demonstrated by ROE for every dollar of Costco’s net assets. Based on these figures, Costco is a financially stable company.

6.      Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that at Sam’s Club and BJ’s wholesale?

Answer) In the United States, Costco is one of the leading wholesale clubs with $116.6 million worth net sales. Sam’s Club is closest to Costco, but in sales, it is far behind at $58 million. On the other hand, BJ’s Wholesale Club made net sales worth$10.6 million in the same year (2015). Costco operating income is $3,624 million while BJ’s Wholesale and Sam’s Club had operating incomes of $208 millionand$1,976 million respectively. The position of Costco is clearly superior when we talk about financial performance.

7.      Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful? Why or why not?

Answer) The data in case Exhibit 2 is not enough to determine whether or not an expansion of Costco is financially successful outside of the U.S. because the figures are very mixed. The only category is a food merchandise category that increased regarding sales. Ancillary remained stable along with other merchandise categories while sundries, soft-lines, and hard-lines decreased regarding sales. The financial profit either decreases or remain same as the warehouses increase, with the exception of food merchandise.

8.      How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?

Answer) Overall, Costco is performing well from the strategic perspective. But the competitive advantage of Costco is not high over BJ’s Wholesale and Sam’s Club in terms of the number of stores owned and 59 percent of total market share in North America. A winning strategy, at the moment, is declining for Costco. Although 59% of market share is being owned by Costco and its strategy is well matched to the condition of the company, the growth decline indicates that the company is losing competitive advantage in the industry.

9.      Are Costco’s prices too low? Why or why not?

Answer) Keeping low membership cost is a major part of Costco’s strategy and company keep their customers coming back for more and more. With the profits and numbers looking good, it can be said that the pricing strategy of Costco is also good.

10.  What do you think of Costco’s compensation practices? Does it surprise you that Costco employees apparently are rather well-compensated?

Answer) Pay scale of Costco is averagely higher than the company competitors. A high fridge benefit package is given to employees of Costco’s that include health and other incentives as well. It is surprising with a lower cost margin that they have much to offer to its employees. On the other hand, one of the core values of Costco is taking care of the company employees because they believe that employees are one of the most important assets of the company.

11.  What recommendations would you make to Costco top management regarding how best to sustain the company’s growth and improve its financial performance?

Answer) The major recommendation that I would like to provide Costco is that the company should reevaluate its cost margin and check if a very small increase in their membership is noticed or not with a small increase in membership price.