Costco wholesale value chain analysis

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.