Prepared below, by request, is a memo detailing 3 possible corporate strategies, that with implementation, could potentially raise profits at Costco. In an effort to increase profits we can maintain our present HR strategy of capitalization upon our employees or use these alternative corporate strategies as an alternative or these different strategies can be used in unification with our current HR strategy.
I. Relevant Facts
Most major retailers maintain the mentality of low prices along with low wages and minimal benefits to employees. Costco follows a different business model of paying employees more and treating them better attempting to make them more satisfied ergo, providing better customers service. Founder James Sinegal believed
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in the idea that superior customer service is a distinct competitive advantage for a company. On average Costco pays employees $20.89 an hour. Costco also offers employees generous benefits such a health coverage which is heavily subsidized by the company as well as, generous vacation benefits, in addition to matching contributions to a 401(k) retirement, plans. Costco’s goal of a low-price warehouse such as Walmart, but still having superior customer service such as that of Nordstrom’s is costly to the business. Prices are kept low with the average markup being 15% in comparison to supermarket having a markup of 25% on average. Making this low markup possible is Costco’s ability to work with vendors to lower prices and keep them low. Costco finds other areas to save on costs such as on lighting and the lack of bags at checkout. Costco has also opted to limit advertising and charges a membership fee to enter. Costco has a 90% renewal rate on membership. Despite a large renewal rate customers still complain of long lines at check outs putting employee’s efficiency into question. With the mentality that retail is in the details, Costco works to keep doing the little things right every time. II. Problem/Issue From the perspective of shareholders Costco has been too generous with its employees, making investors believe that profit margins are not as high as they could be. Founder James Sinegal has always enforced that treating employees better will be a distinct competitive advantage by providing better customer service. This generous mentality however is becoming quite costly to the business. III. Alternative Courses A. Employing the cost leadership strategy would focus more on minimizing costs to generate a higher rate of revenue. One practical way of doing this is by increasing the amount that employees pay for health insurance. Currently this benefit is heavily subsidized by the company but by increasing employee’s contribution even if only by a slight margin will increase revenue for the company. Another way to minimize cost would be to not increase employees’ wages as rapidly, Costco is far ahead of competitors by offering an average of $20.89 an hour. Offering raises at a slower pace will also save the company costs and increase margins for shareholders. B.
Employing the stability strategy will keep management steady and protect itself from environmental threats. Costco has had rapid growth in the past few years. The stability strategy would be used in combination with a pricing strategy of a slight markup in prices. Currently with a 15% markup, which is below average there is room to increase this even if only by a slight amount. Through Costco’s differentiations strategy of developing an image and reputation of quality in its products as evidence through the high volume of Kirkland brand toilet paper being sold and increase in wine sales that is setting itself apart from other retailers. Through this increase in quality Costco can charge higher prices for products. Increasing the markup to 18% from 15% would be small enough amount that customers will not be overly affected by the results, yet yielding an increase in profits for the …show more content…
company. C. Costco already owns and operates stores in Australia, Canada, Japan, Mexico, Puerto Rico, South Korea, Taiwan, and the United Kingdom along with the United States. With its increasing success in the United States Costco could focus on a growth strategy with an emphasis on international growth. Costco has found a unique niche and should attempt to take this market niche to other countries. With this geographic and brand expansion Costco’s name, will be spread around the world. With more stores around the globe Costco has more opportunity to make profit globally. IV Evaluation of Alternatives A. Using a cost leadership strategy will force Human Resources to put its emphasis on recruiting and retaining employees who work very efficiently and are productive but are also still providing the motivation for them to do so. Although increasing profits, decreasing benefits and lowering wages may have adverse effects on employee’s morale. Organizations have psychological contracts with employees, if the expectations of what will be provided to individuals are not being met by adequate rewards they could see a large turnover in employees. By changing the amount employees must contribute to health insurance and decreasing the number of raises given, employees may feel their psychological contract is being violated, leading employees to not be as committed to the organizational goals and lower effectiveness. Human Resources must carefully address the need for changes in the terms of the psychological contract with employees. B. Developing a stability strategy although protecting the company from environmental threats, challenges the Human Resources Manager exist with keeping current employees content when the company is unable to offer as many advancement opportunities and increases in salary. When marking up the prices consumers may notice and choose to shop elsewhere. To maintain a differentiation strategy Human Resources must hire, recruit and retain employees who are able to perform high quality work and still provide exemplary customer service. A reward system needs to be based on factors such as quality of work and customer service provided. The difficulty will be in creating a reward system when they are also attempting to maintain a stability strategy. C. Growth internationally increases brand recognition worldwide and increases profitability for shareholders. However, challenges to the Human Resource Management will be in recruiting and training many qualified employees to assist in the expanding operations. Also, cultural barriers such as language and customs will also present new challenges. Human Resource Management will need to make sure they are attracting and training a large number of new employees needed to implement an international growth plan. Attracting adequate employees may be a challenge when first expanding the company. V. Selected Alternative & Reasoning Employing a cost leadership strategy is the most effective way to implement a new strategy that Costco has not focused on yet to date.
Shareholders are concerned Costco does not have as high of profit margins as possible. Costco’ has minimized its costs by having the lowest overhead as possible through its warehouse styled operations. However, much of Costco’s expense is found in the treatment of its employees. By increasing the amount employees pay for insurance slightly such as only contributing 85% instead of 90% will create a large increase in profits for the company but still be a better offer than competitors. Also by not offering raises as often Costco will still be paying a high wage for a retailer by comparison, but not quite as drastically different from the competition. Attitude is critical in any implementation of a strategy people with positive attitudes toward the job and organization will be much more willing to contribute toward the effectives of the organization to achieve the goal of profit
maximization. Other alternatives such as a stability strategy with an increase in price, directly affects the consumers who are critical in the future of the business. International growth may be profitable in the future, but also may be costly and very challenging for the Human Resource Management team to coordinate effectively. To make Costco even more profitable for our shareholders a new approach different from that of the former two CEOs is necessary for the possibility of an increase in profits of the organization. Our Human Resources team will need to work to keep our employees motivated through this strategic change and still work to maintain a positive admired workplace for all our employees. Our founder James Sinegal created the philosophy of treating employees right so they will offer the best customer service. This philosophy will not be lost through this change, our employees will always be of utmost priority and these slight changes will be handled with care as to not drastically change the generous workplace atmosphere, that is expected and delivered, for our valued employees.
Costco’s business strategy is different from their competitor’s in the wholesale retail industry because their purpose is to keep overhead down and pass the savings to their customers. They do this by choosing not to advertise, sell fewer brands and having an innovative approach by having their own manufacturing facilities for a variety of merchandise. Costco does not market their warehouses and their marketing is through word of mouth from current customers who also must have a membership to shop at Costco. When compared to Walmart Costco sells four brands of toothpaste and Walmart sells sixty brands of toothpaste. Costco can buy more for less from the manufacturer of the four brands of toothpaste and pass the savings on to their customers. Costco’s strategy is to sale a limited number of items because this strategy according to (Lutz, 2013) “increases sales volume and helps drive discounts.” Because of Costco’s profitability in the retail market they have managed to continue to be profitable even in an oppressed economy. Costco’s focus is on high-end customers indicated by some of the brands they carry such as Coach Handbags. Costco offers three different levels of membership and is only open to customers who have a membership. Costco’s philosophy is they do not advertise or markup items more than 15% in order to save their customer’s money. These practices lowers the overhead costs and continues passing the savings to the customer. Costco is an international company and has (Costco Wholesale Corporation, n.d.) “462 locations in 43 U.S. States & Puerto Rico; 87 locations in nine Canadian provinces; 25 locations in the United Kingdom; 10 locations in Taiwan; 9...
Being a stocker for Costco Wholesale is a straightforward job. The stocker comes in each morning and presented with the day 's’ tasks. The stocker is monitored throughout the day by the department manager to make sure all tasks are being met in a timely manner. Costco Wholesale works less like a business and more like a well tuned machine. If one cog in a machine is faulty or rusty then the whole system will run inefficiently. Managers need to work with subordinates to further improve productivity. To avoid ineffective managers, managerial candidates should be democratically elected by future subordinates.
The second thing that Costco needs to know how to pay employees so that they are satisfied with their salary. Costco will want to check on the employees. Costco will have to develop a disciplinary system, if employees get mistaken. Costco encourages employees or employers to become friendlier. They engage with customers fairly, so that they will be satisfied with Costco’s services. If the employees’ attitudes are not good, customers will avoid ...
Costco Wholesale Corporation was an uncommon type of retailers called wholesale clubs. These clubs differentiated themselves from other retailer by requiring annual membership purchase. Especially in case of Costco, their target market is wealthier clientele of small business owners and middle class shoppers. They are now known as a low cost or discount retailer where they sell products in bulk with limited brands and their own brand. The company is competing with stores like Wal-Mart, SAM’s, BJ’s, and Sears. The case begins with an individual shareholder, Margarita Torres, who first purchased shares in 1997 and who is trying to evaluate the operational performance of the business in order to make a decision rather or not purchase more shares
Costco Wholesale Corporation is an international chain of membership warehouses operating on the concept that offering members lower prices will produce high sales volume and rapid inventory turnover (“Annual Report” 4). While Costco warehouses are designed to help reduce costs for small-to-mid-sized companies, memberships are also available for individuals (“Company Profile”). The two memberships offered by Costco include Business and Gold Sta...
“Culture is not the most important thing. It’s the only thing.” (Gabler, The Magic in the Warehouse, 2016). It has been said that “Costco acts more like a cheerful cult than a hard-driving business.” (Gabler, The Magic in the Warehouse, 2016). Costco hasn’t wavered from their founder’s strategy of promoting within; over 98% of their management started their careers with Costco. This strategy clearly works; the environment is one of family not just coworkers. They are loyal to the brand and motivated to work hard and climb the corporate ladder. Costco sees this as ensuring the future of their values which in turn ensures their
Their ability to distribute the cut rate from their operating proficiencies in supply chain management and cash flow, permits them to offers items at discounted rate and a lower price than their competitors. For Costco the meaning of being the low-cost provider while also differentiating from the competitors is ambiguous at best. Costco’s CEO, Jim Sinegal, is certain that low priced, and the high value merchandises are exactly what is needed maintain and achieve a staying power in the industry. Costco also entices their customers with low prices on designated set apart products available only at their stores. Within these designated products, Costco provides a limited selection of nationwide brand-named merchandises in some wide categories. Their approach comprises of selling a limited number of items, keep their costs down, maintain a high volume, compensate employees well, ensure that customers buy their memberships, and target upscale small-business owners through their business only
Costco is one of the companies that have started from humble beginnings to become one of the most recognized institutions in the wholesale industry. Based on the Costco case, there are valuable lessons I have learned and the look of things is that Costco is here to stay. One of the insights I have gained from the Costco case is that organizations should understand their value chains and focus on their strengths to drive competitiveness. Another lesson that I have learned is that information technology can be used by organizations to improve their levels of competitiveness. Also, the Costco case study has enabled me to realize that the management of organizations should constantly evaluate the impacts of the strategies they employ because it is through such evaluations that the best practices can be adopted to improve the performances. Costco has applied these aspects in its different areas of operations, and they have advanced the organization since its inception days to present. From the strategic management practices, the organization has grown from strength to
Key Issues: At the end of 2012, Costco was a successful business; however, there are some issues that they would need to deal with. These issues mainly arise from their previous successful ventures as a warehouse wholesale company. The first issue is that Costco has competitors that can actually be and are a threat to their success. Competition allows a company to improve itself and prove its prowess to its customers. However, when a competitor is able to provide the service at a much reduced cost, problems will arise.
https://www.eatingwell.com/article/8051166/reasons-should-not-shop-costco/ Zacks. n.d. - n.d. - n.d. Costco (COST) thrives on business models and pricing power. Nasdaq.com. The Stock
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