1. What is Costco's business model? Is the company's business model appealing?

Why or

why not?

Costco’s business model is to generate high sales volumes and rapid inventory turnover by

offering members low prices on a limited selection of nationally branded and selected private

label products in a wide range of merchandise. Costco’s business model is built upon customer

memberships, who join and renew annually. This directly shows customer loyalty as satisfied

customers will renew annually. Costco’s business model is great, all customers want to find

good quality bargains and Costco is setup to keep their customers coming back to find them.

2. What are the chief elements of Costco's strategy? How good is the strategy?

Costco’s strategy is built on the principle strategy of low prices, limited selection, and a

treasure-hunt shopping environment. Costco uses their brand Kirkland, which is designed to be

equal or better quality than national brands. Treasure-Hunt merchandising consists of a

constantly changing selection of luxury items on the floor enticing shoppers to spend more than

they might otherwise by offering irresistible deals. Costco’s buyers purchase these items from

wholesalers which enables them to offer discounts to their customers.

3. Do you think Jim Sinegal is 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? Refer to figure 2.1 in chapter 2 in developing your answers.
I believe that Jim Sinegal is an effective CEO as he leads Costco into strategic courses in

preparing for the future. He functions as a producer, director and knowledgeable critic. Sinegal

exhibits attention to detail and pricing and leads a very active role in management as CEO.

4. 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 "A Guide to Case Analysis" and in table 4.1 of the text to help you

diagnose Costco's financial performance. How does the company compare to Sam's

Club and BJ's Wholesale?

A current ratio of 1:05 shows that Costco should be able to meet its current liabilities. Profit is

increased by not having to store inventory. The Asset turnover of 11.54 shows that consistent

with what was described by the case study, Costco holds onto inventory for under 12 days.

Utilizing profitability measures, Costco is doing well financially. A 2% profit margin illustrates

Costco’s pricing policies and the ability to offer ultra-low prices. The 6% Return on Assets

percentage shows that Costco’s assets are being well-used to generating revenue. The ROE

demonstrates $0.13 of profit for every dollar of net assets. Based upon the data driven from

the case, Costco is doing very well.

5. Does the data in case exhibit 2 indicate that Costco's expansion outside the United

States is financially successful? Why or why not?

The data in Exhibit 2 indicates that Costco’s expansion outside the U.S. is financially successful.

Revenue, warehouses and operating income have steadily increased since Costco went global.

The revenue to warehouse ratio has also increased.

6. Perform a SWOT analysis and complete a strategic group map for Costco. What do

these tell you about the company's strategy and performance? How well is Costco

performing from a strategic perspective? Does Costco enjoy a competitive advantage

over Sam's Club? Over BJ's Wholesale?

Strengths

Costco Wholesale offers its customers and consumers lowest prices on a wide range of national

and international branded products and goods, in a wide arrange of merchandise categories.

The products and services of the Costco Wholesale are reliable as the company deals in best

available quality products at competitive prices.

The company pays attention to details and has various strengths that add to its success. These

factors include rapid turnover of the inventory, running an efficient operating structure, reduced

cost of handling of merchandise and generation of high sales volume at each of its store.

Costco Wholesale gives preferences to it customers and provides them best value for the

money.

Other than offering highly competitive prices on best-quality goods and a range of convenience

services, Costco Wholesale does its best to be a valuable quality provider for every community
where they operate. This also includes providing good jobs at good pay, continuous involvement

in community activities and charities.

Costco Wholesale is one of the top wholesale clubs in the United States. It is currently present

in 38 states operative through its 375 clubs.

Costco Wholesale also operates several consumer and business services, ranging from financial

planning to health insurance. By providing top quality goods and services, Costco has been able

to increase its market share a great deal over the past several years.

Weaknesses

Costco’s business conditions constantly change because external and internal forces make other

business participants to alter their actions. The driving forces in this sector are the major

underlying causes changing business and competitive conditions.

Operating on a large scale means difficulty in bringing changes to grass root levels.

Opportunities

Costco Wholesale is one of the first companies to have a growing acceptance of internet

shopping. Costco created a website in the United States as well as website in Canada to be more

effective and competitive in the internet market.

The company is constantly working to make its distribution channels stronger and enter new

potential markets.
By offering value and working more towards developing a strong loyal customer base the

company can gain more market share.

Threats

Warehouse clubs not only compete in one sector or market but it competes with a wide range

of other types of retailers which include Wal-Mart Dollar General, supermarkets, general

merchandise chains, specialty chains, fuel stations and internet retailers. Their competitiveness

changes because the different types of products they deal in.

Due to its tremors growth and growing market share, the company has caught the attention of

many of the market leaders and its competitors.

The industry of wholesale has a number of individual companies that are highly competitive and

have very effective strategies. They have developed loyal customer bases and very one is

relentlessly fighting for the greatest market share. Costco’s major competitors include Wal-

Mart’s Sam’s Club.

Costco’s financial growth and capital structure evolved from its company motto: “Sell big and

Sell Fast” (Schmidt, 2004). The company operates on two basic ideas: 1)”Sell a limited number

of items in a broad range of categories, sell them in large quantities and sell them fast,” 2) “Pay

good wages and you will get good people and good productivity (Schmidt, 2004).” Selling items

in bulk, results in reduced operating costs and high inventory ratios. On that note, most of

Costco’s inventory items are placed on palettes, which minimizes labor costs because stocking is
not required. Additionally selling in bulk allows inventory turnover ratio to be higher than retail

industry averages and lowers the Days Inventory Outstanding ratio in the Cash Conversion Cycle.

Costco’s brand image and excellent financial position, represents a distinctive competitive

advantage for the company and has evolved from the precise execution of several of the

company’s strengths, Costco’s brand image has developed an excellent reputation.

7. Does Costco pay its employees too much? Does it make sense for Costco to

compensate its employees so much better than the employees at Wal-Mart or Sam's

Club? Why or why not?

Costco’s reputation has evolved due to superb employee compensation and low compensation

for executives. Among employees who have been with the company for at least a year, just 6%

leave annually. Sinegal believes if you compensate your employees well, you will get good

production from them.

8. What recommendations would you make to Jim Sinegal regarding the actions that

Costco management needs to take to sustain the company's growth and improve its

financial performance?

I would recommend that Jim Sinegal continue to look for opportunities to grow the overall

quality of their merchandise. This does need to be balanced with competitive pricing and

excellent customer service.

References

Schmidt, Julie. 2004. Costco wins loyalty with bulky bargains. USA Today.

Crafting and Executing Strategy: The Quest for Competitive Advantage—Concepts and Cases,
17th ed., by Arthur A. Thompson Jr, A. J. Strickland III, and John E. Gamble New York: McGraw-
Hill/Irwin, 2010