Answer To: Thompson, Arthur A., XXXXXXXXXXCrafting and Executing Strategy: Concepts and Readings..New York:...
Ishika answered on Apr 17 2021
COSTCO CASE ANALYSIS
Wholesale Industry: 4
The Customer Base: 4
Competitive Analysis 4
3.1 Market Share: 4
3.2 The Five Competitive Forces that Shape Strategy: 5
3.2.1 Threat of New Entrants 5
3.2.2 Sellers of Substitute Offerings: 5
3.2.3 Buyer Bargaining Power: 6
3.2.4 Supplier Bargaining Power: 6
Trends in the Macro-environment: 6
Improvements in Technology: 7
Key Success Factors: 7
6.1 Low Operating Costs: 7
6.2 Quality & Selection: 8
6.3 Location: 8
Member Services: 9
COSTCO Introduction: 9
Internal analysis 10
9.1 Financial analysis 10
9.1.1 Costco financial activity ratios analysis: 10
9.2 Strengths: 11
9.3 Weakness: 11
9.4 Opportunities: 12
9.5 Threats: 12
Current Strategy: 12
Issue: 13
Report to the CEO 13
12.1 Introduction: 13
12.2 Analysis: 13
Recommendations: 14
Conclusion: 15
1. Wholesale Industry:
In the wholesale industry, most companies rely on competence-based theory to generate revenues. They rely on highly efficient chain-value systems and high-quality providing relationships to help maximize efficiency and cost. The environment in which they compete is moderately dynamic and relatively predictable due to their vast product diversification. Most of the firms began in the mid 70's, but only got a big boost in the late 80's at the beginning of 1990. Though relatively young this industry remains relatively stable, with steady growth expected to be 20% greater than the entire retail industry. (Thompson C-14). Most companies in this industry rely on a sophisticated shopping experience, in which large quantities and negotiations are central to consumer experience. Typically, stores charge a “$35-$100 per year” membership fee to purchase in the warehouses. These shops usually offer a mix of “4,000 products with 75% “being constant. This seems to be a huge number of product at first glance, but the number seems very low in comparison with “40,000”, the average for Target and Wal-Mart (Thompson C-5).
2. The Customer Base:
In these wholesale stores, customer bases tend to be somewhat different from the customer base in other stores. Wholesale stores typically target small businesses and large families for their publicity. In particular, in families with five or more individuals, the wholesale industry tends towards women. In addition, the wholesale club's average customer income is usually within the “$50,000” range. Hispanic and Asian are the two ethnic groups that really appeal to the wholesale centres. In America (which is home to most of the wholesale stores), both of these ethnic communities are growing, so that it can be thought that this could have a big effect on the growth of the whole industry. In general, the average customer visits a wholesale 8-11 times during one year and spends an average of $83 per visit (hoovers). Finally, when you visit the shop, one thing which differs from wholesale customers is usually to buy with specific goods in mind, where traditional retailers tend to browse.
3. Competitive Analysis
3.1 Market Share:
The competition for market share can often be a heated battle if there are only a few big players in the wholesale industry. The three main competitors “(Costco, SAMS CLUB and BJ's Wholesale Club)’ have a major share in the discount retail warehouse industry. Costco has 55 percent, the Sam's Club's have 36 percent, and the BJ's together with several other small competitors have 9 percent (Thompson C-12). The number of stores in other countries, such as “Brazil, Mexico, China and Puerto Rico”, does not include this market share.
3.2 The Five Competitive Forces that Shape Strategy:
Warehouse and wholesale industries are now attractive, although there are many opportunities for expansion on international markets in the industry to confront certain threats from competitors and substitutes. The lack of presence in many countries outside of North America offers a great opportunity for the first to acquire brand loyalty and economies of scale before competitors on other markets. However, the companies in this industry face many threats, which make it unattractive. These threats include intense competition among the three key companies, a moderate chance for consumers who choose companies offering substitute products compared to those sold in these clubs.
3.2.1 Threat of New Entrants
Because of high entry barriers, including economy of scale, wholesale clubs face a weak threat from new entrants. New entrants would not be able, and would have to pay higher prices to cover their costs. Scale economies would not be achieved. This makes competitiveness for new companies very difficult, as low prices are important for the industry's success. Scale economies in this industry are rather unique, as the largest company enjoys the greatest cost advantages in a typical industry. The second-largest business is Sam's Club, which has the biggest cost advantage because of its parent Wal-Mart's purchasing power. Current wholesalers use a membership strategy that includes annual fees that allow them to price their products well over costs, ensuring high membership satisfaction and retention of members. The low margins of profit create a strong barrier to entry, because anyone trying to enter the market can't undermine prices and still work for profit. Page 8 The unbelievably low profit margins are voluntary for companies, since new businesses are almost unable to enter the market.
3.2.2 Sellers of Substitute Offerings:
Wholesaler and other retailers such as electric companies, department stores and online retailers who can offer alternative sources of bulk trade or low prices have moderate pressures on the wholesale clubs. Consumers do not always look to buy big quantities, which increases the chance of losing their business, it must be considered. This is particularly true for food items that are lost, where people may want to visit a supermarket. If a customer wants to buy bread from BJ, he might need to buy more bread before he ends and becomes stallized. In this case, customers are more willing to buy a loaf or two at a greater price per unit, as it costs less because they won't pay for more than they use.
3.2.3 Buyer Bargaining Power:
Warehouse clubs are forced, because of their membership fees, to comply with the demands of their priced members concerning lower prices. Because of the direct link between prices and success in the industry, companies have low profits which are attractive to their members in the form of low prices. In the past two years, both Costco and BJs had a profit margin of less than 1.8%. The majority of their profit comes from membership fees. Prices are so low. Since the businesses in this sector are very similar, consumers have the capacity to control low prices because, after their membership expires, they are able to switch to another rival at a low cost without losing any important services. The products and services of each club are very similar to food, clothing, electronics and gas stations. Many have a vision centre, fast food facilities and inside-the-shop mobile providers. But BJs' absence of a pharmacy is a service that could be particularly important to the elderly. The three major firms operate in many areas including large metropolitan areas, suburbs and highways.
3.2.4 Supplier Bargaining Power:
Wholesale clubs are confronting moderate supplier pressure, even if they can use economies of scale. As a result of the large volume of dealers they sell, the level of economies of scale is constrained by the limited reliance of the provider on them. The wholesaler strategy provides them with an advantage that reduces manufacturers' capacity. Since these...