[Insert name]
[Insert subject]
[Insert date]
About Costco
Costco is a warehouses chain operator, involved in the sales of a diverse range of products to its members. The firm operates nearly 663 warehouse in countries like USA, UK, Canada, and Japan to name a few (Costco a, 2014).
Porter’s five forces model analysis
An analysis of the external environment Costco is operating in is performed using the Porter’s five forces model (Porter, 1998).
Bargaining power of buyers or customers is weak. Costco, especially in Northern America has a wider presence. There are numerous consumers buying products in relatively small quantities (Costco b, 2014). There is no one single entity or member accounting for a meaningful fraction of Costco’s sales. Individual members consequently have little leverage or power to bargain better prices or demand better products. Costco does not stand to lose out a whole lot, if a member does not renew their membership, or does not choose to buy products from Costco. Switching costs for members is low (Coulter, 2005), but Costco offers better prices. Obtaining benefits beyond what Costco has to offer through its membership card and competitive prices is difficult.
Bargaining power of suppliers at Costco is moderate to low. Suppliers at Costco are mainly selected by the warehouse according to its strict supplier policies. Large enterprises that are well recognized brands contribute towards a major portion of the company’s products, nevertheless they are not in a strong bargaining position, as Costco has various suppliers supplying similar products. For instance, cleaning products are supplied by nearly twenty suppliers (Costco c, 2014). Costco has a considerable amount of bargaining power over its suppliers as they can procure merchandise as per their needs and requirements. In their wholesale stock, no single supplier constitutes to their merchandise. This limits the bargaining power of suppliers. As Costco is a big volume buyer, Costco can bargain the price at which it buys their products. Costco will observe little disruption of service, if a supplier does not comply with their price demands. As there is ease of switching suppliers, suppliers cannot pressurize Costco into negotiating to their terms and higher prices.
Competitive rivalry is strong. There are many other wholesale clubs like BJ’s wholesale and Sam’s club that offer similar products at attractive low prices (Trevis, 2014). As product differentiation offered by Costco is less, it increases rivalry for Costco (Bacanu, 2010). They also offer considerable cost savings to their members, at the same time offering the added benefits of membership. Costco’s competitors aim at attracting new consumers by opening new stores and endeavouring to increase their sales revenue in their existing stores. Rivalry is intense as households might at any time decide to switch their membership to another club.
Threat of new competitors is low. As competition is already fierce from Sam’s club and Costco, and the wholesalers are expanding fast, the barrier for entry to new entrants is high. Capital requirement required to start a wholesale operation the size of Costco is tremendous, so it is difficult for new entrants to compete on a large scale. It will be difficult for new entrants to build a significant sales volume and customer base.
Threat of substitute service or products is strong. There are alternative channels of purchase, when it comes to the needs of individual households, like online retailers and grocery stores. Threat of substitutes is strong, as substitutes are available readily and in plenty. Buyer cost to make a switch is minimal, and customers can find similar products at convenient locations easily. Product differentiation is low, so competing with substitute products is difficult for Costco.
Identification of problem
Recommendation
Rather than competing on quantity, product and price alone, Costco needs to compete by offering differentiation. As product differentiation is difficult, Costco should focus on strengthening its brand name. Competitive differentiation is achievable only a brand is strengthened. To build brand identity so as to promote both ‘Coscto’ as a firm, and its products sold under the brand name ‘Kirkland’, Costco has to;
1. To build brand identity, Costco can make its consumers aware of its key values in terms of the brands it sells and the quality of products it has to offer.
2. Through active engagement and by creating a sense of community, Costco can increase customer loyalty (Denoue & Saykiewicz, 2009). Costco to increase customer engagement should involve in communicating the unique products it has to offer, and focus on customer preferences.
3. To create a sense of community a loyalty program should be integrated with its present membership program, which rewards frequent users of Costco card. This will also help Costco build its consumer profile, so it can better adapt its business strategies to meet the changing needs of consumers and the market environment.
References
Bacanu, B. (2010). “Differentiation vs. Low Cost Strategies in Romania”, Management & Marketing, 5 (2): 135-142.Coulter, M. (2005). Strategy Management in Action. New York: Prentice Hall.Costco a. (2014). About us. Retrieved from http://www.costco.com/about.html
Costco b. (2014). Membership Overview. Retrieved from https://customerservice.costco.com/system/templates/selfservice/costco_en_us/#!portal/200500000001002/article/200500000003341/Membership-Overview
Costco c. (2014). Cleaning products. Retrieved from http://www.costco.com/janitorial-cleaning-products.html
Denoue, M., & Saykiewicz, J. (2009). Brand loyalty as a tool of competitive advantage, Duquesne University, Pittsburgh, PA
Porter. (1998). Competitive advantage: Creating and sustaining superior performance. New York, NY: Free press.
Trevis, T. (2014). Why Costco Needs To Watch Out For Amazon & Sam's Club? Retrieved from http://www.forbes.com/sites/greatspeculations/2014/10/07/why-costco-needs-to-watch-out-for-amazon-sams-club/
