Costco Companies, one of the major players in the wholesale club industry, has developed a new class of membership that offers discounted services--auto, health, and home insurance, business credit card processing, real estate services--in exchange for a higher annual fee ($100 vs. $40). The case poses two questions: 1) how should the new membership be marketed, to whom, and how much should be spent on the effort? and 2) what are the potential risks and benefits for Costco, which generated $22 billion in 1997 selling products in bulk, in offering services? Which question is emphasized depends on whether the case is taught in a marketing or a retailing course.
Swot Analysis of "Costco Companies, Inc." written by David E. Bell, Ann Leamon includes – strengths weakness that are internal strategic factors of the organization, and opportunities and threats that Costco Membership facing as an external strategic factors. Some of the topics covered in Costco Companies, Inc. case study are - Strategic Management Strategies, Competitive strategy, Employee retention, IT, Leadership development, Managing uncertainty, Motivating people, Organizational structure, Risk management and Sales & Marketing.
Some of the macro environment factors that can be used to understand the Costco Companies, Inc. casestudy better are - – challanges to central banks by blockchain based private currencies, cloud computing is disrupting traditional business models, digital marketing is dominated by two big players Facebook and Google, competitive advantages are harder to sustain because of technology dispersion, increasing energy prices, wage bills are increasing, increasing government debt because of Covid-19 spendings,
increasing inequality as vast percentage of new income is going to the top 1%, customer relationship management is fast transforming because of increasing concerns over data privacy, etc
Introduction to SWOT Analysis of Costco Companies, Inc.
SWOT stands for an organization’s Strengths, Weaknesses, Opportunities and Threats . At Oak Spring University , we believe that protagonist in Costco Companies, Inc. case study can use SWOT analysis as a strategic management tool to assess the current internal strengths and weaknesses of the Costco Membership, and to figure out the opportunities and threats in the macro environment – technological, environmental, political, economic, social, demographic, etc in which Costco Membership operates in.
According to Harvard Business Review, 75% of the managers use SWOT analysis for various purposes such as – evaluating current scenario, strategic planning, new venture feasibility, personal growth goals, new market entry, Go To market strategies, portfolio management and strategic trade-off assessment, organizational restructuring, etc.
SWOT Objectives / Importance of SWOT Analysis and SWOT Matrix
SWOT analysis of Costco Companies, Inc. can be done for the following purposes –
1. Strategic planning using facts provided in Costco Companies, Inc. case study
2. Improving business portfolio management of Costco Membership
3. Assessing feasibility of the new initiative in Sales & Marketing field.
4. Making a Sales & Marketing topic specific business decision
5. Set goals for the organization
6. Organizational restructuring of Costco Membership
Strengths Costco Companies, Inc. | Internal Strategic Factors
What are Strengths in SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The strengths of Costco Membership in Costco Companies, Inc. Harvard Business Review case study are -
Diverse revenue streams
– Costco Membership is present in almost all the verticals within the industry. This has provided firm in Costco Companies, Inc. case study a diverse revenue stream that has helped it to survive disruptions such as global pandemic in Covid-19, financial disruption of 2008, and supply chain disruption of 2021.
Sustainable margins compare to other players in Sales & Marketing industry
– Costco Companies, Inc. firm has clearly differentiated products in the market place. This has enabled Costco Membership to fetch slight price premium compare to the competitors in the Sales & Marketing industry. The sustainable margins have also helped Costco Membership to invest into research and development (R&D) and innovation.
Operational resilience
– The operational resilience strategy in the Costco Companies, Inc. Harvard Business Review case study comprises – understanding the underlying the factors in the industry, building diversified operations across different geographies so that disruption in one part of the world doesn’t impact the overall performance of the firm, and integrating the various business operations and processes through its digital transformation drive.
Highly skilled collaborators
– Costco Membership has highly efficient outsourcing and offshoring strategy. It has resulted in greater operational flexibility and bringing down the costs in highly price sensitive segment. Secondly the value chain collaborators of the firm in Costco Companies, Inc. HBR case study have helped the firm to develop new products and bring them quickly to the marketplace.
Successful track record of launching new products
– Costco Membership has launched numerous new products in last few years, keeping in mind evolving customer preferences and competitive pressures. Costco Membership has effective processes in place that helps in exploring new product needs, doing quick pilot testing, and then launching the products quickly using its extensive distribution network.
Training and development
– Costco Membership has one of the best training and development program in the industry. The effectiveness of the training programs can be measured in Costco Companies, Inc. Harvard Business Review case study by analyzing – employees retention, in-house promotion, loyalty, new venture initiation, lack of conflict, and high level of both employees and customer engagement.
High switching costs
– The high switching costs that Costco Membership has built up over years in its products and services combo offer has resulted in high retention of customers, lower marketing costs, and greater ability of the firm to focus on its customers.
Analytics focus
– Costco Membership is putting a lot of focus on utilizing the power of analytics in business decision making. This has put it among the leading players in the industry. The technology infrastructure suggested by David E. Bell, Ann Leamon can also help it to harness the power of analytics for – marketing optimization, demand forecasting, customer relationship management, inventory management, information sharing across the value chain etc.
Cross disciplinary teams
– Horizontal connected teams at the Costco Membership are driving operational speed, building greater agility, and keeping the organization nimble to compete with new competitors. It helps are organization to ideate new ideas, and execute them swiftly in the marketplace.
Organizational Resilience of Costco Membership
– The covid-19 pandemic has put organizational resilience at the centre of everthing that Costco Membership does. Organizational resilience comprises - Financial Resilience, Operational Resilience, Technological Resilience, Organizational Resilience, Business Model Resilience, and Reputation Resilience.
Effective Research and Development (R&D)
– Costco Membership has innovation driven culture where significant part of the revenues are spent on the research and development activities. This has resulted in, as mentioned in case study Costco Companies, Inc. - staying ahead in the industry in terms of – new product launches, superior customer experience, highly competitive pricing strategies, and great returns to the shareholders.
Ability to recruit top talent
– Costco Membership is one of the leading recruiters in the industry. Managers in the Costco Companies, Inc. are in a position to attract the best talent available. The firm has a robust talent identification program that helps in identifying the brightest.
Weaknesses Costco Companies, Inc. | Internal Strategic Factors
What are Weaknesses in SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The weaknesses of Costco Companies, Inc. are -
Capital Spending Reduction
– Even during the low interest decade, Costco Membership has not been able to do capital spending to the tune of the competition. This has resulted into fewer innovations and company facing stiff competition from both existing competitors and new entrants who are disrupting the industry using digital technology.
No frontier risks strategy
– After analyzing the HBR case study Costco Companies, Inc., it seems that company is thinking about the frontier risks that can impact Sales & Marketing strategy. But it has very little resources allocation to manage the risks emerging from events such as natural disasters, climate change, melting of permafrost, tacking the rise of artificial intelligence, opportunities and threats emerging from commercialization of space etc.
Low market penetration in new markets
– Outside its home market of Costco Membership, firm in the HBR case study Costco Companies, Inc. needs to spend more promotional, marketing, and advertising efforts to penetrate international markets.
High cash cycle compare to competitors
Costco Membership has a high cash cycle compare to other players in the industry. It needs to shorten the cash cycle by 12% to be more competitive in the marketplace, reduce inventory costs, and be more profitable.
Slow decision making process
– As mentioned earlier in the report, Costco Membership has a very deliberative decision making approach. This approach has resulted in prudent decisions, but it has also resulted in missing opportunities in the industry over the last five years. Costco Membership even though has strong showing on digital transformation primary two stages, it has struggled to capitalize the power of digital transformation in marketing efforts and new venture efforts.
Ability to respond to the competition
– As the decision making is very deliberative, highlighted in the case study Costco Companies, Inc., in the dynamic environment Costco Membership has struggled to respond to the nimble upstart competition. Costco Membership has reasonably good record with similar level competitors but it has struggled with new entrants taking away niches of its business.
Employees’ incomplete understanding of strategy
– From the instances in the HBR case study Costco Companies, Inc., it seems that the employees of Costco Membership don’t have comprehensive understanding of the firm’s strategy. This is reflected in number of promotional campaigns over the last few years that had mixed messaging and competing priorities. Some of the strategic activities and services promoted in the promotional campaigns were not consistent with the organization’s strategy.
Workers concerns about automation
– As automation is fast increasing in the segment, Costco Membership needs to come up with a strategy to reduce the workers concern regarding automation. Without a clear strategy, it could lead to disruption and uncertainty within the organization.
Increasing silos among functional specialists
– The organizational structure of Costco Membership is dominated by functional specialists. It is not different from other players in the Sales & Marketing segment. Costco Membership needs to de-silo the office environment to harness the true potential of its workforce. Secondly the de-silo will also help Costco Membership to focus more on services rather than just following the product oriented approach.
Slow to harness new channels of communication
– Even though competitors are using new communication channels such as Instagram, Tiktok, and Snap, Costco Membership is slow explore the new channels of communication. These new channels of communication mentioned in marketing section of case study Costco Companies, Inc. can help to provide better information regarding products and services. It can also build an online community to further reach out to potential customers.
Interest costs
– Compare to the competition, Costco Membership has borrowed money from the capital market at higher rates. It needs to restructure the interest payment and costs so that it can compete better and improve profitability.
Opportunities Costco Companies, Inc. | External Strategic Factors
What are Opportunities in the SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The opportunities highlighted in the Harvard Business Review case study Costco Companies, Inc. are -
Building a culture of innovation
– managers at Costco Membership can make experimentation a productive activity and build a culture of innovation using approaches such as – mining transaction data, A/B testing of websites and selling platforms, engaging potential customers over various needs, and building on small ideas in the Sales & Marketing segment.
Creating value in data economy
– The success of analytics program of Costco Membership has opened avenues for new revenue streams for the organization in the industry. This can help Costco Membership to build a more holistic ecosystem as suggested in the Costco Companies, Inc. case study. Costco Membership can build new products and services such as - data insight services, data privacy related products, data based consulting services, etc.
Developing new processes and practices
– Costco Membership can develop new processes and procedures in Sales & Marketing industry using technology such as automation using artificial intelligence, real time transportation and products tracking, 3D modeling for concept development and new products pilot testing etc.
Leveraging digital technologies
– Costco Membership can leverage digital technologies such as artificial intelligence and machine learning to automate the production process, customer analytics to get better insights into consumer behavior, realtime digital dashboards to get better sales tracking, logistics and transportation, product tracking, etc.
Reforming the budgeting process
- By establishing new metrics that will be used to evaluate both existing and potential projects Costco Membership can not only reduce the costs of the project but also help it in integrating the projects with other processes within the organization.
Manufacturing automation
– Costco Membership can use the latest technology developments to improve its manufacturing and designing process in Sales & Marketing segment. It can use CAD and 3D printing to build a quick prototype and pilot testing products. It can leverage automation using machine learning and artificial intelligence to do faster production at lowers costs, and it can leverage the growth in satellite and tracking technologies to improve inventory management, transportation, and shipping.
Finding new ways to collaborate
– Covid-19 has not only transformed business models of companies in Sales & Marketing industry, but it has also influenced the consumer preferences. Costco Membership can tie-up with other value chain partners to explore new opportunities regarding meeting customer demands and building a rewarding and engaging relationship.
Lowering marketing communication costs
– 5G expansion will open new opportunities for Costco Membership in the field of marketing communication. It will bring down the cost of doing business, provide technology platform to build new products in the Sales & Marketing segment, and it will provide faster access to the consumers.
Buying journey improvements
– Costco Membership can improve the customer journey of consumers in the industry by using analytics and artificial intelligence. Costco Companies, Inc. suggest that firm can provide automated chats to help consumers solve their own problems, provide online suggestions to get maximum out of the products and services, and help consumers to build a community where they can interact with each other to develop new features and uses.
Increase in government spending
– As the United States and other governments are increasing social spending and infrastructure spending to build economies post Covid-19, Costco Membership can use these opportunities to build new business models that can help the communities that Costco Membership operates in. Secondly it can use opportunities from government spending in Sales & Marketing sector.
Reconfiguring business model
– The expansion of digital payment system, the bringing down of international transactions costs using Bitcoin and other blockchain based currencies, etc can help Costco Membership to reconfigure its entire business model. For example it can used blockchain based technologies to reduce piracy of its products in the big markets such as China. Secondly it can use the popularity of e-commerce in various developing markets to build a Direct to Customer business model rather than the current Channel Heavy distribution network.
Learning at scale
– Online learning technologies has now opened space for Costco Membership to conduct training and development for its employees across the world. This will result in not only reducing the cost of training but also help employees in different part of the world to integrate with the headquarter work culture, ethos, and standards.
Harnessing reconfiguration of the global supply chains
– As the trade war between US and China heats up in the coming years, Costco Membership can build a diversified supply chain model across various countries in - South East Asia, India, and other parts of the world. This reconfiguration of global supply chain can help, as suggested in case study, Costco Companies, Inc., to buy more products closer to the markets, and it can leverage its size and influence to get better deal from the local markets.
Threats Costco Companies, Inc. External Strategic Factors
What are Threats in the SWOT Analysis / TOWS Matrix / Weighted SWOT Analysis
The threats mentioned in the HBR case study Costco Companies, Inc. are -
New competition
– After the dotcom bust of 2001, financial crisis of 2008-09, the business formation in US economy had declined. But in 2020 alone, there are more than 1.5 million new business applications in United States. This can lead to greater competition for Costco Membership in the Sales & Marketing sector and impact the bottomline of the organization.
Consumer confidence and its impact on Costco Membership demand
– There is a high probability of declining consumer confidence, given – high inflammation rate, rise of gig economy, lower job stability, increasing cost of living, higher interest rates, and aging demography. All the factors contribute to people saving higher rate of their income, resulting in lower consumer demand in the industry and other sectors.
Environmental challenges
– Costco Membership needs to have a robust strategy against the disruptions arising from climate change and energy requirements. EU has identified it as key priority area and spending 30% of its 880 billion Euros European post Covid-19 recovery funds on green technology. Costco Membership can take advantage of this fund but it will also bring new competitors in the Sales & Marketing industry.
Technology acceleration in Forth Industrial Revolution
– Costco Membership has witnessed rapid integration of technology during Covid-19 in the Sales & Marketing industry. As one of the leading players in the industry, Costco Membership needs to keep up with the evolution of technology in the Sales & Marketing sector. According to Mckinsey study top managers believe that the adoption of technology in operations, communications is 20-25 times faster than what they planned in the beginning of 2019.
Stagnating economy with rate increase
– Costco Membership can face lack of demand in the market place because of Fed actions to reduce inflation. This can lead to sluggish growth in the economy, lower demands, lower investments, higher borrowing costs, and consolidation in the field.
High level of anxiety and lack of motivation
– the Great Resignation in United States is the sign of broader dissatisfaction among the workforce in United States. Costco Membership needs to understand the core reasons impacting the Sales & Marketing industry. This will help it in building a better workplace.
Capital market disruption
– During the Covid-19, Dow Jones has touched record high. The valuations of a number of companies are way beyond their existing business model potential. This can lead to capital market correction which can put a number of suppliers, collaborators, value chain partners in great financial difficulty. It will directly impact the business of Costco Membership.
Backlash against dominant players
– US Congress and other legislative arms of the government are getting tough on big business especially technology companies. The digital arm of Costco Membership business can come under increasing regulations regarding data privacy, data security, etc.
Technology disruption because of hacks, piracy etc
– The colonial pipeline illustrated, how vulnerable modern organization are to international hackers, miscreants, and disruptors. The cyber security interruption, data leaks, etc can seriously jeopardize the future growth of the organization.
Increasing wage structure of Costco Membership
– Post Covid-19 there is a sharp increase in the wages especially in the jobs that require interaction with people. The increasing wages can put downward pressure on the margins of Costco Membership.
Easy access to finance
– Easy access to finance in Sales & Marketing field will also reduce the barriers to entry in the industry, thus putting downward pressure on the prices because of increasing competition. Costco Membership can utilize it by borrowing at lower rates and invest it into research and development, capital expenditure to fortify its core competitive advantage.
Increasing international competition and downward pressure on margins
– Apart from technology driven competitive advantage dilution, Costco Membership can face downward pressure on margins from increasing competition from international players. The international players have stable revenue in their home market and can use those resources to penetrate prominent markets illustrated in HBR case study Costco Companies, Inc. .
Barriers of entry lowering
– As technology is more democratized, the barriers to entry in the industry are lowering. It can presents Costco Membership with greater competitive threats in the near to medium future. Secondly it will also put downward pressure on pricing throughout the sector.
Weighted SWOT Analysis of Costco Companies, Inc. Template, Example
Not all factors mentioned under the Strengths, Weakness, Opportunities, and Threats quadrants in the SWOT Analysis are equal. Managers in the HBR case study Costco Companies, Inc. needs to zero down on the relative importance of each factor mentioned in the Strengths, Weakness, Opportunities, and Threats quadrants.
We can provide the relative importance to each factor by assigning relative weights. Weighted SWOT analysis process is a three stage process –
First stage for doing weighted SWOT analysis of the case study Costco Companies, Inc. is to rank the strengths and weaknesses of the organization. This will help you to assess the most important strengths and weaknesses of the firm and which one of the strengths and weaknesses mentioned in the initial lists are marginal and can be left out.
Second stage for conducting weighted SWOT analysis of the Harvard case study Costco Companies, Inc. is to give probabilities to the external strategic factors thus better understanding the opportunities and threats arising out of macro environment changes and developments.
Third stage of constructing weighted SWOT analysis of Costco Companies, Inc. is to provide strategic recommendations includes – joining likelihood of external strategic factors such as opportunities and threats to the internal strategic factors – strengths and weaknesses. You should start with external factors as they will provide the direction of the overall industry. Secondly by joining probabilities with internal strategic factors can help the company not only strategic fit but also the most probably strategic trade-off that Costco Membership needs to make to build a sustainable competitive advantage.