Costco is able to utilize its resources and capabilities in order to successfully operate a core competency of being a cost leader. While Costco has the ability to increase prices in order to further generate profits, reducing costs enables Costco to remain competitive and maintain a reputation for high-quality goods at low prices.
Costco’s tangible and intangible resources certainly reinforce the cost leadership by enabling Costco to employ high-quality employees and simultaneously consistently generate revenue through membership fees and customer loyalty. It is important to note that the membership fee model operates using very low variable costs.
Costco’s lean capabilities undoubtedly help to orchestrate cost leadership. By definition, lean operations are one of the best ways to reduce costs.
From a VRIO perspective, the core competency can be classified as valuable, rare, costly to imitate, and organized in a way to capture value. In order for another firm to mirror Costco’s competency would require a great deal of resources and strategy. In addition, management would need to operate under relatively strict guidelines if they hoped to successfully become a cost leader in a manner similar to Costco. One of the hardest factors in that scenario would be maintaining low costs while still treating and compensating employees fairly – a strategy that Costco seems to have mastered.
Presently, Costco does a more than adequate job of operating a successful cost leadership strategy. Over the next ten years, I believe that the best overall strategy for Costco to pursue is to maintain a cost leadership strategy.
Costco has a strong strategy when it comes to offering bulk items at low prices for consumers. This “Wholesale” business strategy has proven to be extremely effective and successful. For the next ten years, I believe it would be prudent to continue this model and would be counterproductive to transition to a different model.
Lean operations are one of Costco’s strongest means to reduce costs. For the next ten years, Costco must continue to use and improve processes and operations in a manner that reduces costs as much as possible. One way that Costco can continue to reduce costs is by utilizing more renewable energy. Costco currently uses solar panels on the roofs of some of its warehouses, however, more could be implemented.
Putting solar panels on every warehouse is a great way to exploit renewable energy. An initial upfront cost would be somewhat high, however, over ten years I strongly believe that upfront costs would be recouped by energy savings and possible government subsidies. Costco warehouses have a tremendous amount of unused square footage on the top of the warehouses. If this unused area were implemented to house solar panels, Costco would realize benefits without sacrificing valuable space. A tangent side effect of this initiative would be an improved social reputation. Society would almost certainly praise Costco for harnessing renewable energy in this fashion.
Other than continuing and expanding lean operations and providing low-cost merchandise for consumers, Costco should strategize to increase corporate social responsibility initiatives over the next ten years. Costco should continue to utilize environmental CSR initiatives such as renewable energy use and ethical employment initiatives.
One CSR initiative that Costco could explore in the next ten years is to require greater transparency and ethical behavior and sources from their suppliers. By requiring all merchandise to be produced and transported in an ethical manner, Costco will be able to declare that their merchandise is ethically sourced, and they will also be able to support suppliers who treat their employees fairly and produce goods in a sustainable way. This initiative would have two-fold benefits. Costco would further increase their reputation and good standing with customers, and they would be helping to improve the ethics and responsibility of the global supply chain. Rather than simply donating funds to a charity, this CSR initiative has the ability to actively catalyze positive changes around the world.
The next component to Costco strategy over the next ten years is further developing and increasing their web presence and e-commerce. The future consumer will likely demand to engage with retail more online than in person. This demand will need to be met by Costco by improving e-commerce. One way that Costco can improve their web presence and e-commerce is through the use of a highly refined mobile device application. If consumers were given the ability to complete all of their Costco shopping using their phone or tablet, Costco would be better able to meet future demand.
The final step to Costco improving their strategy to meet future demand is by expanding further globally. Costco does maintain a global presence, however other retailers such as Walmart are able to serve a greater total addressable market by maintaining a broader global presence. It would be wise for Costco to continue to expand globally over the next ten years by setting up more warehouse locations in more countries.
Top 5 Legal Issues
I believe that Costco will be faced with a strong legal threat if they sell food which is contaminated and causes sickness in customers. Costco has experienced past episodes in which meats and produce carry different microorganisms that make customers sick. This issue certainly has the potential to continue over the next ten years. Legally, there is certainly a risk of litigation in the event of a foodborne illness outbreak.
Costco has experienced legal troubles recently regarding how compliant they are when operating pharmacies in their warehouses. I believe that in the next ten years, Costco may be at risk of legal action if they do not abide by pharmacy regulations and processes.
Costco warehouses are laid out in a way that large shelves and displays hold massive amounts of merchandise. This creates liability if any items were to fall off the shelves onto employees and customers. By operating warehouses rather than smaller retail facilities, employees and customers are at risk of injury due to the layout and structure of a warehouse. Legally there is a risk of litigation by customers or employees in the event of an injury in a Costco warehouse.
Over the next ten years, I expect stricter controls and penalties on financial reporting performed and distributed by corporations. Costco will need to ensure careful compliance with financial laws and regulations regarding the way statements are recorded and distributed.
Customer information privacy:
I strongly feel that the greatest legal threat that Costco will face over the next ten years will be the protection of customer information. Hacking and identity theft is becoming extremely prevalent and many large corporations have already had data breaches which expose customer information. Costco would likely face legal action in the event that their customer databases were to be hacked and customer privacy breached.
Top 5 Ethical
Responsibly sourced goods:
One ethical issue that I foresee Costco facing is the stocking and sales of responsibly sourced goods. Society as a whole is beginning to care more and more about the different links in the supply chain. It is becoming ever more important for consumers to feel good about the source of the products that they consume. One of the most important qualities relating to this factor is the working conditions of the employees who produce the goods for consumption. The concepts of “sweatshops” and child labor do not sit well with American consumers, and for good reason; these labor sources are inhumane. In order for Costco to maintain a solid reputation in the eyes of the American consumer, they must ensure that they source their merchandise from responsible sources.
As we discussed, corporate social responsibility is becoming one of the paramount ethical issues demanded by consumers. The upcoming millennial generation has made it clear that CSR is an important topic. I believe that in the next ten years Costco will need to undertake a multitude of CSR initiatives in order to appear ethical in the eyes of consumers.
Over the next ten years, automation will become an extremely attractive opportunity for corporations as a way to reduce costs and improve consistency. This issue becomes ethical if it causes human employees to lose their jobs in favor of computers and robotics. Costco must carefully evaluate the benefits of utilizing automation and the drawbacks it would have on the ethical reputation of the company.
Small business domination:
One ethical issue that already exists today is large corporations overpowering small businesses. This issue will inevitably continue for the next ten years and Costco will likely be involved in the discussion of corporations putting smaller companies out of business.
Another ethical issue that I foresee Costco facing in the next ten years is an increasing demand for healthy food. Many consumers believe that unhealthy food such as food containing high amounts of sugar and fat is unethical to sell. Costco currently sells a wide variety of food both healthy and unhealthy. It may be deemed unethical in the future for Costco to continue to sell unhealthy foods.
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