Costco is known-widely for its wholesale products, competitive premium gas prices, and delicious food court offerings; but do we know how this came to be?
In 1976, Sol Price founded Price Club in San Diego, California which was a company that only provided service to business customers in its beginning days. After a few years, Price saw the future potential of the warehouse club industry and decided to expand its business operations to local companies and individuals. In doing so, anyone interested in purchasing merchandise from Price Club had to purchase an annual membership fee to enter. In 1983, the first Costco warehouse location founded by Jim Senegal and Jeffery Brotman opened for business in Seattle. The newly established Costco became the first company in history to reach $3 billion dollars in sales within a six-year period.
Costco’s achievement as a fairly new company made them a company of interest. Walmart’s CEO Sam Walton was interested in merging with Costco but lost to Sol Price’s “Price Club”. In 1993, Costco and Price Club merged and operated under the new name, PriceCostco which had now owned over 200 locations across North America and generated $16 billion in sales annually. In 1994 Price left the company and it was renamed Costco Wholesale in 1997 and the remaining Price clubs warehouses were renamed as well.
Today Costco has merged the brilliance and pioneering of the late Sol Price and the competitive strategy of Senegal and Brotman to be a multi-billion dollar global retailer and second-biggest retailer in the world. Costco warehouses usually carry supermarket items and a continuously changing selection of other merchandise, including high-quality jewelry and luxury items in a capacious “warehouse”. They also provide ancillary services from gasoline, pharmaceutical, optometry, and tire services to members. On the other hand, they provide a food court that is accessible without a membership. Costco’s food court provides pizza that is currently one of the biggest chains in America.
Ultimately, Costco’s mission statement is to “continually provide our members with quality goods and services at the lowest possible prices. In order to achieve our mission, we will conduct our business with the following Code of Ethics in mind: Obey the law. take care of our members, take care of our employees, respect our vendors.
According to Daft, “A strategy is a plan for interacting with the competitive environment to achieve organizational goals.” Every company or organization will have different strategies depending on their goals. One of their strategies to stay ahead of the competition was to create their own brand. This brand is the Kirkland Signature. By having their own private brand, Costco is able to provide its customers with good quality products at lower prices than their competitors. Not only has Costco created their own private brand, but they have also worked together with other manufacturers to help produce and manufacture their own private label products to sell in their stores. “About a quarter of Costco’s $118.7 billion in annual sales come from Kirkland Signature products, and the percentage is growing, company executives say” (Nassauer, 2017).
Costco’s operating strategy is to offer products to their members with lower prices than other retailing channels, and offers a wide variety of product categories, with only limited national or private brands within each category. This practice enables Costco to produce high sales volumes and rapid inventory turnover. Since Costco relies on having a rapid inventory turnover, it uses a combination of volume purchasing, efficient distribution, and self-service warehouse facilities. Costco’s strategy is to attract customers to shop in their stores and to provide a wide range of brands and products to satisfy customers’ different needs. ( Hu, Fu-Ling, 2009)Costco plans to increase the number of Kirkland Signature items and hopes to drive Kirkland Signature sales to 25 percent of their total in the future. Now Costco is the second-largest general merchandise retailer in the U.S. Costco’s related sales have increased by more than 25 percent in 2006, to more than $8.3 billion (Costco Wholesale, 2006). Another strategy that Costco relies on is to build strong relationships with their customers. They understand that by building this strong relationship and having competitive low prices, customers will continue to shop in their stores. Another thing that helps Costco save money is that by building this customer loyalty, they do not need to spend a lot of money advertising their products. (Hu, Fu-Ling, 2009).
Costco’s goal is to continually provide their members with quality goods and services at the lowest possible prices. Costco follows a strict code of ethics that they believe will help the company be successful in providing the best customer service while being profitable. Costco has five principles in their code of ethics, that they believe will help them become a successful company. “In order to achieve our mission, we will conduct our business with the following code of ethics in mind:
Costco’s goal is to build strong relationships with their customers, offer great products at low prices, and rely on these strategies to make a lot of sales.
As for Costco’s inception, they have benefited from inter-organizational relations. In 1988 Costco founder and CEO stated, “I’m not fazed by having competitors in the development with us. Retailers who say no to this are kind of stupid because it means that competition is going to locate three blocks away and you are not going to get the traffic.”(Consumer Reports). Since that time Costco has not shied away and prides itself on sharing its secrets of success with any person that is interested. Costco is extremely effective in its value chain. Most manufactures are anxious to do business with Costco and even produce items that can be sold exclusively at Costco warehouses because they know that Costco can move the merchandise.
Operating as a multinational entity with several warehouse clubs for members only Costco Wholesale Corporation’s organizational structure is largely depended on its current functions and exactly where they are being performed. In essence, organizational structure for a given company refers to the pattern or rather the arrangement designed and adopted purposely to enhance communication amongst the various organizational components to meet its needs. Costco has adopted a decentralized system that involves a rather stronger functional structure and a supplementary divisional structure. In the first case, employees are grouped based on the business functions being undertaken, for instance, marketing and accounting while the additional structure groups the business components on the basis of their locations or markets.
In that regard, Costco’s organizational structure is mainly by functional grouping as its primary feature and geographic divisions as the secondary feature. Functional grouping underlines the basic functions that maintain the retail business and typically starts from the corporate level consequently affecting the entire organization.
On the other hand, geographic divisions are exclusively concerned with the strategic locations for its entire operations. Geographic divisions are entirely influenced by the functional groupings mostly in terms of its visibility within the market. Decentralized kind of organizational structure in Costco has an advantage in that it is capable of supporting organization-wide control subsequently guaranteeing efficiency. Additionally, through the approach, the company stands in the position of implementing strategies and new policies that positively impacts the entire geographical divisions.
As earlier indicated, Costco is purely a membership only company operating a chain of warehouse clubs in several countries with the United States being the leading region where the majority of its stores are based. As of the year 2015, the company was ranked as the second-largest retailer in the world after Walmart. By 2016, it was the leading and largest retailer of choice around the world especially in the marketing of beef, organic foods, rotisserie chicken, and wine. Costco’s corporate history is very wide and dates back as early as the mid-1970s. It is headquartered in Issaquah, Washington, United States.
However, its first warehouse is estimated to have been opened in 1983 in Seattle. In actual fact, it has been through mergers and other corporate strategies that have seen the full actualization of Costco’s ideas and goals. Notably, it was at the time of its initialization and establishment i.e. in 1976 that its main competitor, Price Club was also founded in San Diego, California. By September 1, 2017, the establishment had 741 warehouses in total. Out of this, 514 warehouses are located in the United States while Canada, Mexico, United Kingdom, and Japan have 98, 37, 28, and 26 warehouses respectively. Others include South Korea, Taiwan Australia, Spain, Iceland, and France. South Korea and Taiwan have 13 warehouses each while Iceland and France have only one each. Australia has 9 of them while the rest are in Spain.
Costco’s developmental success has mainly been driven by several factors amongst this the idea of selling high volumes of merchandise at unusually lower prices. Its first warehouse was originally initiated by Sol Price together with his son, Robert on July 12, 1976, in San Diego, California. Basically, it was through this idea that the concept of retail warehouse club was born. Notably, the first stores managed by the Price family were at first located within old airplane hangars held by Howard Hughes. Nonetheless, the very first warehouse under the ownership of the Costco group was opened on September 15, 1983, by James Sinegal and Jeffrey H. Brotman. Sinegal had previously worked for Sol Price at FedMart while Brotman, a distinguished attorney from a family with a refutable retailing history had an exceptional experience in the sector after been in the business at an early age. The subsequent merger by Price and Costco club saw an expansion of its operations within the region and beyond. It is noted that Price had initially declined to facilitate a union with Wal-Mart and Sam Walton particularly due to the fact that Costco’s business model as well as its size were overwhelmingly comparable to that of Price Club.
At first, they adopted the corporate name, PriceCostco, and with time memberships were universally accepted. In this case, a member of Price Club could shop at Costco by using their membership and vice versa. The new outfit was collectively managed by directors from both ends but in due course, the Price brothers left to start the Price Enterprises in 1994. The company adopted its current name in 1997 followed by the rebranding of the remaining Price Club sites.
In response to the technological advancements witnessed in the contemporary corporate world, Costco has increasingly adopted emerging trends purposely to stay afloat in the sector and enhance its competitive advantage. Essentially, this has been built on the idea that an upgrade to its technological suitability is paramount in keeping prices down thus securing its viability in the market. In essence, Costco is largely involved in the selling of different types of products ranging from automotive supplies, appliances, groceries, hardware, sporting goods, jewelry, cameras, watches, toys, books, computer hardware, and software amongst many others. As such, based on the large volumes of merchandise transacted by the company within the United States and beyond, maintaining Enterprise Facility Information Management is essential. Over time, the company has been able to collaborate with various IT entities to manage its data and other requirements. This comprises of monitoring and control of the entire establishment through a centralized monitoring system operating throughout the clock. Through this infrastructure, the company is able to provide real-time energy information as well as a web-based management option of the existing control systems and the central alarm management.
The software currently used normally operates at low costs mostly on the basis of the agreed-upon terms of operations. One of the major advantages of the adopted technology is that has the capacity of converting data hard copies i.e. paper documents into soft copies in the form of computerized formats. As a result, the company has experienced tremendous growth both in size and revenues and reducing the need for the human workforce for simpler tasks. Most importantly, rendering of services and customer satisfaction has also increased significantly over time hence the reason why it has been able to expand to other regions i.e. foreign locations. Overall, just like any entity in the modern corporate world, technology has indeed enhanced operations within Costco and other close stakeholders.
The organizational culture in Costco maintains its focus on excellence in performance. The company believes that good enough is not enough. This aspect of their organizational culture allows Costco to push its employees further to achieve high-quality service to satisfy customers (Kelley). Efficiency is also included in Costco’s organizational culture. Through the employee’s high energy and a fast-paced work ethic, the workers tend to stay motivated to maintain optimal productivity. This characteristic also contributes to the energetic buzz that helps satisfy customers based on the speed and efficiency of service.
Service orientation is a typical feature in the organizational culture of retail firms like Costco. The emphasis on service helps align workers to the business goal of providing effective retail service but Costco facilities use work teams. This characteristic of the company’s organizational culture maximizes performance by utilizing the synergy of teams. Through teamwork, employees achieve the flexibility that enables Costco to address variations in customer preferences.
Costco is often cited as one of the world’s most ethical companies. It has been called a “testimony to ethical capitalism” in large part due to its company practices and treatment of employees. Costco maintains a company code of ethics which states, “The continued success of our company depends on how well each of Costco’s employees adheres to the high standards mandated by our Code of Ethics…”(Costco Website). By always choosing to do the right thing, they build self-esteem, increase chances for success, and make Costco more successful. Former U.S. Secretary of Labor Thomas Perez stated, “And the remarkable loyalty that employees have to Costco is a function of the fact that they categorically reject the notion that, ‘I either take care of my shareholders or my workers.’ That is a false choice.”(Consumer Reports).
Costco’s innovation comes in the form of a global distributor. The company identified their source of profit in membership sales instead of product sales. Its pricing strategy is designed to give the most benefits to Costco members instead of setting consumer prices solely to increase profit margins like most retailers. Hence its profit margins are smaller than its competitors but gain more from its members. Usually, this type of thinking is seen more in the shipping or logistics industry. With Costco banking $1600 per square foot, it dominates even Walmart with its warehouse-style stores that most try to emulate.
Costco Wholesale follows a decentralized decision-making structure because they recruit the best and talented people. The company invests in its people by providing them continuous training and they have adopted a divisional structure for their operations (Faccio, 2015). Thus, they are able to retain knowledgeable staff by creating loyalty among them. They are loyal to the company as they are allowed to participate in decision making and their suggestions are valued and accepted if feasible. The employees are appropriately rewarded and they are led by example. The CEO of the company would pick up throw the paper into the dustbin in front of a middle level employee, thereby setting an example for them to follow the same behavior. The employees are continuously driven to adopt ethical practices and adopt ethical thinking in their decision-making process. The management continuously communicates with the employees to address their problems and to involve them in any decision-making process.
There is clear communication between all the divisions. They have created a happy and diversified work environment for the employees and offer them a competitive package which has allowed to company to maintain a dedicated workforce.
The way Costco approaches the topic of “conflict, power, and politics” is clearly defined in its mission statement regarding the code of ethics. Costco does well with conflict resolution within the company by “taking care of employees”. Costco is well-known for having top-tier treatment of their employees, providing great benefits to keep their employees healthy and happy including competitive wages compared to other retailers. “by offering fair wages and top-notch benefits, the company has created a workplace culture that attracts positive, high-energy, talented employees.”
Furthermore, when it comes to conflict resolution, Costco runs an Open Door Policy, which grants all managers regardless of the level to the ability to resolve any issues that arise with subordinates. If you have a work-related disagreement, every effort should be made to resolve the issue immediately at the workplace level, start by speaking with your supervisor.
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