Strategic Management

This document discusses the business model and key elements of Costco's strategy, the role of Jim Sinegal as the CEO, the performance of Costco from a financial perspective, and the competitive advantage of the company in the wholesale club industry. It also provides recommendations for the company's future growth.

Running head: STRATEGIC MANAGEMENT
Strategic Management
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Contents
Business model:...............................................................................................................................2
Key elements of Costco’s strategy:.................................................................................................2
Jim Sinegal as the CEO:..................................................................................................................2
Core principles and values Jim stressed at Costco:.........................................................................4
North American whole sale club industry:......................................................................................4
Competitive five force analysis:......................................................................................................5
Performance of Costco from financial perspective:........................................................................5
Comparative financial performance of Costco with Sam’s Club and BJ’s Club:...........................9
Expansion outside US:...................................................................................................................10
Strategic performance and competitive advantage:.......................................................................11
Pricing of products by Costco:......................................................................................................11
Compensation practices of Costco:...............................................................................................11
Recommendations:........................................................................................................................11
References:....................................................................................................................................13

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Business model:
Costco is one of the largest wholesale retailers in the world has its primary place of business
situated in the United States of America. The business model of the company is quite unique in
its own way as the wholesaler apart from selling its products also uses the business concept of
membership warehouse. One of the main objectives of Costco’s business is to continue to
provide highest quality goods and services to the members of the company at lowest possible
prices in the market (Courtemanche and Carden, 2014).
Yes, the company’s business model is appealing because the business not only sales its products
to the normal customers but also provides the members goods and services. This is extremely
attractive as the wholesaler will never be out of demand as the industry players are also buying
goods and services from the wholesaler.
Key elements of Costco’s strategy:
Extremely low prices, selection of national branded and private level products in relevant limit,
environment of treasury hunt shopping, ensuring low operational costs and continuous expansion
of its geographical location by opening new stores across the globe are key elements in Costco’s
strategy. The strategy of the wholesaler is extremely good as these are in line with sustainable
growth and expansion in the business of the company.
Jim Sinegal as the CEO:
The whole expansion of Costco from a start-up entrepreneurial venture to one of world’ largest
retailer has taken place within the period of 28 years from 1983 to 2011. This is the period when
Jim Sinegal was the CEO of the company and he was the driving force behind the growth,
expansion and success of the retail company. Thus, Jim Sinegal was definitely an effective CEO.

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As mentioned the whole growth of the company from a small retailer to world’ second largest
retailer at present is mainly due to the decisions and processes under taken by Jim. Thus, highest
possible grade shall be rewarded to Jim for his tireless effort in bringing the company to its
present condition.
Assessment of the performance of the company till 2011 from 1983 and reporting the finding
shall be offered as a help for the grades. Within 5 years since succeeding Jim, Craig Jelinek the
performance of the company has only improved. During this period the company has become the
second largest retailer only after Walmart in both the US and the world (Courtemanche and
Carden, 2011).
The income statement of the company clearly indicates the improvement of the company since
2011 and in fact in all the yeas the revenue and profitability of the company have improved
significantly. Thus, the performance of both Jim and Craig as the CEOs of the company have
been exceptional. The extract below shows the improved revenue and profits of the company
over the years.

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Core principles and values Jim stressed at Costco:
I. To provide the employees and workers suitable working condition.
II. To provide top quality goods and services to the customers.
III. Work hard and sincerely.
IV. To connect with the customers.
V. To give intense attention to each and every details of the business.
VI. Proper pricing of its products and services.
VII. To keep everybody on their toes by asking questions about different elements of
business operations (Edmonds, 2017).
North American whole sale club industry:
The wholesale business and retail industry in North America in 2015 was a massive of $172
billion industry. The three main players in the industry in North America included Costco

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Wholesale, Sam’s Club and BJ’s wholesale Club. In 2016 out of 1,440 warehouse locations
across the US and Canada Costco had almost 59% share with Sam’s club 34% and BJ’s
Warehouse club having 7% share. Thus, Costco is the clear leader in the market.
The five main competitive factors are price of the products and goods, quality of merchandise,
selection, location and member service. The reason for these factors to be strongest in the market
is because the market allowed free and fair competition on the basis of quality and prices of the
goods and services (Iatridis, 2016).
Competitive five force analysis:
As per fig. 3.4 it is clear that over the years the performance of Costco has improved
significantly despite the competitive forces in the market. In 2005, total revenue of the company
was $43,064 million which increased to $59,624 million in 2010 and further to $84,451 million
in 2015. Thus, over the 10 years period between 2005 and 2015 the revenue of the company
almost doubled. On the other hand the revenue of Sam’s club as well as BJ’s Warehouse Club
have also improved each year as can be seen from the increased amount of revenue and
profitability of these companies since 2007 as shown fig. 3.5 and fig. 3.7. Fig. 3.6 on the other
shows the importance of merchandise categories and qualities on the market and competition.
Thus, the five competitive forces were in play in determining the market leader in the industry
(Johnsen, 2015).
Performance of Costco from financial perspective:
In order to assess the financial performance of the company it is important to have brief
information about its revenue and profits over the years.

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Years
Except
per share
data all
amounts
are in
$'million
2015 2014 2013 2011 2005 2000
Sales (Net) 113,666 110,
212
102,
870
87,0
48
51,8
62
31,6
21
Fees from
Membershi
p
2,533 2,
428
2,
286
1,8
67
1,0
73 544
Total
revenue
116,199 112,
640
105,
156
88,9
15
52,9
35
32,1
65
Net
income
after tax
2,377 2,
058
2,
039
1,4
62
1,0
63 631
Diluted net
income per
share
5.37 4.65 4.63 3.30 2.18 1.35

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Dividend
1.51 1.33 1.17 0.89 0.43 -
It is clear from the above that each year since 2000 the financial performance of the company
have improved continuously. From gross revenue to net income, from earnings per share to
dividend each item has improved significantly since the year 2000.
The ratio analysis on the basis of following ratios shall further enlighten us on the financial
performance c and position of the company over the years (Litvak and Vlasiou, 2010).
Years
Except per share data all
amounts are in $'million
2015 2014 2013 2011 2005 2000
Net profit ratio
2.05 1.83 1.94 1.64 2.01 1.96
Current ratio
Current assets 17,2
99.00
17,5
88.00
15,84
0.00
13,70
6.00
8,23
8.00
3,47
0.00
Current liabilities 16,5
40.00
14,4
12.00
13,25
7.00
12,05
0.00
6,76
1.00
3,40
4.00
Current ratio

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1.05 1.22 1.19 1.14 1.22 1.02
Debt to equity ratio
Long term debt 4,8
64.00
5,0
93.00
4,98
8.00
2,15
3.00
7
11.00
7
90.00
Stockholders' equity 10,8
43.00
12,5
15.00
11,01
2.00
12,57
3.00
8,88
1.00
4,24
0.00
Debt to equity ratio
0.45 0.41 0.45 0.17 0.08 0.19
Net profit ratio at 2.05% in 2015 is highest over the last 10 years’ period indicative of improved
profitability of the company. Current ratio however has fluctuated to currently stand at 1.05 in
2015 whereas it was 1.22 in the previous year. Long term solvency position is also quite strong
as can be understood from 0.45 debt to equity ratio in 2015.
Comparative financial performance of Costco with Sam’s Club and BJ’s Club:
Yes the financial performance of Costco is significantly superior compared to its competitors in
North America, i.e. Sam’s Club and BJ’ Club. Both in terms of revenue as well as profit of the
performance of Costco is significantly better than its main competitors in the market. The table
shall be helpful in comparing the financial performance of these companies (Chandrasekhar,
2014).
The 2011 comparative figures of three competitors are provided below.

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All amounts are in US$ millions
Costco Warehouse Sam's
Club
BJ's Warehouse
Club
Revenue 88,915.00 49,459
.00
10,877.00
Operating income 1,462.00 1,695
.00
95.00
It is clear that in terms of revenue Costco was significantly ahead from its competitors. However,
in terms of operating profit Sam’s Club despite significantly less revenue did topple Costco.
Sam’s Club earned 3.43% net profit in 2011 whereas it was merely 1.64% for Costco on its
revenue.
Expansion outside US:
The following extract shows the performance of the company in and outside USA. As can be
seen from the figures that the expansion of the company outside the US has also been very
successful with significant growth in its revenue from outside operations over the last 10 years.

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The revenue and operating income from operations outside USA are significantly higher than the
capital expenditures incurred by the company in these expansions. Thus, it can be said that the
expansion of the company outside USA is also successful (MANISHA B, 2012).
Strategic performance and competitive advantage:
Costco is performing quite well however, its profitability is still a cause of concern for the
country as its net profit ratio is very low as compared to Sam’s Club. The company however,
enjoys significant competitive advantage over Sam’s Club and BJ’s Warehouse in terms of
market share. In fact Costco currently holds almost 60% of the market share in North America
compared to only 34% and 7% by Sam’s Club and BJ’s Warehouse.
Pricing of products by Costco:
The prices of products and goods offered by Costco are very low and it is visible in the net profit
of the company. However, one of the major reasons for the company to be the second largest

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retailer in the world and in US after Walmart is also due to its low pricing. Thus, the products
and goods offered by Costco is very low and it is visible in the net profit of the company over the
year.
Compensation practices of Costco:
Costco follows a standard compensation practice to compensate its employees for their hard
work. One of the reasons the operating cost of the company is high is because of the fact that the
company compensates it employees handsomely. No, it is not surprising because the company is
the industry leader and should set the benchmark in terms of employee compensation and pay
packages (Mukundan and Seidenwurm, 2012).
Recommendations:
The company has been quite successful in increasing its market share in and outside the US.
However, the net profit margin of the company can be improved by little tweaking in the pricing
strategy of the company. In addition the company should concentrate on reducing its operating
costs by reducing wastage of resources, managing inventory effectively and by making optimum
utilization of its resources.

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References:
Chandrasekhar, S. (2014). Vertiginous Headache and Its Management. Otolaryngologic Clinics
of North America, 47(2), pp.333-341.
Courtemanche, C. and Carden, A. (2011). Competing with Costco and Sam's Club: Warehouse
Club Entry and Grocery Prices. SSRN Electronic Journal, 1(2), pp.17-23.
Courtemanche, C. and Carden, A. (2014). Competing with Costco and Sam's Club: Warehouse
Club Entry and Grocery Prices. Southern Economic Journal, 80(3), pp.565-585.
Edmonds, C. (2017). Can Costco Reign in Spain?. SSRN Electronic Journal, 2(5), pp.13-23.
Iatridis, G. (2016). Financial reporting language in financial statements: Does pessimism restrict
the potential for managerial opportunism?. International Review of Financial Analysis, 45(21),
pp.1-17.
Johnsen, Å. (2015). Strategic Management Thinking and Practice in the Public Sector: A
Strategic Planning for All Seasons?. Financial Accountability & Management, 31(3), pp.243-
268.
Litvak, N. and Vlasiou, M. (2010). A survey on performance analysis of warehouse carousel
systems. Statistica Neerlandica, 64(4), pp.401-447.
MANISHA B, R. (2012). Financial Performance Analysis. Global Journal For Research
Analysis, 3(5), pp.9-10.
Mukundan, G. and Seidenwurm, D. (2012). Performance Measures, Efficiency,
Productivity. Neuroimaging Clinics of North America, 22(3), pp.451-456.

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