Situation and Industry Analysis

Situation analysis is one of the important parts of strategic management process. It helps to determine an organization’s competitive, operating, and financial position during a particular time. From a competition point of view, Costco is currently the leading warehouse and wholesaler in terms of inventory turnover, and sales volume. Costco’s success in inventory turnover has been achieved through a combination of operating efficiencies such as volume purchasing, reduced handling of merchandise in no-frills, efficient distribution, and self-service warehouse facilities. Due to its efficiency in inventory turnover, Costco has managed to operate profitably at significantly lower gross margins compared to its competitors such as supermarkets, mass merchandisers, supercenters, and traditional wholesalers.

In the year 2006, Costco recorded high sales volume than its competitors in the market. Some of the sales made in the year 2006 included 96,000 carats of diamonds, $3000 million worth of digital cameras, $16 million worth of pumpkin pies, $3 million worth of gasoline, 1.5 million televisions, 21 million prescriptions, and 28 million rotisserie chickens. These indicate that Costco occupies the leading position in the market. Customers who do their shopping in Costco are heavy spenders. In the case study, it has been indicated that in 2006, one of Costco’s largest volume stores made annual sales worth $285 million. The high number of annual sales was due to the high spending behavior of the consumers. Costco’s biggest stores recorded average customer bill of $150 per one shop visit. This indicates that the purchasing power of consumer in the market where Costco operates in high. This implies that, currently, Costco can be able to reap as much profits as possible because the consumers buying patterns/spending habits are high.       

Unlike situation analysis, which looks at the general state of affairs at a particular time, industry analysis looks at entire external environment in the industry, where a company operate. Industry analysis provides a company with deep understanding of an industry’s competitive environment. An industry’s environment is made is of suppliers, customers, and competitors. The three industry players determine the profitability and competitiveness of an industry. The competitiveness and profitability of the industry in which Costco operates in can be analysed using porter’s five forces. In terms of threat of substitute goods, businesses operating in this industry face a high threat of substitute goods. This is because there are various manufacturers of similar or related goods, who supply their products to various retail stores. In fact, it is common to find substitute goods displayed in adjustment shelves inside retail stores. However, Costco is not likely to suffer a lot from this threat since it is not involved in any form of production. Nonetheless, for it to be able to compete effectively in the industry, it must capitalize on stocking products from manufacturers who utilize different strategies of overcoming the threat of substitute goods. Such products are those that are highly differentiated through branding or advertising campaigns.

Competitors’ rivalry also affects competitiveness and profitability of an industry. In the industry where Costco operates, the level of competitors’ rivalry can be said to be high. Competitors’ rivalry is said to be high when one of the competitors occupies a very large market share in the industry. In the case study, it has been mentioned that the warehouse retail segment has three main competitors: Costco, Sam’s Club, and BJ’s Wholesale Club. Among the three competitors, Costco holds 55 percent of the market share, followed by Sam’s Club with 36 percent, and JB with 9 percent. It is clear that there is high level of rivalry between Costco and other businesses in the industry. This is because Costco owns more than half of the market share in the industry.

The bargaining power of suppliers in this industry is not high. This due to the fact there are many supplier of similar and related products. For instance, there are more than ten suppliers of digital cameras, televisions, milk, and other food commodities to various wholesales and warehouses. Nevertheless, Costco has established very strong relationships with the suppliers in this industry. In the case study, it has been mentioned that Costco has direct buying relationships with producers of national brands. Besides, Costco buys most of it merchandise directly from manufacturers. Similarly, there is low bargaining power of buyers. However, Costco has adopted a low-price mechanism as its strategy for appealing to more customers in the market.

In the industry where Costco operates in, there exist no barriers of entry. This means that business organizations can enter the industry at any time. Lack of barriers of entry in a given industry makes it possible for many business organizations to participate, thus increasing the level of competition in the industry. However, Costco’s low-price mechanism has assisted it in competing effectively in the industry, since many entrants in the market are unable to offer their commodities at low price as compared to Costco without making losses. Generally, Costco has numerous advantages over other players in the industry, thus being able to take the lead position in the industry.

Problem Statement and Strategy Analysis

When developing a strategy, it is always important to identify the key issue(s), facing the company in the market place, or the key issue(s) in the market place. In the industry where Costco operates, many traditional wholesalers and retails outlets offer their merchandise at high prices. Costco’s aim is to offer top-quality national and regional brands at low prices than its competitors in the market. Another issue is selection. Many wholesalers and retail outlets offer wide variety of selection to their customers. Typical supermarkets stock about 40,000 items while Wal-Mart Supercenter stock around 150,000 items. This makes these businesses to incur huge overheads related to inventory management and they end up passing the costs to the consumers. Costco’s aim is to stock only 4,000 items that will enable it operate efficiently in terms of overheads, thus being able to offer their merchandise at lower prices. Many wholesalers and retail outlets do not stock treasure-hunt merchandise. Most of them stock common merchandises, which do not change constantly. However, Costco want to provide its customers with treasure-hunt merchandise, which keeps on changing, sells quickly, and have great appeal to customers.

Strategy analysis entails looking at how a company is operating, and what its management is focusing on. From the case study, Costco is currently operating profitably. It has been mentioned that in the year 2006, Costco recorded high sales volume and achieved efficiency in inventory turnover. It has also been mentioned that many of its stores record large number of customer visits and are profitable. For these reasons, we can say that Costco is currently operating effectively. In the recent years, the management of Costco has embarked on a growth strategy, whereby Costco has managed to open over 20 locations every year. They also launched two websites to enable their American and Canadian members purchase products and services that may not be available in their locations. In addition, Costco has created a high-valued workforce, which enables it to operate successfully in its numerous locations across the US and Canada. Costco management retains its workforce by offering them attractive compensation packages, internal promotions, and training. Costco’s operations and management efforts indicate Costco’s determination in achievement of its strategic goals (low-priced products, limited selection, and treasure-hunt merchandise.  

Alternative and Recommendation

Costco can utilize mass marketing as an alternative of implementing its strategies. Mass marketing would entail marketing its products to a wide range of consumers: from low-income to high-income earners. This is because Costco offers all its merchandise at low prices, thus making them affordable to all. To achieve this, Costco can open more locations both in upper-end and low-end markets, and offer similar merchandise to all the locations. By doing this, Costco will be able to target a wide range of consumers, thus increasing the chance of expanding its market share. As a recommendation, Costco should focus on both national and regional growth to all kinds of consumers.


By offering low prices, limited selections, and treasure-hunt merchandise, Costco is likely to achieve a bigger market share within the next few years.

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