Business development & management assignment on: Costco’s business model

Q??

What is Costco’s business model? Is the company’s business model appealing?

Why or why not?

Solution:

It is observed that the business model of the company defines the basis for why its strategy and method of the business shall be a success. This kind of rationale explains out the basic mechanism of company’s business strategies and approach, and explains how income can be generated and offers great value to users and at the same time value must be significant to users. The information given in the case points out the major points of business model of Costco’s in a very straight manner.

It is observed that business model of Costco’s created large volumes of sales and quick turnover of inventory by providing customers and members very least prices on a specific category of global branded and chosen domestic tag products in a broad variety of product categories.

It can be seen that due to offering of low prices the company was able to generate big levels of volume of sales on many products. There are some examples which showed that how the company generated high volumes of sales such as selling of 110000 numbers of diamonds in 2007, approximately 40 million rotisserie chickens in 2008, 150 million croissants in 2007, approximately 100 million pounds of beef in 2007, generated 1 million pies of pumpkin throughout the week of Thanksgiving, generated yearly revenue of $ 4.6 billion in gasoline, and around 1.5 million hot dog and combinations of soda pop every week. It is analyzed from the case study that the Costco was the biggest seller of wines around the world.

It is observed that according to the perception of the management if quick turnover of the inventory mixed with the operating efficiencies then it would enable the company in achieving purchase of products in bulk, effective distribution and helps in decreased handling of products and enables self service facilities of warehouse. It is also observed that the self service of warehouse enables Costco to work beneficially at considerably with very less gross margin as compared to conventional wholesalers, supermarkets and big merchandisers.

Lastly, great volumes of sales and quick turnover of the inventory allowed the company to sell the stock and generate cash for stock and the company wanted to pay vendors before the time to receive discounts on payment. It can be seen that the company was capable of financing the big volume of stocks with the timely payments to vendors rather than maintaining working capital requirements.

What are the chief elements of Costco’s strategy? How good is the strategy?

 The chief elements of Costco’s strategy were fewer prices, a restricted product line and selection and an atmosphere which created treasure hunt for shopping. It is observed that company had followed low cost strategy in order to attract more customers. Costco offered global and local tag products at very low prices and with better excellence by reducing all the costs in relation with traditional wholesalers including salesman, delivery and accounts receivable. The strategy of Costco is to offer the products at low prices in order to lure customers. It is observed that Costco was famous for selling of high excellence global and local brands at prices comparatively lower than the conventional retail outlets. The company maintained only those stocked items which can be priced over competitive levels and provides opportunity to members for cost savings. The chief element of Costco strategy is to maintain prices low to employees and members to limit the margins on brand products at 14% as compared to other supermarkets. The private label products of the company were planned in order to ensure better excellence than global brands. The merchandising strategy of the company is to offers customers with a range of 4000 items. Costco provided a broad range of products such as flat screen, digital cameras, baby games, books and seat cover for autos etc. But the usable products such as canned goods, soft drinks and detergent were sold in containers. The company mail program was named as Costco connection that stored a mass of investment coupons for specials. It is observed that for opening of new warehouses, marketing teams of the company contacted with various business man in the area to know about the specific market. The strategy of the Costco was to improve revenue and profit of the company. This strategy had three features such as opening of innovative and new warehouses, building of larger and faithful base of membership and used well planned methods and techniques to lure customers to come and shop at Costco. The company had inaugurated 127 warehouses during the years 2005-2008 and the management of the company was planned to open more 20 or 24 warehouses by the end of financial year 2009.The main purpose of the strategy of the company was to attract more customers and for this company had designed three mechanisms. First, by giving a chance to the users to purchase office supplies, daily routine business and household items at discounted prices second, the company had made shopping interesting at Costco by providing an opportunity to users to buy an ever changing collection of tickets. Third, the buyers at Costco continuously scanned the landscape of manufacturing for attracting the negotiating hunting users. It is observed that the company had given a chance to users to visit Costco weekly or on monthly basis as not to miss the special items sold in a couple of days.

Q.3.) Do you think Jim Sinegal is an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support can you offer for these grades? Refer to Figure 2.1 in Chapter 2 in developing your answers.

Yes, Jim Sinegal is an effective CEO after gone through the case study. Jim Sinegal must get A grade for leading the process of crafting and executing Costco’s strategy. There are various reasons which show that Mr. Jim Sinegal was responsible to lead the path of strategy effectively.

It is observed that Jim Sinegal had made a transparent and well defined planned path for the Costco to follow. He was the only person in the company for the preparation of business model and appreciated over the growth of the strategy of the company. It is observed that Sinegal had know how skills and created an environment to offer treasure hunt in the stores and maintain low prices and helps in promoting large volume of store traffic that helped in building quick turnover of inventory. He was responsible for driving the ability of the company to achieve yearly sales nearly to $130 million per store. According to the case study Sinegal had performed excellent job in the execution of the strategy process at Costco. Sinegal had helped the company by spending more time in the stores, checked out various layouts and converse with employees to get to know how the things are going in the company. He helped the company by taking out various actions in stores to improve the condition of the stores. He performed three functions in the company as producer, knowledgeable critic and director. He went to stores for investigation for checking out the performance of store managers and asked various questions from them, about the performance of stores and told them to do more work on their weak areas. In this case, when Sinegal found answers to his questions less than expected than he told store managers to do more research and come back with sufficient information. His tremendous savvy skills show that he managed the company excellently in order to achieve high profitability. In last, it can be concluded that Sinegal had performed extraordinary in managing the strategic leadership.

Q.4.) what core values or business principles is Jim Sinegal stressing at Costco?

There were two core values or business principles appear to place out at Costco.

The main business principle activity of Costco is to provide high value to users by offering global and local tag products at low prices.

It is observed that the human resource management of the Costco was coordinating and integrating its employees very nicely.

It can be seen from the case that comments of Jim Sinegal’s made it very apparent that he was very committed to capture these values as division of  Costco’s organization culture. Jim Sinegal wanted to say that these two principal activities reflected in working environment of Costco which makes them profitable throughout the world as compared to other conventional wholesalers and merchandisers.

Q.5.) How well is Costco performing from a financial perspective? Do some number crunching using the data in case Exhibit 1 to support your answer? Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 104-105) to help you diagnose Costco’s financial performance.

It is observed that according to Exhibit 1 in case study which indicates that the financial performance of Costco has been excellent from fiscal year 2000 to 2008.

It is analyzed that net sales had increased from $31.6 billion to $71.0 billion throughout the year 2000 to 2008 and indicates CAGR of approximately 12.3% from 2000.With net sales total revenues of the company had also increased from $32.2 billion to $72.5 billion throughout the year 200 to 2008 with CAGR of approximately 12.3%.

It can be seen that EPS had also increased from $1.35 to $2.30 throughout the year 2000 to 2006 with CAGR of approximately 9.3%.

After done the calculations of Costco expense and profitability ratios it has been observed that selling and administrative expenses had increased throughout year 2000.It can be seen that both operating margin and net profit margin ratios had decrease slightly from 2000 but the figures of both operating margin and net profit margin had improved in 2008 as compared to year 2007. Return on equity had decreased in 2005 from 14.9% to 12.0%and then again this ratio had increased in 2007 from 12.1% to 12.6% and in 2008 from 12.6% to 14%.The same trend can be seen in the case of ROA, in 2005 ROA was 7.3% and it dropped down to 5.5% in 2007 and then again increased in year 2008 from 5.5% to 6.2%. The days of inventory at Costco had enhanced since year 2000 which reveals that the management of Costco had done fantastic job of inventory management. After doing the analysis of last five years it has been observed that net income profit of Costco had improved throughout the year 2000to 2008 but the financial condition of the company in 2008 was not good as compared to year 2000.However, in year 2008, the company had shown great profitability as compared to last financial year 2007.The net cash flow from operating activities had increased from 1.78 to 2.08 billion during the last four years which indicates that the company had generated sufficient cash out of its operations and gave an idea to investors that the company had managed its business activities very efficiently and effectively.

Conclusion

After done the analysis of last five years it has been observed that the company financial condition had improved and gave an idea to investors and users to invest in the company for the long run.

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