Question

9-17. Do you think Zara's success is due to external or internal factors or both? Explain. 9-18. What strategic implications does Zara's move into online retailing have? (Hint: Think in terms of resources and capabilities.) CASE APPLICATION 2 A Simple Strategy at Costco Costco launched the warehouse shopping model when it opened its first location in 1976, requiring customers to purchase an annual membership in order to shop at the store." The first location was called Price Club and initially sold only to small businesses More than 40 years later, Costco is one of the nation's top retailers and the nation's largest membership warehouse chain. They operate more than 700 warehouses located around the world, with more than 80 million members and over $116 billion in annual 338 Part 3 Planning revenues. In addition to demonstrating steady growth throughout its history, the com- pany consistently performs better than competitors. For example, Costco's sales per square fool are nearly 70 percent higher than their closest competitor, Sam's Club, So how has Costco achieved this level of success? Experts agree that Costco's simple strategy has allowed the company to persist, even in challenging times. In fact, some say Costco has the best business model in the retail industry. The company's strategies that differentiate it from its competitors are to treat employees well, limit the number of items it sells, and keep markups low. Costco clearly values its employees. The company pays its employees on average 40 percent higher than competitors and offers health care insurance to all employees who work more than 20 hours per week. The company is also known for promoting from within, with 98 percent of their store managers and many of their company execu- tives having started out as stock clerks or cashiers. These efforts have helped build a loyal and hard-working employee base that actively contributes to building a profitable bol- tom line. Furthermore, low employee turnover helps save the company in recruiting and training expenses. The company's average annual turnover rate is about 5 percent, com- pared to the average turnover rate of about 20 percent in the rest of the retail industry. Costco also has a sales strategy that has contributed to its success. They only sell a limited number of brands and, as a result, they are able to increase sales volume that leads to purchasing discounts. For example, Costco only carries lour brands of tooth- paste, compared to about 60 brands you'd find on the shelf at Walmart. Thus, the com- pany is able to purchase those four brands in significant volumes, which allows them to negotiate with the product manufacturers for discounts. The company then passes along those savings to their customers through lower prices. Costco prices items at no more than 15 percent above their purchasing price. This markup strategy assures they are offering the lowest price possible, which is what draws customers and creates a loyal customer base Sticking with these simple strategies has helped Costco huild their retail empire. Can the company continue their growth Trajectory and maintain their leadership position in the retail industry? There is some speculation that as consumers build confi- dence in online shopping, Costco and other brick-and-mortar retailers will face declin- ing sales due to the competition. Costco has responded to this threat by expanding the diversity of their inventory, offering deep discounts on high-ticket items such as jewelry, electronics, and even cars. Such tactics help to cncourage membership by making the company the go-to location for purchases that consumers prefer to make in person. And while they are there, they can pick up some toothpaste at a pretty good price. * DISCUSSION QUESTIONS 9-19. How is Costco's business model different from other relailers such as Walmart and Sam's Club? Why do you think Costco's strategy works? 9-20. Beyond lower turnover, how else does Costco benefit from treating its employees well? 9-21. Are you surprised that Costco sells cars? How does offering diverse products help the company attract new members? 9-22. Costco now has a comprehensive website and sells online. Is this a threat to Costco's business model? Is there a downside to selling online? ENDNOTES 1. W Berger"Find Your Passion with These 8 Thought-provoking Questions," www.lastcodesign.com, April 14, 2014; and G. Anders "MIT's Inspired Call: Graduation Talk by Dropbox CEO, Aste 30, www.forbes.com, June S, 2013. 2. A. Ricadela, "Zalanda Aims for SI I Billion in Sales by Seeking Technology Edge, Bloomberg online, www.bloomberg.com, March 18, 2011, Morton, "Cage-Free Eges May Be Golden Goose lor Kelail Pronts" Bluere online. www.bloomberg com, March 25, 2016; J. Soble, "Dell to Sell Perot Systems to NTT Data of Japan for About $3.1 Billion," New York Times online, www.nytimes.com, March 28, 2016. A. Gupta. "Agil Gupta. How to Compete on Price without sacrificine Profits" Die Wall Sireer Journal online, www.wsj.com. March 23, 2014: "Al Jazeern to Cut 500 Johs." The Wail Smer Jawal online, March 27, 2016. 3. JW. Dean Jr. and MP Sharman "Does Decision Process Maiter? A Study of Strategic Decision-Making Elfectiveness." Academy of Management Jourwal, April 1991, pp. 368–396

Costco launched the warehouse shopping model when it opened its first location in
1976, requiring customers to purchase an annual membership in order to shop at the
store.68 The first location was called Price Club and initially sold only to small businesses.
More than 40 years later, Costco is one of the nation’s top retailers and the nation’s
largest membership warehouse chain. They operate more than 700 warehouses located
around the world, with more than 80 million members and over $116 billion in annual

revenues. In addition to demonstrating steady growth throughout its history, the com pany consistently performs better than competitors. For example, Costco’s sales per
square foot are nearly 70 percent higher than their closest competitor, Sam’s Club.
So how has Costco achieved this level of success? Experts agree that Costco’s
simple strategy has allowed the company to persist, even in challenging times. In fact,
some say Costco has the best business model in the retail industry. The company’s
strategies that differentiate it from its competitors are to treat employees well, limit the
number of items it sells, and keep markups low.
Costco clearly values its employees. The company pays its employees on average
40 percent higher than competitors and offers health care insurance to all employees
who work more than 20 hours per week. The company is also known for promoting
from within, with 98 percent of their store managers and many of their company execu tives having started out as stock clerks or cashiers. These efforts have helped build a loyal
and hard-working employee base that actively contributes to building a profitable bot tom line. Furthermore, low employee turnover helps save the company in recruiting and
training expenses. The company’s average annual turnover rate is about 5 percent, com pared to the average turnover rate of about 20 percent in the rest of the retail industry.

Costco also has a sales strategy that has contributed to its success. They only sell
a limited number of brands and, as a result, they are able to increase sales volume that
leads to purchasing discounts. For example, Costco only carries four brands of tooth paste, compared to about 60 brands you’d find on the shelf at Walmart. Thus, the com pany is able to purchase those four brands in significant volumes, which allows them to
negotiate with the product manufacturers for discounts. The company then passes along
those savings to their customers through lower prices. Costco prices items at no more than
15 percent above their purchasing price. This markup strategy assures they are offering
the lowest price possible, which is what draws customers and creates a loyal customer base.
Sticking with these simple strategies has helped Costco build their retail empire.
Can the company continue their growth trajectory and maintain their leadership
position in the retail industry? There is some speculation that as consumers build confi dence in online shopping, Costco and other brick-and-mortar retailers will face declin ing sales due to the competition. Costco has responded to this threat by expanding the
diversity of their inventory, offering deep discounts on high-ticket items such as jewelry,
electronics, and even cars. Such tactics help to encourage membership by making the
company the go-to location for purchases that consumers prefer to make in person.
And while they are there, they can pick up some toothpaste at a pretty good price.

DISCUSSION QUESTIONS
9-19. How is Costco’s business model different from other retailers such as Walmart
and Sam’s Club? Why do you think Costco’s strategy works?
9-20. Beyond lower turnover, how else does Costco benefit from treating its
employees well?
9-21. Are you surprised that Costco sells cars? How does offering diverse products
help the company attract new members?
9-22. Costco now has a comprehensive website and sells online. Is this a threat to
Costco’s business model? Is there a downside to selling online?

Answer 1

1. Costco follows a simple strategy of selling focussed variety of products. Unlike Walmart that sells all different kinds of products, Costco has a very customer focussed strategy, by offering the useable product lines at the rates which are suitable. This includes lower markups. Also the customers are treated well by employees; that comes from treating the employees well and buildinga loyal culture within the organisation.

2. Costco offer respect at work, by imporved services like health insurance being offered. In addition, setting role models within organisation sets the culture and expectation of growth within the organisation. This enables to offer imporved services to customer; a customer satisfaction is the underlying benefit obtained.

3. Diversified product portfolio attracts a diversified set of customers which can then be captured to sell the other product lines as well. This enables no cannibalisation and easy capturing of new TG, and understanding the consumer behaviour to a very large extent.

4. What the consumer values in costco's model is a highly customised service and a very friendly treatment offered at its store. Both of these are missed out to some degree in online model; yet with the usage of AI it is possible to customise the platform for the user anf offer the suggested recommnedations that would be highly effective.