Question

1. Are Costco’s prices too low? Why or why not?

2. What do you think of Costco’s compensation practices? Does it surprise you that Costco employees

apparently are rather well-compensated?

3. What recommendations would you make to Costco top management regarding how best to sustain the

company’s growth and improve its financial performance?

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Answer 1

1. Costco has lived up to its claims of offering products at the least possible prices. The company has been able to maintain its low price strategy as well as competitive advantage of the company by working up on the efficiency of supply chain in its business process. Other business strategies inculcated in the business model of Costco, to keep its prices low while maintaining the competitive advantage of the company, are as follows:

• No money or capital is spent on advertising campaigns for the company
• The infrastructure and the outlets of the company are quite simple and plain, so as to keep the maintenance as well as administration costs minimal
• Continuous monitoring of the inventory is done to keep the inventory costs of the company as low as possible
• There are no fancy frills in the outlets and display of the company’s outlets, thereby keeping the expenses minimal

2. Costco works on the principles of keeping the employees first in its business model. The compensation structure of the company is quite liberal and aimed at keeping the employees happy. The hourly wage rate of Costco staff is almost double when compared with that of Wal-Mart’s or Target’s. This liberal compensation policy helps in keeping the employees motivated to perform well. The overall turnover of the company is quite low. The team synergy and camaraderie of workers in the company is quite positive and family-like. All these gets reflected in the business performance of the company.

3. To sustain their competitive advantage in future, the Costco management can think in the following lines:

• The company can think of going online. This will increase the overall coverage in business
• If e-business is considered, the company must have a sustained strategy for managing the costs associated with shipment of orders
• The company can consider plans of entering the Asian markets as labor is readily available there and the purchasing power of customers is considerably increasing at a tremendous rate