Management Assignment: Critical Analysis of Costco For Future Growth
Task: This management assignment uses a case study to promote and contextualize your thinking and discussion around organizational planning, sustainable development and its impact on decision making.
Read: Case for critical analysis, Costco in your set textbook, p.273-274. With the issues raised in the case study in mind, answer the following questions:
1. Managers focus on dynamic capabilities of their organization to innovate and develop new sources of value and competitive advantage. Discuss the issues and challenges for Costco in planning and executing future profitable growth initiatives.
2. The case identifies managerial decision issues when expanding into Mexico. What management and diversity issues must be considered when expanding into other cultures?
The present management assignment analyses the case of Costco Wholesale Corporation which is an American international company that owns a network of the supermarket and trading retail stores basically known as Costco Wholesale or simply known as Costco. By 2020 Costco was the world's fifth-biggest supermarket, but in 2016 Costco was the world's leading retailer of choice and prime beef, organic food, chicken rotisserie, and wine (Rahman, 2020). In 2021 Costco ranks number 10 with a cumulative turnover in the Fortune 500 among the top U.S. companies. Till March 2021, Costco owns 804 warehouses all over the world, including 572 stores in the United States including the Districts of Columbia and Puerto Rico, 103 in Canada, 39 from Mexico, 29 from Japan, 16 from South Korea, 14 from Taiwan, 12 from Australia, 3 from Spain, 1 from Iceland, 1 from France and 1 from China (KIM, 2019). The Costco storage facility is opened by Costco in March 2021. In early 2022 the organization expects to build new storage facilities in New Zealand and Sweden. The company has declined from the top position to the 10th rank due to various issues and challenges which is affecting the future growth initiatives of the country. The company has 142000 employees and more than 55 million members associated with the company and its sales reaches to $76 billion dollars.
Issues and Challenges faced by Costco
Costco has a unique business plan for long-term prospects, revenues, and the valuation of shares for profitable business growth. The most important strategy is that Costco keep rates competitive that they are just above cost and by selling memberships they cover for lack of future sales (López-Cózar-Navarro et al., 2017). The group also sells some products on its own and does a little more on these things. It sells some items online, but mostly in-house, storage sales. It has an affiliation renewal rate of more than 90 percent in the United States and Canada. In 2019 the subscription fees charged almost $ 3.35 trillion, up 7% compared to 2018.
Consumer preferences change over time and with the advancement of technology and people getting multiple choices online at varying prices it leads to a difficult situation for Costco to cope up with the changing preferences of consumers (Baek and Wang, 2018). A warehouse solution is used by the firm and it buys vast quantities of such commodities and attempts to market them as fast as possible. However, the approach works only if the high quantities are preserved. Costco may be left with vast quantities of unused, potentially perishable products if customer preferences change.
Say, for example, Costco provides the bulk amount of products to the consumers such as beef, chicken, and other retail products. In 2020, due to the worldwide impact of COVID-19 people have lost their jobs and have faced many hurdles which have led to a situation where consumers are more focused on buying less and saving more which means there is a change in consumer preferences which has led to the decline of sales of the company (Krupskyi and Kuzmytska, 2020). As a manager, it is important to have the creativity to assess the market demand and understand the consumer preferences based on which new strategies are needed to be implemented. The consumer perspective is needed to be understood by the manager based on which the products are needed to be supplied.
The dependency on membership of Costco is one of the main issues with the business model. This approach works well as long as the members continue to come back and purchase bulk products as traditionally, but a variety of problems can affect this pattern (Vitemb, 2018). Customers might opt for a rival, such as Walmart's Sam's Club. The cost of membership ranging from $60 to $120 annually at Costco which is nearly the same ascompetitor wholesalers and the discounts are comparable. Costco could miss out if market demand shifts in goods (Li et al., 2021). Costco also competes against specialty distributors, including Office Depot, PetSmart, and Whole Foods from Amazon. Say for example, if any consumer who is not a member of Costco visits to make the purchase will not be allowed to make a purchase without membership. This will lead to the decrease of potential consumers who might bring in extra revenue for the company. As a manager in this situation, it is important to focus on consumers of both membership and non-membership sections such that the company can focus on future profitability and having a diverse consumer base for a better supply of products. Even the members of the company have to purchase bulk items and don’t have the option to buy small quantity items. So, the consumers can opt for competitors to make a purchase as competitors of Costco provide membership and as well as non-membership purchases and there is no bulk buying condition which is favorable for the consumers to make a purchase. So, the strategy of selling bulk products only to members needs to be modified in order to gain future profitability.
Most retailers have an Omnichannel focus that allows customers to purchase goods online or in shops. Today, consumers are shopping online using various connected smartphones, analyzing goods, and price comparisons. While the focus of Costco on warehousing enables the bulk discount retailer to hold costs quite competitive, the Omnichannel experience that consumers today seek is not really evident (Loftsdóttir and Már, 2017). Costco makes some investments in this aim, but there is no guarantee of the effectiveness of these efforts or the improvements in time to ensure the sustainability of the business. If consumers have to buy anything in bulk, it can be a real challenge to move it around. For local residents who may not be able to park near their homes and families with young children who find it too hard to manage and can make the transport of bulk goods. Costco has some online offerings, but some budget wholesale vendors are offering comparable dealings and free delivery, such as Amazon Prime or Jet. Amazon provides $119 a year for free delivery.
Managerial Decision Issues in expansion to Mexico
Costco in expansion to Cuernavaca, in Mexico has to face various issues. The company thought that the expansion in Mexico and opening a store is a win-win situation but in reality, the company has to face various obligations. In order to expand to different cultures, there are various management and diversity issues are present which need to be understood and proper initiatives are needed to be taken.
Business dynamics are rapidly changing, so the business strategy has to be checked and revised periodically. It is important for the company management to adapt as the business evolves in order to meet changing circumstances during expansion. For example, the management can concentrate on creating productive partnerships and optimizing growth with current customers from gaining new customers. Existing market partnerships are also more profitable and can often provide stable cash flow. Newer ties can boost turnover, but lower profit margins, which can be unsustainable (Nunna, 2018). The management of each store of Costco has the independence to make the decision for the better of the store. The company on expansion to Mexico have to focus on providing employment to the local resident of Mexico as well but there isavarious complaint regarding the job openings which are not frequent and women are not given the opportunity to work in the store. This is creating certain troubles for the company as the local people are not happy with the women's negligence in work opportunity. In order to mitigate the problem, the company has taken initiatives to post job openings online such anyone can apply for the job and there will be no discrimination between men or women. Even implementing an outside vendor for recruiting employees for the store in Mexico that is locally based will create job opportunities for many (Durand et al., 2017).The local people will support Costco only when there are fair job openings for the locals which will bring employment for the local people.
Costco has to focus on multiple cultural diversity in Mexico before the expansion as diversity helps in bringing creativity and innovativeness with the working procedures of any company. Mexico has a different cultural base and different living styles for which expansion to Mexico by Costco has to face certain hurdles (Stanton, 2019). It is important for the management to understand the culture and heritage of the country it is expanding and Mexico is a place where people are vibrant and colorful. Many times avoiding the cultural and heritage sensitivities of any nation leads to downfall to the strategies for expansion. Mexican citizens have different traditions and rituals. Every area has its traditional culture and festivals and they are proud of their heritage. Even in the smallest villages markets and festivals are highly significant in Mexico. Each society has its patron saint, honored each year through festivals and processions (Gogoi, 2020). The recognition of the site values through a process of elicitation involving the stakeholders is the most critical step in values-based management. It is not until this is achieved that the management is able to identify the importance of the location and the procedures and procedures necessary to the proper comprehension of the physical capital. Say, for example, Costco opened a supermarket in Mexico and provided high-quality jobs and low-priced products for the local people but the company has been charged with cultural insensitivity issues (Blusteinet al., 2019). The company moved when a dilapidated casino opened in that area. The main issue that is being faced is that land, where the company thought of developing a parking lot, is of great heritage and art in Mexico and the company is being opposed to developing a parking lot in that region worth millions of dollars. In order to maintain the cultural heritage of Mexico, the company has set aside millions of dollars to restore murals and develop an art and cultural center and museum with the help of the local and state representatives of Institutes of Fine Arts and Literature.
Costco Warehouse Company is facing stiff competition from supermarket giants such as Walmart and Walmart's Sam's Club in particular. Moreover, several small and medium-sized companies are now offering products at cheap rates on the online market, competing with Costco. The movement towards animal welfare is a danger, as it can limit demand for some of Costco's goods, but this is addressed by the organization by further strengthening its supply chain policies.
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