Tuesday, April 17, 2012

Costco: An Example of Low-Cost Leadership

While reading about Wal-Mart’s low-cost leadership in the article, Types of Strategy: Which Fits Your Business?, I immediately thought about Costco.  I would argue, that Costco is much more effective than Wal-Mart in operating a low-cost strategy.  After researching on the Internet, I found many others do as well.
Although everything in Costco’s warehouses are the same products and services that can be found elsewhere, customers believe they can get the same items for less money at Costco. In order to effectively keep the cost of providing the products lower than those of their competitors, Costco utilizes several means: continuous improvement, exploitation of the experience curve, and unbeatable supply chain.
Sam’s Club, owned by Wal-Mart and Costco’s largest competitor,  is often criticized for their low wages and poor benefits, arguably in order to increase their profits. However, Costco’s pay is on average 42% higher with an hourly employee salary of $17.  Because of their good wages and benefits, they have extremely low rates of turnover and therefore their learning curve is stable.
Costco continuously improves their warehouses to become more efficient.  Their bare-bones structure offers limited products, at large quantities. Instead of stocking 10,000 items in a store as Wal-Mart does, Costco only stocks 4,000. Additionally, Costco may offer only up to four brands of a product while Wal-Mart could offer up to 60.
Part of Costco’s supply chain focus includes their pricing of items. Costco has a rule that they cannot mark up an item by more than 14%, while other supermarkets generally do by 25% and department stores by 50%.  Even though they could probably get a lot more money for the items they do sell, the company fears that they may lose their principle and value of minimizing costs and prices for the company and its customers.
By valuing both their customers and employees highly, Costco balances the interests of shareholders, employees, and customers.

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