The purpose of this section is to do a value chain analysis of Costco, identify their

resources and capabilities, to conduct a SWOT analysis, identify the opportunities in which they
are lagging and to form a strategy to move forward using the recourses and capabilities in the
direction of utilizing those opportunities.
Introduction
Costco and its subsidiaries began operating in 1983 in Seattle, Washington. It engages in
the operation of membership warehouses in the U.S., Canada, U.K., Mexico, Japan, Australia,
and Spain. It also has majority-owned subsidiaries in Taiwan and Korea. The company strategy is
to offer its members low prices on a limited selection of nationally branded and select privatelabel products in a wide range of merchandise categories. This will typically produce high sales
volumes and rapid inventory turnover. Too, the operating efficiencies achieved by volume
purchasing, along with efficient distribution and reduced handling of merchandise in a no-frills
warehouse, allows the company to operate profitably at lower gross margins than traditional
wholesalers, mass merchandisers, supermarkets, and supercenters.
Products sold include food (dry and packaged), sundries (tobacco, beverages, cleaning
supplies), hardlines (major appliances, electronics, beauty aids), fresh food, softlines (apparel,
home furnishings), and ancillary and other (gas stations, pharmacy, food court). By using a
membership format, and strictly controlling the entrances and exits of its warehouses, Costco has
lower inventory losses than those of other discount retail operators. The company had about
195,000 employees at the end of fiscal 2014. Its headquarters are in Issaquah, Washington.
Value Chain Analysis for Costco
Conducting a value chain analysis provides a snapshot for identifying a firms relative
competitive performance, core competencies, and for focusing on customer centric activities.
Costcos customer driven focus allows primary and support business activities to work in unity
creating a stronger competitive advantage and thereby increasing profitability. Profitability and
shareholder value rely on coordination of both sets of business activities to create a firms
competitive advantage.

Costcos infrastructure skills and capabilities support operations for achieving low cost
global leadership in warehouse retail sales and better than industry average. Costcos culture
strives to provide a limited variety of quality merchandise goods from private label and some
well established brands.
Costcos value chain provides a diversified product base to a large globally diverse
consumer base. Costco is industry leader to Target, and sometimes loses positioning to WalMarts Sams Club. Costcos culture type is at Level 3, and positions the company for short-term
and long-term success (see Table).
Table
Value Chain Analysis

Business Process

Costco

Firm Infrastructure

Organizational structure is aligned with Level 3 Culture Type

R&D

Pursues innovative technologies and private label to create value

Human Resource

Pursues best practices in the industry for hiring, training, and

Management

compensation

(HRM)
Procurement

Large single order purchases and partners with suppliers for 4000
select products

Inbound logistics

Depots and Custom Fleet delivering merchandise within 24hrs.

Operations

Limited product storage on sales floor

Outbound logistics

Daily warehouse management, rapid inventory turnover-12.6x

Marketing & Sales

Minimal SG&A expenses; no advertising policy

Support Services

Extended warranty services, and special services for members

Costcos operations, outbound logistics, marketing and sales, and support services perform
activities within the same function to gain cost advantages for interlocking skills and capabilities.
Costcos skills and capabilities in these business activities outperform much of the industry and
direct competition.
Resources and Capabilities of Costco
Costco achieves operational effectiveness in warehouses; such as efficiencies arising
from floor plan designs that handle daily warehouse sales, support merchandise, inventory, and
support services for customers concerned with high quality and low cost (Costco, 2014). Unlike
most retailers, Costco receives financing terms from suppliers and does not need to use working
capital to fund sales increases (Costco, 2014).
Costcos human, technical, and financial resources and capabilities integrate to enhance
efficiencies in procurement, such as high volume purchasing skills from single vendors, and for
developing an efficient method for inbound logistics capable of delivering freight to designated
warehouses within 24 hours (Costco, 2014). Costcos warehouse capabilities effectively reduce
losses resulting from theft, produce higher sales, and achieve faster inventory turnover.
Costcos human resource skills are well supported to implement strategy. For example,
employees receive higher than average benefits and compensation levels remain constant even
during bad economic times. This provides management with the motivation to make essential
daily choices toward accomplishing Costcos goals.

Costcos supply chain capabilities receive cost and competitive advantages from large
purchases with single vendors. Costcos technical capabilities contribute to the development of
innovative packaging for increasing consumer safety.
Costcos capabilities also include low overhead operations, 24-hour distribution centers,
671 global warehouses averaging 143,000 square feet in size, and limited manufacturing
businesses to produce low cost high quality goods and services. These capabilities enhance
Costcos operational effectiveness in the short term, but easily open to imitation by rivals in the
future.
Costcos SWOT Matrix

Strengths

Pricing Authority
Strong brand Loyalty
Economies of scale
Strong culture

Opportunities

Attracting Younger Customers

Weaknesses

Geographic Dependence
Older Customer Base

Threats

Exposed to competitions from various

fronts
Intense price competition
Internet Retailer Giants

Strengths
Pricing Authority: Costcos philosophy is to provide its members with quality goods at the most
competitive prices. The company also uses its gasoline business to draw members to warehouses.
While this business is relatively lower margined than others, it again drives higher volumes of
other higher-margined products.

Brand Loyalty: Costcos relentless pursuit of offering high-quality products and offering great
value has allowed it to attract a very loyal customer base. This has allowed the company to grow
market share and increase its customer base over the years.
Weaknesses
Geographic Dependence: Costcos performance is highly dependent on its North American
business. Sales in the U.S. and Canada represented 87% of the total for 2014.
Older Customer Base: While Costco has a fairly broad customer base, it is more skewed toward
older baby boomers. As these customers age, they tend to spend less. The company needs to try
and attract younger customers, including Generation X and Y, who are savvier e-commerce
shoppers.
Opportunities
Attracting Younger Customers: Shoppers between the ages of 19 and 34, should help to drive
longer-term sales and earnings at Costco. The company is attracting these customers in several
ways. It is making it more convenient for them to shop by using services such as Google Express
and InstaCart.
International Expansion: Costco plans to continue to expand, both domestically and
internationally. Its current store base is around 670, but management hopes to reach 1,200
warehouses in the long term. The company has recently expanded in Spain, and plans to open up
in France in due time. We also think Costco is planning to enter China within a couple of years,
which would be a huge growth opportunity.
Threats
Competition: The discount warehouse services industry is highly competitive. There are several
warehouse operators across the U.S. and Canada that offer similar merchandise quality, selection,
and price. Primary competitors include Sams Club and BJs Wholesale Club.

Internet Retailer Giants: While not directly competing with Costco, some Internet retailers like
Amazon offer a range of low-cost, good-quality products with shipping options that are hard to
beat.
In conclusion Costco can use their human resource and technology capabilities in
forming a strategy to attract the younger generation customers by improving e-commerce and mcommerce and opening more stores internationally.
References:

http://josephspencermcdaniel.blogspot.com/

http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__Costco_Wholesale_Corp
oration.aspx

http://seekingalpha.com/article/2907246-swot-analysis-costco-wholesale-corporation