Stockholder Meeting
September 10, 2006
Grow managers Passion Coach
Do something
you
enjoy
Lead & grow
the business
Running
the
Stay involved
business
right
&
Mentors
Open-door
policy
Lead by example
respect
motivates
Teaching is 90%
Rotate
positions
people
Success
is
imperative
Work
as
a
team
The people running the business
are the leaders & they make
things happen
Hands-on
Who We Are
Cleta Smedley
Director of Operations
Corey Carolina
Vice President of Operations
Joya Horvath
Executive Vice
President
Shona Koehn
Vice President of Finance
Roy Nelson
Vice President of Marketing
What we will cover today
• The history of our company & CEO
• Theoretical foundation for why we are
successful
• How theory affects practice
• What it means for you, the stockholder
• Question and answer
The Costco way…
A history of the company and
the man behind it
History of Costco
• Founded in 1982
• Seattle, WA 1983
• 487 warehouses – 8/25/06
• 130,000 employees worldwide
• 47 million cardholders
• Sales $58.9 billion
Mission
To continually provide our
members with quality goods
and services at the lowest
possible prices.
Code of Ethics
1. Obey the law
2. Take care of our members
3. Take care of our employees
4. Respect our suppliers
5. Reward our shareholders
What Costco Sells
Jim Sinegal - CEO
•
•
•
•
•
•
•
Co-founder and CEO
Protégé of Sol Price
Benevolent style of management
Open-door policy
Coach
Only rich on paper
Time Magazine’s 2006 list of The 100 most
influential people
Jim Sinegal - CEO
"Our attitude is that if you hire good people and
pay them a fair wage, then good things will
happen for the company."
Why it works…
A theoretical foundation
Trait Theory
• The great man theory
• Oldest approach
• Qualities and characteristics which only
great men possess
• Physical characteristics, personality, and
aptitudes
Studies of Leadership Traits &
Characteristics
Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.
The Style Approach
• Focuses on what leaders do rather than
who leaders are.
• Blake & McCanse, 1991; Blake and
Mouton, 1964, 1978, 1984 managerial
leadership grid.
• Jim’s style is Team Management
Transformational Leader
 Bass (1985) provided a more expanded and
refined version of transformational leaders that
was based on, but not fully consistent with, the
prior works of Burns (1978) and House (1976)
 Bass’ work gave more attention to the followers’
rather than leaders’ needs
 Describes transactional and transformational
leaders as a single continuum
Jim Is Transformational
• Concerned with values, ethics, standards, and
long-term goals
• Focused on satisfying needs of employees
• Employees trust him
• Engages creativity and innovation
• Employees are confident in achieving goals
Principles of Ethical Leadership
Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.
The Path-Goal Theory
• Evans (1970), House (1971), House and Dessler (1974)
and House and Mitchell (1974)
• How leaders motivate subordinates to accomplish goals
• Emphasizes the relationship between the leader’s style
and the characteristics of the subordinates and the work
setting
• For the leader the challenge is to use the correct
leadership style that best meets the subordinates
motivational needs
The Path-Goal Theory
Leader Behavior
- Directive- “provides guidance”
- Supportive- “provides nurturance”
- Participative- “provides involvement”
- Achievement oriented- “provides challenges”
Obstacles
Motivation
Path
Subordinates
Goal(s) / Productivity
Path-Goal Leadership
• Defines goals
• Clarifies path
• Removes obstacles
• Provides support
Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.
Leader-Member Exchange
Theory
Stranger
Acquaintance
Partner
Roles
Scripted
Tested
Negotiated
Influences
One-Way
Mixed
Reciprocal
Exchanges
Low quality
Medium Quality
High Quality
Interests
Self
Self/other
Group
Northouse, P. G. (2004). Leadership. Theory and Practice. 3nd Edition. Thousand Oaks, CA: Sage.
Leader-Member Exchange
Theory
Leadership Making
• Graen & Uhl-Bien (1991)
• A prescriptive approach to leadership that
emphasizes that a leader should develop high
quality exchange with all subordinates
• Suggest that leaders should create networks
of partnerships throughout the organization
What the numbers say…
A comparison to Sam’s Club
Higher Pay = Lower Turnover
• Average Costco Wages:

$35,360 per year ($17/hour)
• Average Sam’s Club Wages:

$21,028 per year ($10.11/hour)
$40,000
$35,000
$30,000
Dollars
$25,000
Costco
Sam's Club
$20,000
$15,000
Cascio, W. (2006). Decency Means More than
"Always Low Prices": A Comparison of Costco
to Wal-Mart's Sam's Club. Academy of
Management Perspectives, 20(3), 26-37.
$10,000
$5,000
$0
1
Higher Pay = Lower Turnover
Costco Em ployees & Turnover
Sam 's Club Em ployees & Turnover
11,492
48,488
110,200
67,600
•Costco Turnover:
17%/year
•Sam’s Club Turnover:
44%/year
Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club.
Academy of Management Perspectives, 20(3), 26-37.
Lower Turnover = Lower Cost
• Estimated Costco Turnover Costs:

$21,216 x 11,492 employees = $243.81 million
• Estimated Sam’s Club Turnover Costs:

$12,617 x 48,488 employees = $611.77 million
Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club.
Academy of Management Perspectives, 20(3), 26-37.
Higher Pay =
More Productive Employees
Sales per Employee per Square Foot
Sam's Club
Costco
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
Dollars
Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club.
Academy of Management Perspectives, 20(3), 26-37.
More Productive Employees =
Higher Net Sales
6-Month Sales Comparisons
$7.000
Dollars (in billions)
$6.000
$5.000
$4.000
$3.000
$2.000
$1.000
$0.000
March
April
May
June
July
Month
Costco
Sam's Club
Data taken from each company’s 2006 monthly sales reports
August
What You Really Want to Know
Cascio, W. (2006). Decency Means More than "Always Low Prices": A Comparison of Costco to Wal-Mart's Sam's Club.
Academy of Management Perspectives, 20(3), 26-37.
Wrapping Up…
What does it all mean?
Conclusion
• Innovative company built on values
• Jim Sinegal the Dynamic Leader
• Killing the competition with Kindness
• Stock is ripe for the picking
Question & Answer