Exam #2 – Question #1
Submitted by:
Dean Barbera
To:
Professor Russell KH Ching, Ph.D.
In Partial Fulfillment of The Course Requirements
For MIS 271
At:
Department of Management
College of Business Administration
California State University, Sacramento
On:
December 12th, 2005
Dean Barbera
Costco Wholesale is the largest wholesale club operator in the United States. Costco has over 45
million cardholders in 37 states, Canada, Mexico, Japan, South Korea and the United Kingdom.
Having almost $53 Billion in 2005 revenues, of which $1 Billion to $2 Billion is in annual
membership fees, Costco is a proven industry giant. The headquarters of Costco’s 460
membership warehouses in located in Issaquah, Washington. Costco warehouses offer
approximately 4,000 products, additional services such as insurance and travel packages are
offered at many of their locations.
Costco’s key competitors are; Sam’s Club ($40 Billion in annual revenues), Target Corporation
($47 Billion in annual revenues), and Wal-Mart Stores, Inc ($200 Billion in annual revenues).
Sam’s Club is a subsidiary of Wal-Mart, but each player is seen as a potential competitor to
Costco. Costco has differentiated itself from their competitors in numerous ways, not the least of
which is making it well known that they employ union labor. Although only 18% of Costco’s
113,000 employees belong to labor unions, CEO Jeffrey Brotman often uses the “union card”
when interviewed or providing press releases. He explains that superior revenues and quality
come from the use of highly skilled union employees. He often refers to Wal-Mart’s lack of
union employees as a competitive disadvantage to their operation quality. Whether or not the
small number of union employees has put Costco at the top of their industry, this contentious
point often polarizes many groups depending on which side of the labor struggle they belong.
This competitive industry offers many opportunities, but these opportunities do not exist without
significant threats as well.
Relating to Porter’s Five Forces Model, Costco’s threats come primarily in the areas of Industry
Competitors, Customers and Buyers, and Substitutes. The fore mentioned competitors are all
powerhouses in their respective subsection industries. Sam’s Club on the other hand is a direct
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competitor within the wholesale club operator industry. Sam’s Club has attempted to take
Costco head-on. They have chosen to locate their warehouses next door, across the street or
anywhere near the competing Costco locations. This strategy, along with competitive
membership pricing has created a rivalistic atmosphere. Another key threat facing Costco is
customer loyalty. Although current membership is at 45 million, it is a constant battle to
maintain loyalty. Annually members pay either $35 or $100 for membership. If a customer
chooses not to renew, that customer is lost. Costco must provide low enough pricing to entice
customers to see the annual savings equal to or greater than the membership fee; additionally
they must compete for customers among the numerous competitors of which many do not charge
any membership fee. Finally, competition is very high among most of the 4,000 products sold at
Costco Warehouses, creating an environment with numerous substitute products. Although,
most of these products are lower priced than grocery or department stores, negative connotations
are associated to bulk purchasing for discounts. The lack of consumer savvy may create a
perception that pricing is higher at Costco compared to other retail locations, without taking into
account dissimilar size and packaging of many of their products.
One of the key threats that Costco should attempt to minimize is that of their customers seeking
out competitors. Costco should make strategic decisions to gather appropriate customer data; at
signup, renewal and membership termination. Using data mining techniques, Costco can
determine the most effective way to create customer loyalty and the highest level of membership
renewals. An effective Decision Support System can help in determining the appropriate steps to
be taken to maximize customer loyalty and membership renewals. An additional threat that
should be addresses through strategic decisions is that of Porter’s Five Forces Model:
Substitutes. Distinguishing Costco’s line as superior and unique will be key to diminishing the
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effects of substitutes. Additional strategic decisions will need to be make in order to educate
members on Costco product advantages.
Herbert Simon’s Phases of Decision Making can be used to help in strategic choices in
attempting to minimize the effectiveness of substitutes. First of all intelligence needs to be
gathered; including data collection and defining the problems that create substitute products.
Consolidating this into a problem statement could be written as “Substitutes have a larger than
expected impact on revenues due to customers need to compare equal amounts and/or sizes with
department and grocery outlets”. Once this problem classification and statement is determined it
is time to move towards design. Designing a model should evaluate key criteria followed by
alternatives. One possible model would include high levels of IT gathering to compare regional
prices per ounce or other comparable sizes. If this possible model was the choice of several
alternatives, implementation of the model would be planned for. This model would require the
implementation of a high speed centralized computer system, creating data warehousing with
regional, national and global data. This data warehouse would be accessible at every level of
management. Individual stores or regions would use the data, provided to customers in summary
sheets, to compare items in Costco warehouses to that of competitor grocery and retail outlets.
The comparison would concentrate on comparing like items or extrapolating to compare equal
size amounts. These types of decisions fall in the Semi-Structured region. The collection of data
may be very structured, but the implementation by regional management would most likely be
semi-structured. Comparisons of products may very significantly between regions, which would
create an environment best suited for regional managers to decide what comparisons would be
made during any given period of time.
Dean Barbera
The implementation of a data warehouse to prevent decisions to use substitutes creates a similar
but distinct opportunity to create customer loyalty through membership options. Data mining
once gathered will have numerous affects on reducing threats to Costco. The data warehousing
infrastructure can be used in a dissimilar way to increase renewal revenues and loyalty. The
assumption is made that once Costco can entice a member to renew, customer loyalty is created.
Data will be collected at each level in an effort to determine how many members who chose not
to renew can be persuaded to change their minds. Assuming that the data warehousing returns
information that the key decision why those who chose not to renew do so for financial reasons;
several strategic decisions can be made to reduce non-renewal rates. Offering customers the
ability to pay membership in several installments may limit the burden of a one-time charge.
Additionally, providing statements to customers of their savings, may also entice many to renew
their memberships. The overall decision would be a semi-structured decision giving regional
management goals and an ability to make decisions to maximize renewal rates; hence creating
customer loyalty.
Costco Wholesale Corporation can use a variety of Structured and Semi-Structured decisions to
create an IT environment that would help in the reduction of threats to their market position.
These IT decisions would combine the implementation and use of a Decision Support System
(DSS) using Data Mining to understand the needs and desires of both existing and future Costco
members.
Dean Barbera
Bibliography
"Yahoo Finance" Quotes
Dec 1, 2005 http://finance.yahoo.com
"The Costco Challenge: An Alternative to Wal-Martization?" LRA Online
July 5, 2005 http://www.laborresearch.org/print.php?id=391
"Majority says Wal-Mart bad for America: poll” Routers
Dec 1, 2005 http://today.reuters.com/news/newsarticle.aspx
"Costco Wholesale Corporation” Hoovers
Nov 23, 2005 http://www.hoovers.com/costco-wholesale-corporation/