Costco Organizational Analysis - Spring 2013

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Appendix C: Organizational Analysis
Costco Wholesale Corporation

The purpose of this Organizational Analysis is to discuss Costco’s current mission and values, provide a snapshot of their existing overall business model and the environment they are working in, and then discuss the key success factors required to succeed in their industry. Beyond that will be an examination of what resources (tangible, intangible, and human) and capabilities (functional and value chain) are needed to deliver on these key success factors, as well as analyze how Costco ‘stacks up’ to the competition in those areas. Finally there will be a discussion of what areas should be either improved or exploited moving forward to give Costco a more distinct competitive advantage (and therefore increased profits) in this industry. Mission, Values, and Strategy…

Costco’s mission, quite simply, is to provide high quality merchandise at the lowest possible prices for its members, in an ethically responsible manner. Below is a copy of their mission statement directly off of the Costco website… The Mission Statement of Costco Wholesale:

"Costco's mission is to continually provide our members with quality goods and services at the lowest possible prices. In order to achieve our mission we will conduct our business with the following Code of Ethics in mind: • Obey the law

• Take care of our members
• Take care of our employees
• Respect our vendors
If we do these four things throughout our organization, then we will realize our ultimate goal, which is to reward our shareholders." Along with their core mission Costco discusses in detail how they comply with the above mentioned code of ethics, and they don’t stop there. One additional example of how important ethical behavior is to them is demonstrated by their “supplier code of conduct” disclosure. In it Costco mentions several acts and behaviors that they prohibit of their suppliers (as well as their sub-suppliers), and requires them to commit to third party audits thereby ensuring compliance. Costco’s strategy is to maintain low margins (no more than 15% mark-up) on all of their product offerings and focus on volume and membership fees to generate the bulk of their profits. In fact, membership fees generally account for more than 2/3 of their operating income. That being said, you can really sum up Costco’s strategy as doing whatever it takes, in a legally and ethical manner, to maintain and grow club membership (in short…“delighting the customer”). Several of Costco’s resources and capabilities (to be discussed in detail later) allow them to achieve this strategy, and in most cases, much better than their competition.

Costco currently has over 600 locations in 9 different countries, with a club membership total approaching 70 Million. Although expansion plans were slowed down somewhat in 2011, they still opened 19 stores in FY 2011 and 25 more in FY 2012 (over 4% growth) (Warehouse List on Investor Relations website, 2013). The company manages its supply chain extremely well, and even owns some of its own manufacturing and distribution facilities – thereby giving them increased flexibility and control on the supply side.

Leadership and Corporate Governance…
The founder and prior CEO, Jim Sinegal, recently announced his retirement and appointed Craig Jelinek, a long time Costco employee and the President and COO at that time, to replace him as CEO. Mr. Jelinek has worked at Costco for close to 30 years, starting as the manager of their 6th store and then moving up to managing the entire CA region just one year later. Comments and actions thus far from Mr. Jelinek indicate that he sees no need to change course, and that the current business model / strategy is working well. In a recent article, Mr. Jelinek even highlighted the fact that Costco runs the business to give the best possible value to their customers, is not in the business to increase...
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