Costco Corporation: Porter's 5-Forces Analysis | Free Essay Example

Costco Corporation: Porter’s 5-Forces Analysis

Words: 591
Topic: Business & Economics
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Costco began its operations in the United States in 1976 where its first business location was an abandoned airplane Hangar. Costco experienced extraordinary revenue growth during its first six years of operation. Costco has changed its name twice in the course of its history. Also, Costco has since operated in several locations across the United States (Mitchell, 2006). This paper is a study of the Costco Corporation using Porter’s five forces analysis.

Some various trends and forecasts are specific to Costco’s business strategy. Costco faces a low risk when confronting the threat of new market entrants. The warehousing club business is expensive to start and it has low-profit margins. This hindrance discourages interested parties from venturing into this type of business. Costco has managed to survive in this industry because the company has attained a scalable economy. However, most new market entrants lack the resources that can enable them to compete on Costco’s level. Furthermore, the advertising and marketing costs that are associated with Costco’s type of business are prohibitive. Costco’s mode of operation does not favor certain brands or product types. Most of the company’s club warehouses stock products that satisfy its customers. Also, Costco is larger than most of the companies that supply it with products. Costco has mastered the art of substituting brands by the needs of the market. Therefore, Costco acquires and distributes global brands by the company’s buying criteria.

Costco has over fifty million members worldwide and this customer-base is an important component of Porter’s five forces analysis. The company’s profitability depends on the buying power of these members. Costco’s members are categorized by their buying habits. For instance, a Gold member is a regular buyer of Costco’s products. Nevertheless, customers do not have any substantial bargaining power although they have an indirect influence on the pricing of various goods at Costco. Competitive rivalry is a threat that could compromise the company’s profitability. Costco faces stiff competition from other wholesalers such as BJ’s wholesalers and Sam’s Club (Pearce & Robinson, 2013). However, the company can be able to survive the onslaught of the two companies because it has more stores within the United States and it has a better international presence than its competitors. Costco has adopted the trend of low pricing to benefit its customers. Also, Costco makes it easy for members to switch from one membership package to another and this liberty retains and attracts new customers for the wholesaler (Jackson, 2009). The strategy that is used by Costco is effective but it is under medium threat-levels from various specialty stores. Specialty stores offer customers a wide selection of goods such as electronics and apparel. Specialty stores also can offer better discounts. Costco’s business strategy is also under a monumental threat from the advent of online purchasing. Most potential customers are embracing the ease and convenience of online shopping while abandoning the complexities of manual purchasing.

Porter’s five forces analysis indicates that Costco is a solid business. Costco has good prospects when it comes to competing against other wholesale establishments. The company’s organizational strategy is rooted in its early entry into the wholesale market. The tools of analysis that are used to ascertain the suitability of Costco’s business strategy are wholesome and they provide; insight into the company’s future, a method of accessing performance, and a strategy of improving the company. Nevertheless, these tools of analysis are ineffective because; they fail to give a clear picture of the company’s future, they are limited to foreseeable factors, and they are determined by efficiency in management.

References

Jackson, S. E. (2009). Membership has its shareholder rewards. Journal of Business Strategy, 30(1), 53-55.

Mitchell, S. (2006). Big-box swindle: The true cost of mega-retailers and the fight for America’s independent businesses. New York: Beacon Press.

Pearce, A., & Robinson, R.B. (2013). Strategic management: planning for domestic & global competition. New York: McGraw Hill.