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Costco Five Forces Model Analysis

1215 words - 5 pages

MEMORANDUM

TO: Strategic Business Planning Committee
FROM: Raquel Hansen
DATE: March 16, 2014
SUBJECT: Five Forces Model Analysis

As we begin to strategically plan for our business, it is important for us to take a deep dive into our competitive environment to understand where we are strong competitively and where we are weak competitively. An analysis of the forces driving industry competition using M.E. Porter’s Five Forces Model will assist us in determining where the power lies in a business situation as we begin to plan. We must understand how they work in our industry and how they affect our particular situation. Whatever the collective strength of these forces is, our ...view middle of the document...

A supplier power that we need to recognize is our labor. Some may question the relative power of our labor supply. While we do lead the market in wages and benefits, we will stick to our core values and continue to treat our employees well. It could be assumed our labor has considerable power should we ever choose to change our model for how we treat our employees.

Buyer Power – Weak Bargaining Power

Costco members are numerous with no single member accounting for a meaningful fraction of total sales. Consequently, individual members have little power or leverage to bargain over the prices they will pay or over other terms and conditions of sale. That being said a member can choose not to purchase a particular item (but obtain it from another retailer or discounter) and can also choose not to renew their membership, but this does not yield any bargaining power of consequence. Even though members have low switching costs, they cannot negotiate for better prices or obtain any benefit beyond what their membership card provides.

Competitive Rivalry – Fierce Competition

Costco’s major competitors are Sam’s Club and BJ’s Wholesale. BJ’s is less concerning as a competitor as it is limited to fewer, less productive store units which exist only on the East Coast and Sam’s Club represents a greater threat in the market given its somewhat larger number of units—though Costco enjoys a greater presence abroad (George, Glick, & Glowalla, 2004). We all offer low prices to attract members and provide them with considerable cost savings enough to more than cover membership fees. It is easy for households and businesses to switch their memberships from one club to another. Switching costs are low, strengthening competition. There is considerable similarity in the merchandise offerings. The degree of product line differentiation is weak, which also increases competition. We have to keep in mind that we also compete with other retailers such as Target and Best Buy. Customers can choose to go outside the typical Big Box retailer to make their purchases.

Threat of New Entrants – Low Threat
Potential new entrants into the market are a low threat for Costco. We have the advantage of economies of scale and having learned by doing. Our economies of scale come from better management coordination of processes, long term relationships with our suppliers, and enhanced employee performance with low turnover (Pearce et al., p. 100). The cost for a new entrant would be significant given the capital investment required to start up a warehouse business. Any
Costco has a cost (i.e. price) advantage and would be able to price an entrant out of the market. We must still be mindful of other big-box retailers...

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