Generic and Intensive Strategies used by Costco
Founded in 1983, Costco has grown to become the largest warehouse retailer in the world. In the 21st century competition has grown highly intense and Walmart and Costco are taking the lead in the battle. Costco is not just financially strong but has also grown an impressive presence internationally like Walmart. It has adopted highly innovative practices in terms of operations and supply chain which provide it a competitive advantage. There are two things that Costco is known for, one is the low prices for its members and the other is its excellent customer service which is also an exclusive privilege of the members of this membership based wholesale brand. Any firm that wants to be in the lead position must have one or the other source of sustainable competitive advantage. Michael E Porter had highlighted three generic strategies that a firm could use to achieve competitive advantage. These strategies are cost leadership, differentiation and focus. The third strategy has two subcategories that are cost focus and differentiation focus.
Costco’s strategy can be understood as a mix of cost leadership and differentiation. Apart from managing pretty low costs and great deals for its members, the brand has managed an excellent supply chain. It has differentiated its supply chain from others to reduce the costs of operation. Other areas where Costco has differentiated its business from other retail brands is in terms of HR and customer service. However, these are the sources from which Costco obtains a competitive advantage. Apart from these there are intensive strategies that brands use to grow their brand in the long term. This article is a discussion of both generic and intensive strategies which Costco has utilized to build and sustain a competitive advantage and achieve long term growth.
There are three generic strategies mainly cost leadership, differentiation and focus. The last one has been sub-divided further into categories that are – cost focus and differentiation focus. While cost leadership is the main strategy that Costco has used, one can also see that it has differentiated its supply chain and HR management to be more competitive than its competitors. It is a membership based warehouse company and retail store that sells only to members. Every person buying from Costco is a member and a large part of the revenue is generated from these memberships. However, the membership costs are worth it for the members because the exclusive deals that are made available to them are really great. Members enjoy low prices and most of them make bulk purchases However, unlike Walmart these deals are not available to anyone or everyone. Only the members can avail of these fantastic deals and low prices. Another area where Costco’s services are differentiated from other retailers is in terms of customer service and HR management. Costco has managed its human resources much better than its competitors and they provide excellent customer service to Costco’s members.
However, a well managed supply chain is also a reason that Costco is able to keep its operational costs low and pass the benefits to its members. It has exclusive long term contracts and very good relationships with its suppliers and vendors and since it buys in bulk from them, it is able to buy at very low prices. This is how it manages to keep the prices very low for its members. Costco’s competitive advantage like Walmart also arises from its size. Both retailers make large purchases and are able to ask their suppliers to the lowest prices possible. However, one thing is quite distinct about Costco. While everyone can be a Walmart customer not everyone is a Costco shopper. It s because the memberships are for people who do their shopping once or twice a month and make bulk purchases. Not everyone would like to buy a membership for shopping. So, it is generally the bigger families with good household incomes that are the customers of Costco. However, every Costco membership has its own benefits.
Ansoff’s matrix highlights four intensive growth strategies that the brands can use to grow their sales and market share. They are market penetration, market development, product development and diversification.
Costco has used this strategy to sell more to its existing customer base. Its customers generally make bulk purchases and it is mainly because of the low prices and the attractive deals. Every Costco member can avail of these deals and some of the memberships can provide deals that are more attractive than the general.
It includes introducing your products and services to new markets or segments. Costco has expanded abroad aggressively over the past few years. By June 2016, it had opened 200 warehouses in eight countries including Canada, UK, Mexico, Japan, Korea, Taiwan, Australia and Spain.
It includes developing and introducing new products to your existing customer base. The Kirkland signature brand is Costco’s private label brand. Costco has continued to expand its line of private label brands. About 20 percent of the products found in Costco’s warehouses belong to the Kirkland signature brand. It includes “everything from men’s dress shirts to laundry detergent, pet food to toilet paper, canned foods to cookware, olive oil to beer, automotive products to health and beauty aids”. The most important thing about Kirkland is that it offers a perfect mix of quality and price. Costco also uses its private label brand to develop new products and product categories that compete with the existing brands.
This is another very important strategy that Costco has used to grow its market share and size. It includes entering a new market with a new product offering. While such an endeavor can be costly and risky, the rewards are also great. Costco has diversified into several new areas and the picture below provides a list of the other various kinds of services offered by Costco.
This was a discussion of how Costco has used both generic and intensive strategies to grab a leadership position and grow its brand nationally and internationally.