CASE - Costco A Different Path

Costco: A Different Path77
In 2010, Costco’s reputation for rock-bottom pricing and razor-thin profit margins
helped the company maintain its position as the nation’s fourth-largest retailer and
the No. 1 membership warehouse retailer, with 572 stores (425 in the United
States), 142,000 employees, and 55 million members. Sales reached $76 billion,
up 9.1 percent, reflecting, in part,
a unique corporate culture that doesn’t just pay lip service to the value of its
employees, but maintains a reputation for honoring that value.
CEO Craig Jelinek, successor to founder and longtime CEO James Sinegal,
believes that the secret to Costco’s success lies in the many ways the company
overturns conventional wisdom. Despite Wall Street criticism, the company is
devoted to a well-compensated workforce and scoffs at the notion of sacrificing
the well-being of its employees for the sake of profits. Average hourly wages of
around $20 smash those of competitors ($10–$11.50 per hour). Costco’s
competitors attempt to improve profits and shareholder earnings by keeping wages
and benefits low. As a result, Costco enjoys a reputation of having a loyal, highly
productive workforce, and store openings attract thousands of high-quality
applicants.
Jelinek is a no-nonsense CEO whose annual salary ($650,000) is a fraction of the

traditional pay for large corporate executives and dramatizes an organizational
culture that attempts to minimize disparity between management and workers.
Luxury corporate offices are out of the question. It is the “in the trenches together”
mind-set that defines Costco’s corporate culture, contributing to a level of mutual
support, teamwork, empowerment, and rapid response that can be activated for
confronting any situation. A dramatic example occurred when employees instantly
created a Costco emergency brigade, armed with forklifts and fire extinguishers,
whose members organized themselves and rushed to offer first aid and rescue
trapped passengers following the wreck of a com- muter train behind a California
warehouse store.
Whether attracting employees or customers, the need for public relations or

advertising is nonexistent at Costco. Sinegal told a reporter for ABC News that the
company doesn’t spend a dime on advertising, with over 140,000 enthusiastic
employee ambassadors spreading the word about Costco to friends and neighbors.
Equal care has been given to organizational design. Jelinek’s belief in a “flat, fast,
and flexible” organization encourages delegation of great authority to local
warehouse managers who have the freedom and authority to make quick,
independent decisions that suit the local needs of customers and employees.
Moreover, Costco’s new store location efforts seek “fit” between the organization
and the community that it serves. Typical suburban locations emphasize the bulk
shopping needs of families and small businesses, and Costco has extended its own
private label, Kirkland Signature. The private label provides additional savings of
up to 20 percent off of products produced by top manufacturers, such as tires made
by Michelin specifically for the Kirkland label.
The rapid expansion from having one store in Seattle to becoming America’s
warehouse club leader and a top global retailer has come with its share of growing
pains, as the organization attempts to adapt to its various environments. In the face
of rapid growth, Costco management has come up against a myriad of new
problems ranging from complaints of a lack of notification for management job
openings to persistent complaints of a glass ceiling, providing few opportunities
for the advancement of women within the organization. In response, the company
has instituted online job postings, automated recruiting, the use of an outside
vendor for hiring, and a recommitment to equity in promotion.
International issues are often more complex and often run up against local needs
and perceptions. For example, efforts to expand into Cuernavaca, Mexico, were
viewed from the company perspective as a win-win situation, opening a new
market and also providing jobs and high- quality, low-priced items for area
shoppers. When the site of a dilapidated casino became available, Costco moved
quickly, but suddenly found itself facing charges of cultural insensitivity in
Mexico. Accusations that Costco was going to build a parking lot on land in
Cuernavaca with significant artistic and national heritage led to negotiations under
which the company set aside millions of dollars to preserve the landscape, restore
murals, and work alongside city planners and representatives of the Institute of
Fine Arts and Literature in Mexico City in the construction of a new, state-of-the-
art cultural center and museum.
Indications are bright for Costco’s future. New CEO Jelinek believes in
maintaining the modest levels of compensation for top management and the
company’s above-average wages and benefits for employees. But questions loom
on the horizon: How will increased globalization alter the strong corporate
culture? Will Costco be able to maintain and expand its loyal customer base in the
face of shifting consumer interests, as reflected in the decline of shopper traffic in
physical stores and increased sales via the internet?
Questions
1. Have you shopped at a Costco store? How do you think a Costco store
compares to Sam’s Club, Target, or Walmart stores? What do you value most
when selecting a low-priced store at which to shop?
2. With respect to competitive strategy, identify and evaluate Costco’s target
customers, its core competence, and how it builds synergy and delivers value.
3. Would you rate Costco’s competitive strategy as pursuing differentiation, cost

leadership, focus, or some combination? Why?

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Costco: A Different Path77

Jelinek is a no-nonsense CEO whose annual salary ($650,000) is a fraction of the

Whether attracting employees or customers, the need for public relations or

3. Would you rate Costco’s competitive strategy as pursuing differentiation, cost

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