Business Analysis Project - Costco

Costco Wholesale Corporation
BUS-690
Professor Desa
Section 5 – Group 2
Nadim Ebadi
Alicia Lo
Lei Lei
Kevin Bernaga
Joanna Nguyen
Binbin Li

BUS-690 Report: Costco Wholesale
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Table of Contents
Company Introduction and Strategic Problems .............................................................................. 2
External Environment Analysis ...................................................................................................... 4
Internal Environment Analysis ....................................................................................................... 7
Strategic Analysis and Strategic Recommendations..................................................................... 14
Appendix: Digital Strategy ........................................................................................................... 16
Appendix: PESTLE Analysis ....................................................................................................... 21
Appendix: Statistical Graphs ........................................................................................................ 25
Appendix: References................................................................................................................... 28

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Company Introduction and Strategic Problems
Founded in 1983 in Seattle, Washington by James Sinegal and Jeffrey Brotman, Costco
Wholesale, also known as Costco, is the largest membership-only warehouse retailer and the
second largest retailer in the world. Today, Costco has 741 warehouses around the world, with
most of them located in the United States. In 2016, Costco had over 205,000 employees and 85
million members worldwide. Costco mainly focuses on its “low price but large volume” strategy
and sells various kinds of products, such as foods, clothing, electronics, furniture and home
supplies. Some of Costco’s most well-known products are fresh meat, especially beef, wine and
rotisserie chicken. Costco also has its own gasoline station, pharmacy and auto services.
According to the “2017 Fortune 500,” Costco is ranked 16th
on the list and the “2017 BrandZ
Top 100 Most Valuable Global Brands” rankings announce that Costco is ranked at number 68.
However, since competition within the retail industry has grown very quickly, Costco has
had difficulty with gaining a sustainable competitive advantage in the retail industry. As a result,
other large retail companies such as Walmart and Target have taken away some profits from
Costco. Costco faces various strategic issues which involves issues with Costco struggling to
deal with the increased competition within the retail industry, such as Costco struggling to
expand their geographic/operational reach in order to compete with their competitors (due to not
having enough physical land resources to build new operating facilities around the world),
expand the overall company within the retail industry, increase their revenues/profitability, gain
financial sustainability, and gain a sustainable competitive advantage due to increased
competition from large, well established companies such as Walmart, Target, and Amazon. The
increased competition among retail companies has resulted in Costco’s profitability/revenue gain

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slowly starting to flatten, which can eventually lead to losses in financial sustainability and
losses in sustainable competitive advantages for Costco.
For example, because of increased competition, one specific strategic issue that Costco is
currently facing is determining how to compete with large competitors, such as Walmart, Target,
and Amazon, who are offering alternative, low-priced products of their own, which takes away
some of Costco’s unique features, such as Costco’s low-price bargains, and can ultimately result
in decreasing Costco’s customer base, profits, and revenues. In addition, some online retail
platforms such as Amazon and eBay have also threatened Costco since consumers are more
willing to buy products online today, further increasing the salience and urgency of competitive
pressure on Costco. Furthermore, another strategic issue Costco faces is that Costco does not
have enough physical land resources to operate on. This leads to Costco having less operating
locations and a smaller operational reach than its competitors, causing Costco to have an overall
smaller consumer base compared to its competitors. Costco's competitors, such as Walmart,
Target, and Amazon, have many operating locations around the world, with Amazon operating
internationally as an online retailer, and this leads to these competitors having an increased
consumer base and their public image being spread to reach more customers. This strategic issue
of Costco facing increased competition is urgent and should be immediately addressed as
competitors are beating out Costco in terms of profitability/revenues. For example, based on both
theoretical and empirical evidence in 2017, Costco has “741 total locations and yearly revenues
of approximately $129 billion compared to a popular Costco competitor, Walmart, which has
11,695 total locations and yearly revenues of approximately $485 billion” (Prower 7). Costco
will ultimately need to formulate new strategies that can help them compete with their

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competitors and the increased competition within the retail industry, increase their operational
reach, and broaden their public image in order to attract more consumers.
External Environment Analysis
In regards to the external environment analysis, along with the addition of the general
external environment PESTLE analysis (see Appendix: PESTLE Analysis), we will be using
Porter’s Five Forces Model to analyze Costco’s external environment and will be using the retail
industry as the unit of analysis. By analyzing the external environment of Costco and the retail
industry using the Five Forces Model, we can determine the issues Costco is facing within its
external environment as the company operates in the retail industry, help formulate solutions to
these issues, and determine the attractiveness of the retail industry Costco operates in. As stated
previously, the Costco Wholesale Corporation is one of the largest retailer companies that
require membership to be able to purchase from their store. Costco sells goods in large quantities
at a discounted price which range from fresh produce to home appliances. One of Costco’s
biggest competitors is Walmart, and Walmart is one of the largest discount retailer chains.
Walmart has the ability of targeting the masses because they do not require membership to be
able to purchase from their store. Walmart is known for offering low prices for their products
which include similar products that you could purchase from Costco, but not in bulk. By
conducting an external analysis through using the Five Forces Model, we can ultimately identify
all external factors which can affect Costco’s performance in the retail industry, be able to assess
the levels of threats and opportunities that these external factors may introduce, and be able to
determine the attractiveness of the retail industry that Costco operates in.

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The threat of new entrants is low within the retail industry as it will be hard for new
entrants to compete with large retailers like Costco. This is mainly due to those new entrants
starting out as new businesses while popular retailers like Costco are already well
established/own a large market share within the retail industry and pose as an attractive option to
consumers. Costco also follows a cost leadership strategy and are safe from new entrants as it is
hard for new competitors to enter the market due to Costco offering their products in bulk and at
low prices. Competitive rivalry and the threat of substitutes are high in the retail industry
because there are large, well established chains, such as Walmart, Target, Alibaba, and Amazon,
that are continuing to challenge Costco through providing good deals by offering low prices for
their products as well as many alternatives (or substitutes) to Costco's products. Costco’s
established competitors also have their own way of appealing to the consumers, such as Alibaba
and Amazon, who provide fast and easy shipping/delivery and low prices for their products
through their e-commerce website. Amazon also offers prime membership which gives
customers options for one or two-day shipping, membership discounts for students, and
AmazonFresh which supplies/delivers fresh produce to its customers. Furthermore, Amazon also
bought out Wholefoods, making them an even bigger competitor/substitute to Costco due to
Amazon having a store for their grocery products as well, instead of just being a purely online
supply/delivery company. Overall, in the retail industry, there are many substitute products, such
as substitutes for food products, electronics, clothing, etc., offered through many competitors at
low prices (with the added perks of fast/easy online delivery in regards to Costco’s e-commerce
competitors), ultimately making the threat of substitutes and competitive rivalry high.
Buyers have moderate to high bargaining power against Costco in the retail industry.
Since Costco has so many possible substitutes, buyers have low switching costs as they have the

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choice to shop at various competitors offering substitute products. If buyers don’t like the prices
Costco offers, they can look at their competitors, like Walmart or Amazon, to see if the product
they are looking for is available. However, compared to other retailers, many of Costco’s
products are sold in bulk and are provided at low prices, so customers often shop for a month’s
worth of goods. Costco retains its customers by having a membership and offering low prices for
their products/bulk products which makes the cost of switching to a competitor high for Costco’s
loyal customers. Also, since members have to pay an annual fee to shop at Costco, they feel the
need to take advantage of their deals considering how there are rewards exclusive for members.
Suppliers have low to moderate bargaining power against Costco in the retail industry
as there are large populations of suppliers and no single supplier can impose its demands on
Costco. However, Costco also often makes deals with the supplier companies they partner with
to determine how much Costco needs to pay supplier companies to supply them with products, as
well as how much the supplier companies are paying Costco to carry their products in some
cases. As a result of the bargaining power of suppliers, Costco can often have new products, as
well as supplier products, in their stores for short periods of time and sometimes will not carry
those products anymore after that period is over. Furthermore, Costco ultimately determines
whether a product will stay in their store or not depending on the product’s success (if customers
will continue to buy the product/how often). Overall, the cost of a product needs to be worth
Costco’s investment towards a supplier and products should also be popular enough to attract
need/demand from consumers.
Based upon our external environment analysis of Costco and using the retail industry as
our unit of analysis with Porter’s Five Forces Model, we determine the profit potential
(attractiveness) of the retail industry that Costco operates in to be very high. This is mainly due

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to the fact that, in the retail industry, various retail products are always in-demand, which attracts
many consumers towards those markets. Furthermore, retail products also tend to be on a
constant slope of growth as consumers continue to purchase these products every day. If Costco
is able to constantly supply the consumer demand of retail products in the retail industry through
offering retail products at lower prices than their competitors, Costco will gain benefits, such as
increased profits/revenues as well as increased company growth. Overall, with the various
benefits that Costco can obtain/provides from operating in the retail industry, this may lead to
Costco increasing their profitability/gaining financial sustainability, and achieving a sustainable
competitive advantage within the retail industry, ultimately contributing to company growth and
increasing the profit potential (attractiveness) of Costco and the retail industry as a whole.
Internal Environment Analysis
Internal Environment Introduction: Within the Costco company, there are many
important internal environment factors which affect the company as a whole as well as the retail
industry the Costco company competes in. With an internal environment analysis on the Costco
company, some key internal environment factors include the management of company’s
tangible/intangible resources, management of business capabilities, effectiveness/efficiency of
human resources, clarity in organizational direction, and financial sustainability. All of these
internal environment factors are internal factors which can ultimately influence the company's
choices. By conducting an internal environment analysis, many of Costco’s resources,
capabilities, sources of competitive advantage, core competencies, and strengths/weaknesses can
be brought to the surface and prioritized/improved on in order to help Costco become more

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successful within the retail industry. Furthermore, analyzing Costco’s internal environment
factors will also help drive Costco’s decisions and determine their opportunities and risks.
Tangible and Intangible Resources: In regards to resources, the Costco Wholesale
company possesses a variety of both tangible and intangible resources. In terms of
physical/tangible resources, Costco possesses resources such as “manufacturing/distribution
plants, buildings, land, specialized machinery, operating assembly lines, oil fuels, electricity,
systems, company vehicles, supplier companies” (Prower 3), and all other retail specific
equipment required to produce/distribute their products. In terms of intangible resources, Costco
possesses resources such as Human Resources (employees, managers, factory workers, board of
directors, etc.), partnerships with supplier companies, business methodologies, and copyrights,
patents, and trademarks for Costco’s distribution of various retail products as well as Costco’s
own products, such as the Kirkland brand. Costco’s retail products also include a variety of
categories ranging from electronics to office supplies, apparel, cosmetics, and food and drink
products. Because Costco has access to various resources, Costco is able to efficiently produce a
variety of products which attracts more consumers to their retail markets, ultimately generating a
larger consumer base for Costco, which leads to increased profitability, financial sustainability,
and overall growth for the Costco company.
Capabilities: In terms of capabilities which contribute to the execution of Costco's
business strategies, Costco is able to “efficiently produce and allocate their tangible and
intangible resources/low-priced products towards various markets as well as effectively utilize
their human resources” (Estevez 7) properly in ways that will lead the company towards success
within the retail industry through cutting down on operating costs, generating profits, and
potentially gaining a sustainable competitive advantage. Costco's other capabilities also often

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involve investing their resources towards certain industry areas depending on the state of the
market/economy, managing employees to satisfy company goals, hiring managers for strategic
management, using specialized machinery to produce/distribute their products at an exponential
rate, and offering low prices for their retail products compared to their competitors, all of which
can help Costco compete with its competitors, become more successful, and grow within the
retail industry as a whole. Costco also has the capability of innovation/creativity by being the
largest American membership-only warehouse club and offering low prices for their products
through their exclusive memberships/offering exceptional customer service (with services such
as unparalleled return policies), beating out many other retail competitors in terms of product
prices/services and attracting more customers in the process. Through developing and cultivating
these capabilities and by focusing on the areas where Costco excels, Costco will be able to gain
an advantage in the competitive environment. By utilizing their capabilities, Costco can
potentially gain profitability, financial sustainability, and a sustainable competitive advantage
within the retail industry. With these capabilities, the business strategy of Costco will also be
further reinforced and can ultimately contribute to the overall company’s success and growth.
VRIO Analysis: Through conducting a VRIO analysis, we have determined that many of
Costco's resources and capabilities, specifically combinations of their specialized
manufacturing/distribution plants resources and capability to use specialized machinery to
produce/distribute their retail products at exponential rates, are considered to be Costco’s main
sources of competitive advantage. For example, in regards to value, these resources and
capabilities have value as they are relatively expensive to obtain, ranging up to “$100-200
million for each manufacturing/distribution plant with specialized machinery” (Lewis 9) (value
assigned point value of 0.5). Furthermore, these resources and capabilities that Costco possesses

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are rare as specialized manufacturing/distribution plants and machinery tailored to manufacture
and distribute a wide range of retail products are hard to find, making these resources/capabilities
relatively limited for other competitors to find and utilize (rarity assigned point value of 1). Due
to the overall rarity and costs of purchasing/utilizing these resources/capabilities of specialized
machinery and specialized manufacturing/distribution plants, Costco's competitors will also have
some difficulty imitating these resources and capabilities (imitability assigned point value of
0.5). Lastly, these resources and capabilities are organized to capture value as Costco's resources
of specialized manufacturing/distribution plants and machinery are used to manufacture and
distribute Costco's low-priced retail products at exponential rates, ultimately allowing Costco to
constantly supply the consumer demand for retail products by providing products at low-prices,
beating out some of Costco's competitors in the process, such as Target (organized to capture
value assigned point value of 1). Based on the VRIO analysis of Costco's resources and
capabilities, we have determined that Costco has an overall point value of 3 out of 4, giving
Costco a temporary competitive advantage within the retail industry. However, Costco will need
to further prioritize their resources and capabilities towards overall company growth/physical
expansion in order to achieve a sustainable competitive advantage. As a result, we have also
listed Costco's strengths and weaknesses within its internal environment and the company's core
competencies/sources of competitive advantage in order to determine strategic options that
Costco can take to achieve a sustainable competitive advantage within the retail industry.
Sources of Competitive Advantage: In terms of gaining a sustainable competitive
advantage in the retail industry and based on our VRIO analysis, Costco will have the most
success with gaining a competitive advantage by exploiting their sources of core competencies
and various capabilities, such as through the effective utilization of Human Resources towards

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company goals, offering low prices for their retail products compared to their competitors,
representing themselves as a middle-class brand/low-cost provider of quality goods, and
specifically through the possession of Costco’s many economically profitable physical resources,
such as their manufacturing/distribution plants, supplier companies, land, and specialized retail
machinery used towards Costco’s capability of producing/distributing their products at an
exponential rate. These physical resources also appear to be sources towards gaining a
sustainable competitive advantage as the markets for electronics, office supplies, food/drink, and
apparel products created through these physical resources are always growing/in demand,
making the resources/products highly sought after. Through providing a constant supply of their
products at low/optimal prices within the retail industry, Costco can efficiently increase their
profits, generate revenue, and ultimately gain a sustainable competitive advantage within the
industry. Furthermore, with a sustainable competitive advantage, Costco will be able to expand
their public image to reach more customers and also attract a larger consumer base towards their
overall company. Gaining a sustainable competitive advantage can also lead to company growth
within the retail industry and can be used as an advantage to compete with Costco’s competitors.
Core Competencies: The core competencies of the Costco company heavily revolve
around the various profitable physical resources and capabilities the company possesses such as
manufacturing/distribution plants, supplier companies, buildings, land, and specialized
machinery used to produce/distribute their retail products at an exponential rate as well as the
effective utilization of Human Resources within the company, offering low prices for their retail
products compared to their competitors, partnerships with supplier companies, and the ability to
represent themselves as both a middle-class brand and low-cost provider of quality goods which
attracts a larger consumer base. Furthermore, because retail products are always in demand, on a

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slope of growth in the industry market, and can be constantly supplied by Costco at low prices,
these physical resources used to produce/distribute their low-priced products in combination with
Costco’s capabilities, along with the effective utilization of Human Resources such as directing
employees, managers, and board of directors to work towards company goals, partnerships with
supplier companies, and the ability to represent themselves as a middle-class brand/offer lower
prices for their retail products compared to their competitors, are considered to be the main core
competencies which give Costco the ability to be competitive in the marketplace. These core
competencies ultimately provide Costco with an advantage that helps distinguish the company
from its competitors within the retail industry. By distinguishing itself, Costco can ultimately
offer better alternatives/lower prices for various retail “in-demand” products. With Costco
distinguishing itself from its competitors, Costco can gain a larger consumer base and generate
profitability, financial sustainability, and achieve a sustainable competitive advantage.
Costco – Strengths and Weaknesses: Costco's strengths revolve around the core
competencies exploited through their possession of economically profitable manufacturing
plants, distribution plants, and specialized machinery physical resources used to
produce/distribute their products at efficient rates, ability to present themselves as both a middle-
class brand and low-cost provider of quality goods, offering low-priced retail products compared
to their competitors, and capabilities such as effective human resource utilization, utilization of
specialized machinery to produce/distribute products, and efficient resource allocation through
various markets. Costco also has weaknesses as they lack ways to deal with the increased
competition within the retail industry and this leads to Costco’s competitors, such as Walmart,
Target, and Amazon, taking away some of Costco’s unique features by offering low prices and
alternative/unique products of their own. Costco also lacks other tangible resources such as not

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owning significant amounts of land to operate on. This lack of land resources leads to a lack of
capabilities with Costco not having an extensive geographic/operational reach, which other
competitors in the retail industry, such as Walmart and Amazon, do possess, resulting in a
smaller consumer base for Costco. Furthermore, Costco also lacks capabilities such as
establishing effective organizational control and an establishment of proper organizational
hierarchy throughout all of their operating locations which, in the long run, can ultimately affect
Costco negatively in the retail industry in terms of growth, profits, and physical expansion.
Through capitalizing on their strengths and providing solutions to their weaknesses, Costco will
be able to create a stronger representation for the company in the retail industry and in turn, lead
the company towards growth.
Internal Environment Analysis Conclusion: Overall, by focusing on the internal
environment of Costco as well as the retail industry, the main weaknesses and strengths of
Costco can be brought to the surface in terms of owned resources (tangible, intangible, Human
Resources), gaining profitability/financial sustainability, and utilization/exploitation of core
competencies and capabilities. These internal factors can ultimately lead to influencing the
company's decisions, activities, and overall business approach. Analysis of Costco's internal
environment can influence other key internal factors as well, such as employee behavior,
leadership styles, and organizational management. By conducting an internal environment
analysis, Costco can also determine their opportunities/risks when it comes to making business
decisions and gaining overall company growth. Furthermore, through Costco's internal
environment strength factors determined by internal environment analysis, Costco can ultimately
prioritize the company's goals in line with their internal environment factors in order to achieve

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growth within the company, gain a sustainable competitive advantage, and achieve
growth/expansion within the retail industry Costco operates in.
Strategic Analysis and Strategic Recommendations
Strategic Analysis: In regards to business level strategy and international strategy,
Costco follows a cost leadership strategy. Through a cost leadership strategy, Costco aims to
operate with the lowest cost of operation in its industry and provide their retail products at the
lowest prices compared to their competitors. By following a cost leadership strategy, Costco is
able to reduce various expenses, such as operating, resource (ex. specialized machinery), and
management costs, as well as attract more consumers from various regions/markets by
producing/selling their products/bulk products at low prices and expanding themselves through
partnerships with supplier companies (both nationally and internationally). With having the
ability to reduce expenses, Costco will be able to use more of their profits/revenues towards
manufacturing their products at increased rates, constantly supplying consumer demand, and
expanding their operational reach by purchasing more land resources. Furthermore, by attracting
more consumers, this will in turn lead to a larger consumer base for Costco which results in
Costco gaining increased profitability, financial sustainability, and a potential sustainable
competitive advantage within the retail industry. Costco also follows a value-creating corporate
level strategy, which allows Costco to edge out its competitors by gaining more market share.
Through Costco's corporate level strategy, Costco uses a cost strategy of applying discounts to
their products offered through forms of memberships, selling their products in bulk, and offering
their products at low prices in order to draw more customers towards their markets, ultimately

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further increasing Costco’s profitability. Overall, by following a cost leadership business
level/international strategy and a value-creating corporate level strategy, Costco will have the
power to continue to compete with its competitors, such as Walmart, Target, and Amazon,
expand themselves within the retail industry, and experience increased company growth.
Strategic Recommendations: One of the biggest threats to Costco is the increased
competition they face within the retail industry. With many large, well established competitors,
such as Walmart, Target, and Amazon, Costco is beginning to lose their attractive and unique
qualities as these competitors are also able to offer their own alternative/substitute products at
low prices. Because of this, we have created two strategic options, guided by the external and
internal environment analysis as well as Costco’s sources of competitive advantage, that Costco
can take to compete with their competitors and gain their competitive advantage once more.
First, besides being known as a store where bulk products can be bought at low prices,
Costco is also recognizable by their own in-store brand, Kirkland. Kirkland Signature products
range from food/drink, to liquor, to clothing. Even though Kirkland is a substitute product to
brand names, the quality is known to be very good. As a result, Costco can take advantage of
their own product and use it to expand. So far, the only place to buy Kirkland products is through
Costco, but if the company is able to create partnerships with other retailers, then consumers
would be able to see Kirkland products on the shelves of their local grocery or retail stores.
Doing this gives Costco a chance to expand their name as well as products, giving them a more
sustainable competitive advantage, and at the same time, the ability to create more revenue for
themselves. One of the advantages of a competitor, such as Walmart, is that the average
consumer can go into their store and buy exactly what they need, and can also go to Sam’s Club
if they need to buy in bulk. Therefore, having these options for Costco, through their Kirkland

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products, can help equalize the competition in the retail industry. Costco can also use their
source of competitive advantage in regards to their possession of economically profitable
resources and specialized machinery to further create increased amounts of their Kirkland
products at efficient rates, ultimately leading to increased distribution and potential increased
revenues/profitability from their products reaching and supplying more consumers.
Second, since Costco is already very successful in providing and efficiently selling bulk
packaged products to the average consumer, mainly through utilizing their source of competitive
advantage by representing themselves as a middle-class brand/low cost provider of quality
goods, it would also be a good strategic move and innovative strategy for Costco to prioritize
their resources and capabilities towards creating more separate warehouses that only cater to
businesses’ needs as well. These warehouses would sell office supplies for corporate offices,
ingredients by the bulk for restaurants, plain pieces of clothing for clothing printing companies,
etc. Therefore, through creating this chain of specialized warehouses, Costco would not only
increase their reputation, revenue, and operational reach, but also their inventory turnover rate.
Furthermore, from these recommendations, Costco will also need to prioritize and utilize
their sources of competitive advantage (as previously stated) and their resources/revenues
towards physical expansion in order to increase their operational reach and be able to compete
with their competitors through gaining a larger consumer base. Costco can do this by using their
revenues to buy more land resources, or by using their resources/revenues to create partnerships
with other companies and advertise their products in their partner’s stores in order to increase
their physical presence. With these recommendations, along with Costco's methods of adopting a
digital strategy (see Appendix: Digital Strategy), Costco has the opportunity to further grow their
business to be able to reach more consumers and become a threat to their competition once more.

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Appendix: Digital Strategy
TO: W. Craig Jelinek – CEO of Costco Wholesale
FROM: Group 2 – Nadim Ebadi, Alicia Lo, Lei Lei, Kevin Bernaga, Joanna Nguyen, Binbin Li
DATE: October 23, 2017
SUBJECT: MEMO – Digital Strategy Recommendations: Costco Wholesale
Following a digital strategy is important as it can lead towards increased maturity and growth for
an overall company. We strongly believe that through the integration of new digital strategies,
Costco will be able to seek new levels of competitive advantage within the retail industry. With a
competitive advantage, Costco will also be able to deal with the increased competition of the
retail industry. Furthermore, through the implementation of new digital strategies, Costco can
gain increased competitive power over its competitors and ultimately attract a larger consumer
base. With Costco we have looked at 3 characteristics we can adopt from the Deloitte strategy
report in order to become "digitally mature." Overall, if Costco is able to successfully implement
all, or even some, of these characteristics, we believe that Costco will become more “digitally
mature” and be able to fall in line with today’s digital age, ultimately allowing Costco to attract
more consumers in the modern digital world, expand their customer base, gain increased
profitability, financial sustainability, company growth, and a potential sustainable competitive
advantage within the retail industry.
Characteristic 1: Pgs. 6-7 – “Working Backwards from a Future Vision”
One characteristic we strongly believe that our company should adopt in order to become
"digitally mature" involves turning the traditional strategy development process on its head and
“creating a digital strategy that transforms” by first, as Benn Konsynski, a professor of
Information Systems and Operations Management at Emory University, proposes, setting a
future vision for the company’s goals and then “working backwards before plotting the
organization's next steps through the analyzation of new company capabilities” (Kane, Palmer,
Phillips, Kiron, and Buckley 8). The Costco Wholesale company operates within the retail
industry where various products are always in-demand and as a result, Costco has the potential
for high growth rates and achieving overall success for the company. Some of Costco's
implementations of its capabilities includes the company being able to efficiently produce and
allocate their tangible and intangible resources/low-priced products across various industry
markets, investing their resources towards certain industry areas depending on the state of the
market/economy, and offering low-prices for their retail products compared to their competitors.
However, in order to become closer towards "digital maturity," Costco must also implement the
characteristic of an organizational direction which is influenced by groups instead of individuals
as well as continue to analyze and utilize their capabilities. Furthermore, this implementation of
organizational direction and continuation of analyzing/utilizing company capabilities is also
noted as a step towards becoming “digitally mature” as stated in the article.
One way to implement this characteristic and create an organizational direction towards "digital
maturity" involves Costco being able to set a future vision and find new capabilities towards

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effectively utilizing their resource areas, such as their Human Resources. As a result, Costco can
set a future vision of effectively utilizing their Human Resource capabilities in ways that will
lead the company towards success within the retail industry, which can also ultimately lead to
generating profits/revenues, gaining a sustainable competitive advantage, and expanding the
company within the retail industry as a whole. For example, Costco can effectively utilize their
Human Resources in new, specific ways to lead the company towards growth/success, such as
through using their Human Resources towards implementing new technologies to upgrade their
point-of-sale/advertising systems and online websites to fall in line with the digital age.
Furthermore, Costco can also revise their international business strategies by utilizing their
Human Resources to create partnerships with international supplier businesses in order to further
expand themselves within the retail industry and attract more consumers from international
markets. Effective Human Resource utilization will ultimately contribute to increased efficiency
in the daily operations of the Costco Wholesale company as well. In these ways, through
effective Human Resource utilization, an effective organizational direction can then be
portrayed, which is ultimately influenced by groups rather than just individuals.
Costco can also utilize their capabilities towards "digital maturity" through performing extensive
research in finding more ways of effectively and efficiently investing/allocating their resources
and implementing new resource technologies, such as advanced specialized machinery used to
produce/distribute Costco’s various retail products, new manufacturing/distribution factories for
the various products Costco sells to consumers, etc. Another way to implement this characteristic
towards "digital maturity" involves Costco setting a future vision in terms of determining where
to invest and allocate their resources/resource technologies beforehand. Costco can then use
extensive research through studying trends, market prices, economies, etc. and work backwards,
investing/allocating their resources/resource technologies towards certain industry areas in which
they predict will create profitability for the company, which ultimately depends on the
information gained from studying the market/economy, trends within the retail industry,
managing employees to satisfy company goals in resource investment, and utilizing managers for
strategic management. For example, when looking at the recent market economy for electronics
such as smartphones, one can observe demand increasing over time as smartphones continue to
develop while supply remains constant. If Costco is able to predict when the supply of specific
smartphones will decline and in turn, provide the supply of those specific smartphone electronics
from certain carriers at optimal prices themselves in their retail stores, such as through Costco
Wireless, which is Costco’s phone store which often offers big savings on various phones from
many carriers, and/or through utilizing their new resource technologies, Costco will likely see an
increase in sales and in the growth of the company. This example reflects a way in which Costco
can set a future vision of, for example, supplying smartphones at a predicted supply decline, and
then ultimately benefit from the scenario due to the extensive research conducted beforehand.
Overall, with the implementation of these capabilities and through setting a future vision, we
strongly believe that Costco will be able to work backwards and implement their organizational
direction and capabilities in ways which will lead the company towards "digital maturity."
Furthermore, through creating a strategy that transforms and working backwards from a future
vision, Costco may be more likely to gain increased exposure and a larger customer base.
Through increased exposure and a larger customer base, Costco can then gain increased

Page 19
profitability and financial sustainability. These benefits can also lead to Costco obtaining
increased competitive power which will give Costco more power to compete with its major
competitors, such as Walmart and Amazon, and potentially lead to Costco achieving a
sustainable competitive advantage within the retail industry. Lastly, through the process of taking
steps towards becoming more "digitally mature," the business strategies of Costco will be further
reinforced and can ultimately contribute to the overall success of the company.
Characteristic 2: Pgs.10-11 – “Sparking New Ideas”
Another characteristic Costco could adopt to become more digitally mature is sparking new
ideas. One way that Costco can spark new ideas in order to gain increased digital maturity is
through innovation. The idea of innovation is a very important factor when it comes managing a
large company like Costco, attracting more consumers towards the company, and leading the
company towards overall success. The Deloitte Strategy report states that "in reality, many new
ideas arise through collaborative efforts among people of different backgrounds (Kane, Palmer,
Phillips, Kiron, and Buckley 10).” For example, in order to incorporate innovation through
collaboration, Since Costco has different departments within its stores, the company could
specifically create cross-functional teams and let those teams collaborate with each other to
innovate new digital products or services, such as implementing electronics repair services, high-
tech lounge areas, digitalized in-store events, exclusive digital branded/discounted products such
as electronics, etc., in order to attract more customers. Furthermore, within the competitive
atmosphere found in the workplace, collaboration becomes a key factor that can be utilized to
spark new ideas towards innovation and lead a large company like Costco to become more
digitally mature. In addition, the Deloitte Strategy report also emphasizes the importance of
“people of different backgrounds.” Since each person can have different life/work experiences
and different cultural backgrounds, Costco could hire employees from different
cultures/backgrounds in order for various employees to share their unique knowledge/ideas for
innovation.
Another way that Costco can spark new ideas to become more digitally mature is not only by
collaborating within the company, but also outside of it. In order to get a better sense of what
their consumers want, Costco could survey and consult with small focus groups of randomly
picked customers. The purpose of focus groups is to have informed decision making, strategic
planning, and resource allocation. Focus groups also add a human dimension to impersonal
gathered data. Within the survey, Costco can ask questions regarding what the people in the
focus groups want to see in Costco’s stores. For example, one of the weaknesses of other similar
competitor companies, such as Walmart, is that their stores are packed with products, shelves,
and racks. Because of this, there is very little room to move around, especially when the store is
packed full of holiday shoppers. Therefore, the company can get a better understanding of how
to improve their stores in regards to environment, organization, and accessibility, especially
through implementing digital technology. Costco can benefit greatly from focus groups because
they would obtain in-depth information about the feedback and feelings of groups of people who
shop regularly at their stores. Executing focus groups can also save time and money compared to
individual interviews or surveys. The best people to ask for new ideas are sometimes the ones
that it affects directly. By collaborating with actual customers, Costco can learn “what the people

Page 20
want” and deliver. By showing that customer input is valued, Costco will build more trust with
their consumers, ultimately driving customers to continually shop at Costco’s stores.
Characteristic 3: Pgs. 9-10 – “Taking Risks Becomes a Cultural Norm”
Another characteristic that Costco could adopt to be more “digitally mature” is through taking
risks. In fact, it has become a “cultural norm” for companies to take risks. The Deloitte Strategy
report states about how “large companies nowadays, such as Facebook and Google, take on big
risks while other large companies are still taking minimal risks” (Kane, Palmer, Phillips, Kiron,
and Buckley 9). An example of a company taking big risks is Amazon, which was able to attract
more consumers and target the masses across grocery markets through purchasing Whole Foods
in order to expand their AmazonFresh subsidiary, an Amazon subsidiary which supplies and
delivers fresh produce to its customers. Through the purchase of Whole Foods, Amazon now has
physical locations which they can use to store and distribute their fresh produce across various
national and international regions. If Costco Wholesale were to take bigger risks, like Amazon,
in order to become more “digitally mature” and expand themselves within the retail industry
through the prioritization of their various resources, capabilities, and/or core competencies,
which were previously mentioned throughout this report and in the first digital strategy
characteristic, Costco could potentially target a larger consumer audience which can lead to an
increased customer base. With an increased customer base, Costco could gain increased
profitability, financial sustainability, more competitive power, and a potential sustainable
competitive advantage within the retail industry.
One specific way that Costco can take risks in order to become more “digitally mature” is by
taking the risk of investing their specialized manufacturing/distribution machinery resources,
which are used to manufacture/distribute Costco’s retail products at efficient rates and low
prices, towards certain product markets. For example, if Costco conducts prior research through
studying market trends, price graphs, etc. and the company predicts that, say, the beverage
industry for water will see an increase in profit margins in the near future, Costco can then utilize
their technological capabilities through investing a majority of their specialized
manufacturing/distribution machinery resources solely towards manufacturing and distributing
more of their Kirkland Signature water products at increased rates, such as through utilizing
digital manufacturing and sales systems (ex. digitalized product assembly machinery, vending
machines, etc.). With increased manufacturing and distribution of their water products and
selling their water products at low prices during the predicted increase of profit margins in the
near future, these products will be able to reach more consumers due to the increased supply as
well as attract more consumers due to Costco’s low-price offerings, ultimately allowing Costco
to target a wider audience, gain a larger customer base, and increase the sales of their Kirkland
Signature water products. While this is a risk that Costco takes in exchange for increased
profitability, Costco can minimize this risk through further research in order to increase the
confidence interval of their resource investments. Furthermore, due to the extensive prior
research Costco conducted before investing their resources in this scenario/example, this risk of
resource investment has already become minimized and the chance of profitability within this
scenario has greatly increased.

Page 21
Another specific way that Costco can take risks in order to become more “digitally mature” is by
taking the risk of buying out other companies or expanding their markets into different
industries. As an example, Amazon was originally an online book store but branched out into
selling electronics and groceries. If Costco were to further expand into their retail industry or buy
out another company in a different industry, it would allow Costco to capture more consumers.
For example, Costco can utilize Costco Travel, a subsidiary of Costco Wholesale which offers
various travel deals and leisure travel for its members, in order to partner or merge with other
travel companies. By partnering with travel agencies, the company that provides the travel can,
for example, allow Costco foods to be sold during travel time through utilizing digital sales
systems, such as selling Costco’s food court items or their frozen foods, which can ultimately
lead to Costco gaining increased recognition within the travel industry. Costco could also
become more “digitally mature” by taking a risk through carrying different kinds of exclusive
items. For example, since Costco already has their own Kirkland Signature brand, Costco could
branch out the Kirkland brand to different items, such as electronic products. As a result, Costco
could develop their own electronic products through the Kirkland Signature brand (ex. TVs,
smartphones, cameras, etc.) instead of selling other electronic products from brands like
Samsung or Apple (ex. Samsung/Apple TVs, smartphones, etc.), which is similar to what
Amazon has done by coming out with their own Amazon Kindle. However, by taking this risk,
Costco will have to spend more on research and development in order to create another product.
Appendix: PESTLE Analysis
Note: The following PESTLE analysis write-up we constructed in regards to Costco’s general
external environment analysis was also used towards further helping create our overall external
environment analysis on the Costco Wholesale company and Costco’s retail industry through the
use of Porter’s Five Forces Framework.
Costco’s General External Environment Analysis: PESTLE Factors Analysis
In regards to the general external environment analysis, Costco’s general external
environment heavily revolves around the relevant segments of political, economic, socio-
cultural, technological, legal, and ecological factors, also known as the PESTLE factors. In terms
of Costco’s political factors, Costco must consider following the laws and regulations enacted

Page 22
by administrations, such as the FDA, OSHA, and IRS, which fall in line with
manufacturing/distributing the company's retail products of electronics, apparel, cosmetics,
office supplies, gas, and food and drink. For example, since Costco manufactures retail products
through a variety of categories ranging from electronics to office supplies, apparel, cosmetics,
gas, and food and drink products, Costco must follow the laws and regulations put in place in
order to ensure their products will be safe when it comes to customer use. In terms of Costco’s
economic factors, Costco must determine the effect of their retail and gas products’ prices on
the economy, set taxation levels on their products, adjust their product’s prices for inflation,
determine how stable the economic environment will be when distributing their products in
various markets, and maintain a constant level of supply to match the level of demand for their
products. Furthermore, since Costco manufactures and distributes a wide variety of retail
products ranging from electronics to apparel, cosmetics, gas, office supplies, and food and drink,
Costco must research the market economy of each of these categories to maintain economic and
financial sustainability in operating in these markets.
In terms of Costco’s socio-cultural factors, Costco must consider the
ethical/environmental concerns on how Costco manufactures their products in terms of effects on
the economy, overall environment, and people in the area. These ethical concerns can ultimately
limit the appeal of Costco's products among socially-conscious consumers, leading to a decrease
in sales. For example, Costco’s gas product is a key socio-cultural factor when it comes to
environmental effects and ethical concerns for the environment. Costco must also consider other
socio-cultural factors which involve the well-being of their employees and customers, such as
distributing salaries/wages appropriately, constantly improving the work environment/customer
experience, etc. In terms of Costco’s technological factors, Costco's competitors within the

Page 23
industry, such as Target and Walmart, can manufacture similar retail products through utilizing
technology towards outsourcing/production efficiency and can thus duplicate the services that
Costco provides. The growing demand for the products companies like Costco
manufactures/distributes can in turn lead to more competitors coming into the industry and
therefore causing threats of new entrants. New entrants will further increase competition and can
deter consumers towards the competitors' products. The emergence of innovative technology is
another technological factor to consider as “innovative technology can ultimately lead to the
emergence of new competitors and the creation of introducing better alternatives than physically
shopping for Costco's retail products” (Smithson 7). An example of innovative technologies is
the emergence of more e-commerce websites like Amazon, who are major competitors of
Costco, which offer consumers the convenience of shopping in their own homes instead of
physically going to places like Costco.
In terms of Costco’s legal factors, Costco must make sure to not violate any laws and
regulations (set by the FDA, OSHA, IRS, etc.) when it comes to manufacturing and distributing
their retail products in order to avoid legal issues as well as maintain consumer safety when it
comes to product usage. For example, an important “regulation the Costco company has to obey
is the CPSIA (Consumer Product Safety Improvement Act)” (Prower 4). This act addresses
regulations on voltage safety controls for electronics, oil/gas safety controls, lead safety in
products, choking hazard safety across various items, etc. Other legal factors Costco must
consider involves following various licensing regulations, taxing regulations, and taking trade
regulations into account while operating in the retail industry. Lastly, in terms of Costco’s
ecological factors, Costco’s ecological factors heavily revolves around the effect that creating
Costco's products will have on the environment as a whole, such as manufacturing plastic bottles

Page 24
for Costco’s Kirkland water. Another ecological factor to consider is the process involved in how
Costco will effectively dispose of their products in environmentally friendly ways, such as
disposing their various electronic products and Kirkland water’s plastic bottles through
recycling. Furthermore, through the process of Costco manufacturing and distributing their
products, other ecological factors can ultimately surface such as pollution, greenhouse gases,
usage of fossil fuels, and effects on global warming.
Overall, by conducting a general external environment PESTLE analysis and focusing on
Costco’s PESTLE factors, we can gain an understanding of the impact key macro-environmental
factors have within Costco’s external environment, further conduct an external environment
analysis through Porter’s Five Forces Framework, and help identify, address, and provide
solutions to problems that arise within Costco’s general, external, and internal environment.
Through identifying and attempting to solve these problems, Costco can become more efficient
and effective within the retail industry. With improved efficiency/effectiveness, Costco may be
able to increase profitability, gain financial sustainability, and be able to compete with its major
competitors, such as Walmart and Amazon. Furthermore, this may lead to Costco potentially
achieving a sustainable competitive advantage within the retail industry. Gaining a sustainable
competitive advantage can then lead to overall company growth and expansion within the
industry.

Page 25
Appendix: Statistical Graphs
1-A: Graph 1-A depicts the price index of office supplies, which is one category of Costco's
retail products, increasing throughout the years and also shows a constant growth curve as of
2016.

Page 26
2-A: Graph 2-A depicts the stock price % change of Costco, which is shown as COST,
witnessing relatively minimal, stable increases and decreases from November 2015 through
September 2016 while Amazon (AMZN) stock price % change experiences sharp increases and
decreases over time. S&P 500 stock % price change is also stable and is similar to Costco’s price
% change.

Page 27
3-A: Graph 3-A depicts Costco's yearly revenues as of 2015 compared to one of its main
competitors, Amazon. It can be observed that Costco’s yearly revenues portray a steady increase
while Amazon’s yearly revenues have drastically increased starting from 2010.

Page 28
Appendix: References
Butler, Renee. “4 Problems with Costco's Business Model (COST)." investopedia.com. IAC, 12
Jan. 2016. Web. 2 Oct. 2017. <http://www.investopedia.com/articles/markets/011216/4-
problems-costcos-business-model-cost.asp?adtest=mobile-lazy-load-0>.
Cardenal, Andres. “Stock Performance: Amazon vs. Costco.” media.ycharts.com, The Motley
Fool, 14 Sept. 2016. Web. 17 Sept. 2017.
<https://media.ycharts.com/charts/1dcc99af0f176ed8a7a4e8de8faa664e.png>.
Estevez, Rosa. “Organizational Environment: Internal Analysis.” coursera.org. Course Era
Publishing, 12 June 2014. Web. 14 Sept. 2017.
<https://www.coursera.org/learn/prresearch/lecture/ZkEL0/organizational-analysis-part-
1-internal-environment-and-public-perception>.
Kane, Gerald C., Doug Palmer, Anh Nguyen Phillips, David Kiron, and Natasha Buckley.
“Strategy, not Technology, Drives Digital Transformation.” dupress.deloitte.com.
Deloitte University Press, 18 August 2015. Web. 18 September 2017.
<https://dupress.deloitte.com/content/dam/dup-us-en/articles/digital-transformation-
strategy-digitally-mature/15-MIT-DD-Strategy_small.pdf>.

Page 29
Kokemuller, Neil. “What Are Internal & External Environmental Factors That Affect Business?”
smallbusiness.com. Aceloce Publishing, 3 June 2017. Web. 20 Sept. 2017.
<http://smallbusiness.chron.com/internal-external-environmental-factors-affect-business-
69474.html>.
Lewis, Robert. “Costco An American Company." britannica.com. Encyclopedia Britannia Inc.,
24 Aug. 2014. Web. 8 Oct. 2017. <https://www.britannica.com/topic/Costco>.
Lutz, Ashley. “Costco's Simple Strategy for Outperforming Wal-Mart and
Target." businessinsider.com. Business Insider Inc., 30 Sept. 2014. Web. 18 Oct. 2017. <
http://www.businessinsider.com/costcos-simple-strategy-2014-9>.
Munoz, Vincent. “Office Supplies: Price Index.” fred.stlouisfed.org, FRED, 9 Oct. 2016. Web.
21 Oct. 2017.
<https://fred.stlouisfed.org/graph/fredgraph.png?id=PCU4532145321&nsh=1>.
Prower, Miles. “Costco Wholesale Corporation SWOT and PESTLE Analysis.”
swotandpestle.com. Holistics Publishing, 15 May 2017. Web. 10 Sept. 2017.
<http://www.swotandpestle.com/costco-wholesale-corporation>.
Siwakoti, Dinesh. “Costco Case Study and Strategic Analysis.” dineshperspective.blogspot.com.
Blogspot, 13 Apr. 2011. Web. 20 Oct. 2017.
<http://dineshperspective.blogspot.com/2011/04/costco-case-study-and-strategic.html>.

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Smithson, Nathaniel. “Costco Wholesale PESTEL/PESTLE Analysis." panmore.com. Panmore
Institute, 6 Feb. 2014. Web. 5 Oct. 2017. <http://panmore.com/costco-wholesale-pestel-
pestle-analysis>.
Tan, Rachel. “Amazon vs. Costco: Revenue.” media.ycharts.com, The Motley Fool, 19 Sept.
2016. Web. 3 Oct. 2017.
<https://media.ycharts.com/charts/7e60df7d1e3c4b94069f761e0e6287ad.png>.

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