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Costco Wholesale Corporation Porter Five Forces Analysis
Strategic Management Essays, Term Papers & Presentations
Porter Five Forces Analysis is a strategic management tool to analyze industry and understand underlying levers of profitability in a given industry. Costco Wholesale Corporation managers can use Porter Five Forces to understand how the five competitive forces influence profitability and develop a strategy for enhancing Costco Wholesale Corporation competitive advantage and long term profitability in Discount, Variety Stores industry.
Brief overview of Costco Wholesale Corporation
Costco Wholesale Corporation is one of the leading firms in the Discount, Variety Stores. Over the years Costco Wholesale Corporation has redefined the ways of doing business in Services. Costco Wholesale Corporation is listed at New York Stock Exchange (NYSE) and have a market cap 78.97B USD.
What are Porter Five (5) Forces
In his revolutionary article - "Five Forces that Shape Strategy", Michael Porter observed five forces that have significant impact on a firm's profitability in its industry. These five forces analysis today in business world is also known as -Porter Five Forces Analysis. The Porter Five (5) Forces are -
- Threat of New Entrants
- Bargaining Power of Suppliers
- Bargaining Power of Buyers
- Threat from Substitute Products
- Rivalry among the existing players.
Porter Five Forces is a holistic strategy framework that took strategic decision away from just analyzing the present competition. Porter Five Forces focuses on - how Costco Wholesale Corporation can build a sustainable competitive advantage in Discount, Variety Stores industry. Managers at Costco Wholesale Corporation can not only use Porter Five Forces to develop a strategic position with in Discount, Variety Stores industry but also can explore profitable opportunities in whole Services sector.
Costco Wholesale Corporation Porter Five (5) Forces Analysis for Services Industry
Threats of New Entrants
New entrants in Discount, Variety Stores brings innovation, new ways of doing things and put pressure on Costco Wholesale Corporation through lower pricing strategy, reducing costs, and providing new value propositions to the customers. Costco Wholesale Corporation has to manage all these challenges and build effective barriers to safeguard its competitive edge.
How Costco Wholesale Corporation can tackle the Threats of New Entrants
- By innovating new products and services. New products not only brings new customers to the fold but also give old customer a reason to buy Costco Wholesale Corporation ‘s products.
- By building economies of scale so that it can lower the fixed cost per unit.
- Building capacities and spending money on research and development. New entrants are less likely to enter a dynamic industry where the established players such as Costco Wholesale Corporation keep defining the standards regularly. It significantly reduces the window of extraordinary profits for the new firms thus discourage new players in the industry.
Bargaining Power of Suppliers
All most all the companies in the Discount, Variety Stores industry buy their raw material from numerous suppliers. Suppliers in dominant position can decrease the margins Costco Wholesale Corporation can earn in the market. Powerful suppliers in Services sector use their negotiating power to extract higher prices from the firms in Discount, Variety Stores field. The overall impact of higher supplier bargaining power is that it lowers the overall profitability of Discount, Variety Stores.
How Costco Wholesale Corporation can tackle Bargaining Power of the Suppliers
- By building efficient supply chain with multiple suppliers.
- By experimenting with product designs using different materials so that if the prices go up of one raw material then company can shift to another.
- Developing dedicated suppliers whose business depends upon the firm. One of the lessons Costco Wholesale Corporation can learn from Wal-Mart and Nike is how these companies developed third party manufacturers whose business solely depends on them thus creating a scenario where these third party manufacturers have significantly less bargaining power compare to Wal-Mart and Nike.
Bargaining Power of Buyers
Buyers are often a demanding lot. They want to buy the best offerings available by paying the minimum price as possible. This put pressure on Costco Wholesale Corporation profitability in the long run. The smaller and more powerful the customer base is of Costco Wholesale Corporation the higher the bargaining power of the customers and higher their ability to seek increasing discounts and offers.
How Costco Wholesale Corporation can tackle the Bargaining Power of Buyers
- By building a large base of customers. This will be helpful in two ways. It will reduce the bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its sales and production process.
- By rapidly innovating new products. Customers often seek discounts and offerings on established products so if Costco Wholesale Corporation keep on coming up with new products then it can limit the bargaining power of buyers.
- New products will also reduce the defection of existing customers of Costco Wholesale Corporation to its competitors.
Threats of Substitute Products or Services
When a new product or service meets a similar customer needs in different ways, industry profitability suffers. For example services like Dropbox and Google Drive are substitute to storage hardware drives. The threat of a substitute product or service is high if it offers a value proposition that is uniquely different from present offerings of the industry.
How Costco Wholesale Corporation can tackle the Treat of Substitute Products / Services
- By being service oriented rather than just product oriented.
- By understanding the core need of the customer rather than what the customer is buying.
- By increasing the switching cost for the customers.
Rivalry among the Existing Competitors
If the rivalry among the existing players in an industry is intense then it will drive down prices and decrease the overall profitability of the industry. Costco Wholesale Corporation operates in a very competitive Discount, Variety Stores industry. This competition does take toll on the overall long term profitability of the organization.
How Costco Wholesale Corporation can tackle Intense Rivalry among the Existing Competitors in Discount, Variety Stores industry
- By building a sustainable differentiation
- By building scale so that it can compete better
- Collaborating with competitors to increase the market size rather than just competing for small market.
Implications of Porter Five Forces on Costco Wholesale Corporation
By analyzing all the five competitive forces Costco Wholesale Corporation strategists can gain a complete picture of what impacts the profitability of the organization in Discount, Variety Stores industry. They can identify game changing trends early on and can swiftly respond to exploit the emerging opportunity. By understanding the Porter Five Forces in great detail Costco Wholesale Corporation 's managers can shape those forces in their favor.
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