Costco Case Study and Strategic Leadership

Strategic leadership at Costco focused on the flexibility leadership model that takes into account a leadership theory focuses on organizational performance. A company’s organizational performance such as Costco must be based on the long-term competitiveness and success of the organization. Costco learned by focusing using flexible leadership that has contributed to the success of the organization. According to Ken Blanchard flexible leadership is one of the three skills of a situational leader; “when you can comfortably use a variety of leadership styles you have mastered the second skill of a situational leader” (Blanchard, 2011, p. 88).

Since Costco’s success has depended on these very factors that flexible leadership uses the effectiveness of the whole process is dependent for Costco and other companies who use a flexible leadership style. The leadership at Costco adapted the approach of using flexible management and understood it must also be cost effective; maintain customer satisfaction and product quality as they objectively worked to meet the company’s goals. The leadership must also have competency and be viewed by customers, employees and investors as competent. They are not to lead by trial and error but by actions with enough history or research to back their actions as reliable. It is important that leaders be able to balance the different parts of strategic leadership. “Leaders can influence innovation and adaptive ability if they make them part of the company culture, rather than reacting suddenly to dramatic market changes” (Rivenbark, 2004).                     

Company Overview

According to the (NASDAQ: COST) Costco is the largest warehouse club retailer on a global scale and the second largest general retailer, following Wal-Mart, in the United States. Costco sells food, general merchandise including appliances in bulk at deeply discounted prices. Both of Costco's two main competitors Sam's Club and BJ's Wholesale Club operate similar business strategies to Costco. The business strategy of offering merchandise items in bulk and services at low prices have helped Costco maintain positive growth during slow economic conditions. During negative economic growth business such as Costco draw larger numbers of price conscious consumers hoping to get the most out of what could be less expendable income. Costco unlike many other companies that have struggled during the latest economic downturn has fared quite well. It seems their greatest concern is rapid expansion could result in a loss of being able to maintain the valued shopping experience and cannibalization of existing store locations. This has executive leadership to announce it will slow its domestic expansion plans as they focus on international markets for future growth (Wikinvest).

Flexible Leadership Definition

            In this day and age where the norm for organization is to adapt to internationalization globalization, mixed cultures and expansion, the need to outperform competitors and at the same time attract and maintain a sizeable market share is needed to keep ahead. Markets constantly change and trends quickly come and go; hence, leadership quality is needed to ensure the organization’s survival and dominance.

            The model of flexible leadership includes ideas and concepts from earlier leadership theories that have been gathered throughout the ages. The core of this model presents different organizational processes that ensure organization success (Yukl, 2008). Leadership efficiency, which imbibes management implications, is viewed as an indirect and direct influence on how organizational processes are carried out. Key themes in flexible leadership include the requisite to appropriately balance demands and tradeoffs, adapt to shifting conditions, integrate various forms of leadership, coordinate leadership across different levels and units of the organization, and the need for ethical leadership guided by organization ideologies. The flexible leadership model can aid leaders in becoming aware of the various challenges that can be encountered and how to deal with these more successfully (Yukl & Lepsinger, 2004).

Traits of an Organization that Adapts Flexible Leadership

            The overall performance of an organization can be evaluated based on its long term survival and prosperity; evaluation of this can be measured by net earnings, profit growth, profit margin, stock price increase and many more. Nevertheless, organizational performance is best determined by the following: efficiency and process reliability, adaptation and innovation, and human resource management (Yukl & Lepsinger, 2004; Yukl G. , 2008). These determinants are significant in affecting organizational performance and are influenced by the external and internal environments’ volatility; hence, leadership – both direct and indirect – influences also the efficiency of these.

Efficiency and Process Reliability

            Efficiency in operations calls for the involvement of effectively utilizing the human resources of an organization that minimizes cost without giving up quality and safety standards. Organizational efficiency indicators include cost of sales, employee productivity, and operational costs. Manufacture and competent delivery of products and services denote process reliability; value is added through an efficient, timely and safe manner of product or service deliverance (Yukl & Lepsinger, 2004). Process reliability is experienced when defects or errors, work accidents, as well as delivery delays in producing and providing end-products or services are minimized or eliminated.

            Leaders today need to formulate motivational methods that would encourage employees into actively contributing to the entire organization’s success; hence, formulating new visions, negotiating acquisitions and even reinventing the organization come into play. Contemporary management and leadership practices encourage delegation of enhancing or exacting product and service quality to low-level managers; prioritizing efficiency and process reliability is cascaded by strategic management team throughout all members of the organization (Yukl G. , 2008).

Adaptation and Innovation

            The external environment constantly changes; threats and opportunities that involve changes in technology, customer demands, economic conditions and others continuously emerge and require organizations to rapidly adapt. Indicators of adaptation include dimensions of the financial statement such as sales growth and profitability, as well as the increasing market share customer satisfaction and loyalty, and others (Yukl G. , 2008). Innovation calls for improvements implemented in the value chain, which include research and developments, as well as new products and services as exemplified by patents and inventions. All organizations whether large or small are faced with events of adaptation or failure; larger organizations that have more stable resources often change processes infrequently as compared to smaller organizations; however, continuous change is always required (Yukl G. , 2008).

Human Resource Management

Recognition for the human capital as assets within an organization has grown as of late; knowledge sharing, shared capabilities and competencies of individual members of the organization are viewed as assets and sources of core competencies. As such, continuous development and motivation of the human resource of an organization have resulted to tangible and positive impacts to organizational performance (Yukl G. , 2008).

Enhancing Effectiveness through Flexible Leadership

Direct Leadership

There are three leadership behaviour types that are categorized based on their primary focus, which include efficiency and process reliability, adaptation and innovation, and human resource management. Task-oriented behaviour gives more focus on process reliability and efficiency; change-oriented behaviours focus on adaptation and innovation, especially so for adapting to the external environment; and relations-oriented leadership behaviours focus on improving the human resources and relations within the organization (Yukl G. , 2008).

Leader behaviour may have a central focus as its main goal; however, the leader’s behaviour can influence the other determinants of performance. Leadership behaviour at any circumstance is dependent on the leadership situation; some behaviour types are more required in a particular situation than others (Yukl & Lepsinger, 2004). The performance determinants of organizations are often influenced by leaders through the implementation of a formal organizational structure, formal programs, and management systems. Top management or strategic leaders have more authority than mid- or lower-level managers or leaders and have the capacity and authority to decide which programs of improvement are to be implemented, what changes to the organizations would be made; and, which growth strategies such as acquisitions and joint ventures, would be enacted (Yukl G. , 2008). These indirect leadership forms are often aimed at improving one performance determinant and generally influence the other performance determinants also.

Traits of a Flexible Leader

Leaders should uphold situational responsiveness

Responsiveness and awareness involves current knowledge about the internal and external environments that affect the entire organization. Such knowledge should include historical events and current trends, and be aware of their subsequent effects to the different determinants of organizational effectiveness. In order for leaders to have updated knowledge, he should have an extensive and reliable network of contacts within and outside the organization  (Yukl & Lepsinger, 2004).

Leaders should practice systems thinking

The processes involved between the different performance determinants are better understood using this method; long-term and short-term effects of tweaking these determinants would be better envisioned. Leaders should be aware of the disadvantages or advantages of changing a process within a determinant and view the consequent reaction of this change to the other aspects of the organization (Yukl & Lepsinger, 2004).

Leaders should build a commitment to the organization’s core ideologies

It has often been mentioned that leaders should have common core ideologies and values with that of the organization; in this case, various leaders within an organization should have an aligned set of core ideologies to ensure compatibility, coordination and cooperation  (Yukl & Lepsinger, 2004). Leaders of the organization uphold and gain support for core ideologies of the organization which is more effective if the ideologies they are gaining support for is something that they truly believe in.

Leaders should lead by example

Leader behavior is an important aspect of gaining support from the different members of the organization across the different performance dimensions. The proper example emanated by the leader is an important source of influence that can greater underscore the processes of performance determinants (Yukl & Lepsinger, 2004).

Costco and Flexible Leadership

Strengths

Costco operates using a strategic plan that offers large discount on particular brands and products. They actually charge more for memberships than BJ’s Wholesale Club and Sam’s Club but through aggressive marketing they build value that their members believe is worth the cost difference. Costco has done a great job marketing to business and studies show business customers tend to buy in bulk. But, you asked what makes Costco different since other wholesale clubs also sell in bulk. One of the major strengths of Costco is that they have such high volume their suppliers also offer them the deepest possible price. Costco also sells brands not offered at their two biggest compactors. Using this strategy, “Costco has successfully expanded its customer base, mainly in executive membership which has seen rising penetration from about 23% in mid 2007 to about 29% in mid 2009. Executive members pay a higher membership fee of $100 (compared to business members who pay $50 annually) and they account for around 60% of total Costco sales and have higher membership renewal rates. As penetration of executive membership increases, Costco’s RPSF for its United States stores is likely to increase” (Forbes, 2011).

The above-stated scenario presents the various methods applied across the different performance dimensions; the value chain which is an integral part of process reliability and efficiency, has been improved upon, where bulk supplies are acquired across different suppliers, shipped at a largely lesser cost, and offered to customers at a much lower price than its competitors. Focusing on the external environment, in order to be highly competitive, Costco has captured a market of customers that highly appreciate the use of frequency and loyalty cards.

Weaknesses

Having the benefit of years in retail marketing and now as a finance concentration I see margins could affect revenue dollars since they operate on a small margin. According to Datamonitor Costco has a markup limit of 15% and operates on lower margins than its competitors; in addition they offer customers a 2% reward program further reduce profits. Low margins, aggressive marketing and over expansion may hurt their profitability (DataMonitor, 2010).

Cannibalization is yet another threat to Costco, although they have a lower market share in the North Eastern United States, BJ’s major marketing area, it faces the threat of cannibalization. “If a company is practicing market cannibalization, it is eating its own market. For example, say Coca Cola puts out a new product called Coke2, and customers buy Coke2 instead of regular Coke. Although sales may be up for the new product, these sales may be eating into Coke's original market, in which case the overall company sales would not be increasing. Because of the possibility of market cannibalization, investors should always dig deeper, analyzing the source and impact of the success of a company's new but similar product” (Market Cannibalization). Costco just as any company must avoid this practice and many companies have failed as a result from cannibalization.

Costco has to strategize further in order to survive the increasing competition in their industry. There are a growing number of specialized retailers in the industry that are becoming more adept at improving their value chains that threaten large organizations such as Costco. The organization should focus more on how to continue its leadership in the retail sector and strategize more effective methods of gaining its market share without sacrificing performance determinants such as in the case of cannibalism.

Conclusion

Costco like other organizations work best when they inculcate this leadership model to their system. Strategic leadership, “ strategic leaders are the ones in charge of setting and changing the environment, culture, strategy, structure, leadership, and technology of an organization and motivating employees to implement the decisions” (Nahavandi, 2012, p. 217). Flexible leadership theory has proved to work well for Costco. In Costco’s case they have trained employees and recruit leaders who posses flexible leadership qualities. In any organization including Costco there can be some resistance to change but as Costco evaluates its history they have a greater chance operating in a flexible leadership manner and have cultivated a supportive environment that has benefited from this leadership model. At Costco a flexible leadership style has been the best leadership model for them. While developing and refining their flexible leadership style that best fits Costco they used a predictive and goal directed approach towards objectives in the organization. Employees working at Costco and other organizations utilizing flexible leadership quickly become viewed as a vital element in the organization. The theory emphasizes on qualities such as efficiency, innovativeness, reliability and adaptation as essential factors to the realization of organizational goals. Costco through continued expansion at a manageable rate in the United States and international and a vision for future growth that includes the leadership styles of its history could be astounding.