Costco Corporation can continually readjust its policies and strategies according to the dynamic environment prevalent in the retail industry steered by external factors. Michael Porter has designed this model that analyses the five forces and their influence externally prevalent in the business environment. The analysis has examined the effects of these external forces on the business environment. The company needs to address the influences of some external factors prevalent in the macro-environment of the company. These forces have different intensities by which they influence the company. The company stands as a leader in the membership warehouse club chain business across the US. Therefore, it is not difficult for Costco Corporation to address these forces to enhance the effectiveness and growth of the company.
Where suppliers exert the weakest force on the company’s remote industrial environment, Costco Wholesale faces some strong forces in the working environment, as shown by the Five Forces Analysis by Porter’s model.
Overview: Five Forces Analysis of Costco Corporation
The company is facing several external forces influencing the external working environment of the company. However, they influence the environment with fluctuating intensities. Subsequently mentioned Five Forces are influencing the business environment of the company:
- Competition or competitive rivalry (strong force)
- Buyers’ power to bargain (strong force)
- Suppliers’ power to bargain (weak force)
- Substitution or substitutes threat (strong force)
- New entrants’ threat (moderate force)
These forces are exerting influence on the industrial business environment. Although they differ in intensities, these forces affect the company’s business. The weak force of substitutes or substitution is not pushing the company into any challenging position. Other forces of new entrants and rising competitiveness in the market must be addressed by the company. The strong force of substitutes or substitution threat can be addressed by strengthening the competitiveness of the company by offering diverse and quality products in the industry.
Competition Or Competitive Rivalry Influences Costco (Strong Force)
The company must address the negative impacts of swelling competition in the market. This analysis has revealed the robust competition in the industry environment as the strong force. The firms are undertaking aggressive competition against each other. The factors which are responsible for shaping this environmental competitiveness are explored in the ensuing discussion:
- Increasing firms in the market (strong force)
- Diverse firms in the market (strong force)
- Low switching cost for consumers (strong force)
The industrial environment is becoming more competitive with the increasing number of firms in the market. The saturated market significantly improves the competition. Moreover, the diversity in firms adds more competition by attracting customers with their unique strategies. Likewise, the consumers find it easier to switch brands due to the low costs of switching, therefore, a factor contributing to shifting the loyalties of the customers. Therefore, the external forces of competition or competitive rivalry are a significant threat to the growth, expansion, and revenue generation of the company.
Buyers’ Power to Bargain (Strong Force)
The company must satisfy its customers or buyers by employing different strategies. This analysis examines the impact of customers on the industry environment. The buyers’ power to bargain exerts a noticeable threat to the company’s environment. The subsequent external factors are worth mentioning while exploring this force of threat:
- Low switching cost for consumers (strong force)
- Excessively available substitutes in the market (strong force)
- High quality and easy access to information (strong force)
Sam’s Club of Walmart is an easy alternative for the customers of Costco due to its low switching costs. In the same way, the buyers can choose a variety of substitutes from other stores. Thereby, these two factors exert a strong force on Costco Corporation’s business environment. Moreover, the penetration of the internet has made it easier to compare the information about products. Hence, the customers exert a strong as it is no longer difficult to choose the best quality product at the lowest rate available. The company must devise a shrewd strategy and wise policy to mitigate this force of threat to retain the customers and market share for the long term.
Suppliers’ Power to Bargain Against Costco Wholesale (Weak Force)
Suppliers have the power to affect the business environment of the company. This section of the Five Forces Analysis covers the suppliers’ interaction with the company and their resultant impact on the business of the company. The analysis revealed a weak force of threat based on the nest mentioned factors:
- Great number of suppliers (weak force)
- Intensive supplies (weak force)
- Low forward integration of suppliers (weak force)
The company is facing a weak force of threat due to the availability of a great number of suppliers who are ready to provide their services on Costco’s call. Likewise, the abundance of supplies means that the supplier cannot monopolize the situation even if he wishes to do so. This factor further weakens the overall force of the supplier’s threat. In addition, these suppliers have shown their low forward integration that does not enable them to control the supply or distribution of the products rotating in supply/demand chains. Thus, the company is witnessing a weak force of the threat of suppliers in its external industrial environment.
Substitution Or Substitutes Threat (Strong Force)
This section sheds light on the force of substitution or substitutes on the company and the relative threat to it. The Five Forces analysis reveals that this force is posing a serious threat to the company, and therefore, Costco must envision strategic actions to minimize this threat. The following given factors are contributing to the strong force of substitution or substitutes threat on the working environment of the company.
- Low switching cost for consumers (strong force)
- Excessive substitutes available in the market (strong force)
- Elevated ratio of performance-to-price of substitutes (strong force)
The easy availability and access to the substitutes make the lower switching cost of it. It means that the market is saturated with the ample availability of substitution. Moreover, the presence of substitutes for the company’s many products, food products, further intensifies this force of threat. These substitutes are also capable of beating the company’s products in terms of quality. Therefore, this section highlighted the strong force of threat prevalent in the business environment of Costco Wholesale Corporation. The firm must address this threat to sustain the long-term dependence of the customers on the company’s products and services.
New Entrants’ Threat (Moderate Force)
The Five Forces Analysis revealed the threat posed by the new entrants against an established firm like Costco as moderate. The succeeding factors are responsible for the exertion of the moderate force of threat on the company’s business environment.
- Low switching cost for consumers (strong force)
- Modest cost to establish a business (moderate force)
- Costco’s large scale economy (weak force)
The low switching cost exerts a strong force on the company’s external business environment. The ease for consumers to shift from one brand to the other poses a serious threat as it provides an opportunity for these new entrants to attract customers. The relatively modest cost of establishing a business poses a moderate force of threat to the company. The force is further weakened when compared to the economies of scale of the competing rivals. The company has a great competitive edge against new entrants due to the larger scale of its economy. Therefore, the company must address this threat as it poses a moderate threat to the business of Costco Wholesale Corporation identified by the Five Forces Analysis.
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