Free «PESTEL Analysis of Costco and Porter’s Five Forces Analysis of the Industry» Essay Sample

Costco is an American membership-only warehouse club that provides a wide range of merchandise on selection. The company was founded in 1983 in Seattle. Over the years, it has grown tremendously to build 698 warehouses in selected countries around the globe. The company has a reputation for selling the low-cost, limited selection and retail treasure hunts. Naturally, businesses face competition from other players in the market. Costco faces stiff competition from Walmart and Target. The corporation has developed strategies to deal with threats and opportunities that can be identified by the PESTEL analysis. The PESTEL model is a tool used by companies to monitor and analyze the macro and micro environment factors that affect an organization. The results of the PESTEL analysis can then be used to do a SWOT analysis of an organization. To maintain its position as the largest membership-only warehouse in the US, Costco will have to address its opportunities and threats (Costco).

Political Factors Affecting the Warehouse

Success of an organization partially depends on the political condition of its macro environment. In the model, political factors refer to the government actions and their effect on the external environment of an organization (Costco). Costco is lucky to have set up stores in countries that enjoy stable governments. For instance, Costco has over 400 stores in US,  89 in Canada and 26 in the United Kingdom (Young, 2015). These countries are stable and there are minimal government actions that may hinder business operations. Political stability is an opportunity that needs to be exploited (Braun & Latham, 2014). Costco has growth opportunities under minimal political disturbance. Similarly, based on the provisions of the environmental and animal policies, the company can adjust its operations to exceed these expectations (Chaput, 2011).

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Economic Factors

The economic aspect of the PESTEL model deals with the external factors that affect company’s economic viability. Costco, therefore, needs to align its business strategy with the economic situation in every country of its operations (Young, 2015). Some notable economic factors affecting an organization include increase in the international trade agreements, gradual growth of the American and UK markets, rapid and accelerated growth of developing and emerging markets. With the increase in international trade agreements, the company can take an advantage expanding its business to the new territories (Farabi, 2012). Developing markets also offer an opportunity for the company to expand to improve financial performance. Various economic factors provide the company with further growth opportunities.

Social and Socio-Cultural Factors

Social and cultural issues are known to affect the behavior of businesses and their consumers. Costco also has social factors that affect it including environmentalism, increased demand for business’s social responsibility and an increasing trend of animal rights activism (Chopra & Meindl, 2007). Increased demand for social responsibility presents Costco with an opportunity to improve its corporate social responsibility hence enhancing its brand image in public perception. Similarly, increased animal rights activism and environmentalism provide a further opportunity for Costco to create and implement new policies (Farabi, 2012). Therefore, company’s commitment to our environment will attract consumers inclining them to take membership and join the trend.

Technological Factors

Most firms that Costco includes are often affected by technological innovation. Advancement in technology provides an opportunity for Costco to exploit its production capacities. Major technological factors include the emergence of e-commerce and business automation (Chaput, 2011). The emergence of e-commerce has presented an opportunity to most businesses not only Costco. Businesses can now generate a larger market share through e-commerce (Berman, 2011). Business automation has come to help Costco improve its efficiency hence enabling cost savings and enhanced financial performance (Chaput, 2011). Another opportunity lies in investing in other innovations such as HR applications, processing of information and packaging processes. Technological factors present many opportunities for Costco.

Environmental Factors

Environmental factors also can affect business performance. Costco should consider the effect of environmental or ecological concerns on its operations. These factors include climate change, pollution and adoption of low carbon lifestyles among others (Soni, 2016). Change in climate conditions poses a threat to the company since one section of the warehouse deals with farm produce. To ensure that the produce is in stock, optimal climatic conditions are paramount (Valdani, & Arbore 2013). On the other hand, the change in consumer lifestyle provides an opportunity for the company. Considering environmental factors, Costco will have to adjust its supply chain.

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For firms such as Costco there are legal requirements to be met. Some external legal factors that can affect Costco include GMO regulations, change in the employment laws and tax regulations. By improving its employment policy, a company can exceed legal expectations, which is an opportunity for the business. A change in tax regulations is a threat to the company. Although, it can adjust its strategies despite the tax reforms (Gamble, Thompson & Peteraf, 2013). A change in GMO regulations can also be an opportunity or a threat. Considering a class of consumers that prefers GMO, company’s food can increase its market share. The company would need to adjust its strategies and business practices to capitalize on the opportunities that result from changes in legal regulations.

Five Forces Analysis for Warehouse Clubs and Supercenters Industries

The demand in the warehouse clubs and supercenter industry has not changed much over five years. Presented below is the Porter’s Five Forces analysis of the industry.

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Bargaining Power of Buyers

Since members are numerous and they mostly buy in small quantities, the warehouses have a weak competitive force. However, members do not have an opportunity to bargain the prices with the wholesaler. Due to a crowded market, a consumer can prefer not to buy an item from a certain outlet getting a cheaper version from another retailer or discounter (Magretta, 2012).

Rivalry Among Players

The rivalry among the players varies from moderate to high. Almost all wholesale clubs offer low prices to their customers. It is also possible for consumers to switch memberships from one wholesaler to another due to relatively low switching costs. Thus, the industry experiences continued rivalry (Courtemanche & Carden, 2014). There is also a close similarity of the product offerings since the degree of merchandise differentiation is weak and thus, the level of rivalry among the warehouses is very high (Magretta, 2012).

Bargaining Power of Suppliers

Although the suppliers of these warehouses are manufacturers with big brand names, they rarely have the leverage to dictate the terms and conditions for their products. Wholesalers can easily switch suppliers with minimal disruption to their businesses. As a result, suppliers enjoy a low bargaining power (Courtemanche & Carden, 2014).

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Threat of Substitute Products

Most households and individuals rarely shop at warehouses as there are many other alternative places including online shops and other retailers. Thus, wholesalers have a very strong threat of substitutes (Wholesale Club Industry). Emergence of these alternatives has made the threat stronger than before (Wholesale Club Industry).

Threat of New Entrants

The chances of a new player entering the market are relatively low due to high barriers to entry. Hence, the threat of new entrants is low (Packaged Facts, 2010). Existing players already enjoy large market shares and considerable economies of scale, which is hard to compete with. Startup capital investment for a new entry is also very high (Bensoussan & Fleisher, 2013).

From the Five Forces analysis, it is eminent that the company is operating in a competitive environment, but it is performing well. The key source of its competitive advantage is the economies of scale, which is hard for any new entrant to achieve (Wholesale Club Industry). Additionally, the company has a higher bargaining power than its suppliers and thus, it receives goods at lower prices (Wholesale Club Industry). Recent factors strongly influencing the industry include increased number of firms and low switching costs required (Bensoussan & Fleisher, 2013). High availability of substitutes is another key factor affecting the strength of the industry.

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These forces relate to one another and the changes that happen to one force directly influence others. If there is a new entry in the market, it will affect the bargaining power of both buyers and suppliers. If the new player is strong enough to compete with the leaders, the rivalry among players will also increase (Wholesale Club Industry). Changes in the forces affect the profitability of the industry in many ways. Increased threats of rivalry and new entrants are likely to lower companies’ profitability.

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