General Motors & Samsung Marketing Mix Case Studies

Description

Instructions:

#1. At the very beginning of the five-week session, students will select a company they are interested in analyzing.* This company could be either a public or private firm. If the student chooses a private company, however, relevant marketing data and information must be readily available in order to complete the project. Students will then analyze and present on each of the “Four Ps of Marketing” in the following order:

  • Module/Week      3, Place: Students will provide an overview of how the firm moves      goods and services to customers. The company to research is (General      Motors Corporation)

Students will prepare and submit a two pages summary of their weekly findings, including four APA-cited sources used to prepare the overview. It must be noted that these weekly projects are not based solely on the opinions and observations of the students, but a combination of research, observation, analysis, and summation of a variety of sources. These weekly projects will serve as the basis for the final project in this course. Professional business writing is expected.

#2. We will utilize the case studies within the textbook to help broaden our marketing knowledge and introduce more research into the subject matter.

With the case studies, you will be able to select the case study you would like to research from each of our chapter readings this week, we should have one case study from each chapter (chapters 12, 16, and 17).

For chapter 12, select between Samsung (Answer Questions 1 & 2) or IBM (Answer Questions 1 & 2).
For chapter 16, select between eBay (Answer Questions 1 & 2) or Southwest Airlines (Answer Questions 1 & 2).
For chapter 17, select between Amazon (Answer Questions 1 & 2) or Costco (Answer Questions 1 & 2).

  • After      you answer the questions from each selected case study, then include a      personal reflection on the case study topic; ensure to make clear      connection(s) between what is learned from the topic and that you      demonstrate further analysis and/or insight.  The personal reflection      should be at least two paragraphs in length.
  • Your      answer(s) should include a citation from the textbook and your reflection      should be support by a scholarly peer-reviewed article to assist with the      analysis and/or insight of the topic.

Case Study Format:

  • Include      title page.
  • Properly      formatted in APA, with the correct number of sources (text and      peer-reviewed).
  • Double-spaced;      12-point font.
  • Proper      cited reference page.
  • With      a case study format; we do not have to include any type of introduction or      conclusion.
    • All       cases can be in one document and ensure to label each case study.

Marketing Management: 15 Edition

By:  PHILIP KOTLER, Northwestern University 

And KEVIN LANE KELLER, Dartmouth College

Here are the Scenarios.

Ch. 12:

Samsung

Korean consumer electronics giant Samsung has made a remarkable transformation since its founding in 1938. Originally created as an exporter of dried Korean fish, vegetables, and fruit, the company evolved into a provider of value-priced commodity products during the 1970s and 1980s that original equipment manufacturers (OEMs) sold under their own brands. When Samsung’s founder passed away in 1987, his son Kun-Hee Lee succeeded him and restructured the company with the goal of becoming one of the world’s top electronic companies. Samsung initially focused on volume and market domination rather than profitability. During the Asian financial crisis of the late 1990s, other Korean chaebols or conglomerates collapsed beneath a mountain of debt, but Samsung took a different approach. The company cut costs and refocused its vision on product quality, complete customer satisfaction, and manufacturing flexibility.

This revolutionary strategy allowed its consumer electronic products to go from project phase to store shelves within six months. Samsung invested heavily in innovation, and many of its products—from semiconductors to LCD screens—gained significant market share and became industry leaders in their respective categories. The company also focused intently on its memory-chip business, which established an important cash cow and made it the largest chipmaker in the world. Samsung continued to pour money into R&D during the 2000s, budgeting $40 billion for 2005–2010 alone. The company made innovation one of its highest priorities and emphasized its importance through extensive training and recruiting. As a result, it introduced a wide range of electronic products under its strong brand umbrella.

Samsung also partnered with longtime market leader Sony to create a $2 billion state-of-the-art LCD factory in South Korea and signed a milestone agreement to share 24,000 basic patents for components and production processes. Today, Samsung is a global marketer of premiumpriced, Samsung-branded consumer electronics such as smart phones, flat-screen TVs, digital cameras, batteries, digital appliances, and semiconductors. The company’s high-end smart phones and cell phones are now its growth engines, leading to a steady stream of innovations including the first cell phone with an MP3 player, the first Blu-ray disc player, and the first Smartwatch. Samsung’s success has been driven not only by successful product innovation, but also by aggressive brand building. The company has spent billions of dollars in marketing over the past decade, including sponsoring the Olympics since 1998 and running several global ad campaigns themed “Imagine,” “Quietly Brilliant,” and “Men Are Idiots,” all of which included brand messages such as “technology,” “design,” and “human sensation.” In 2005, Samsung surpassed Sony in the Interbrand ranking for the first time, and it continues to outperform Sony today.

Samsung faces competitors in several different industries, including Google and Apple. However, the company is unique because, unlike rival firms, it has become a global leader in making both the components for electronics products and the actual devices sold to consumers. It controls virtually everything in the smart phone supply chain, from the chips to the screen, while Apple has to outsource these products. As a result, Samsung can keep costs low, create many products for many needs, make design changes quickly, and introduce new products at an unusually fast pace. The company recently passed Apple as the number-one player in smart phones. With record sales of $327 billion in 2013 and more than 275,000 employees worldwide, Samsung continues to work toward its goal of earning $400 billion in revenue by the year 2020.

Questions

1. What are some of Samsung’s greatest competitive strengths?

2. Samsung’s goal of earning $400 billion in sales by 2020 would bring it to the same level as Walmart. Is this a feasible goal? Why or why not?

IBM

International Business Machines Corporation (IBM) manufactures and sells computer hardware and software, offers infrastructure services, and provides global consulting services. The company’s roots date back to the 1880s, but it officially became known as IBM in 1924, under the leadership of then-president Thomas J. Watson Sr. IBM flourished during the 1930s and 1940s, growing primarily through sales of technologies developed for the military during World War I and World War II and of tabulating machines, which helped underpin the Social Security system in the 1930s. Watson Sr. led the company for four decades and helped establish some of its most successful business tactics, including exceptional customer service, a professional and knowledgeable sales force, and a focus on large-scale, custom-built solutions for businesses.

Watson Sr. also created the company’s first slogan, “THINK,” which quickly became a corporate mantra. Thomas J. Watson Jr. took over as CEO in 1952, and under his management IBM paved the way for innovations in computation. The company worked with the government during the Cold War and built the airdefense SAGE computer system for $30 million. In 1964, it launched a revolutionary family of computers called the System/360, which used interchangeable software and peripheral equipment. For the system to succeed, however, IBM had to cannibalize its own computer product lines and move its current systems to the new technology. Fortunately, the risk paid off, and IBM architecture became the industry standard. By the 1960s, the company was producing approximately 70 percent of all computers, beating out early competitors like General Electric, RCA, and Honeywell. The 1980s were a pivotal time in IBM’s history.

In 1981, the firm launched the first personal computer, which offered 18KB of memory, floppy disk drives, and an optional color monitor. It also opened new channels of distribution through companies like Sears and ComputerLand. However, IBM’s decision to outsource components of the PC to companies like Microsoft and Intel marked the end of the company’s monopoly in computing. During the 1980s, its market share and profits eroded as the PC revolution changed the way consumers viewed and bought technology. IBM’s sales dropped from $5 billion in the early 1980s to $3 billion by 1989.

The dip continued into the early 1990s when the company felt pressure from Compaq and Dell and tried to split into smaller business units to compete. The results were disastrous, and IBM posted net losses of $16 billion between 1991 and 1993. Things turned around when a new CEO, Louis Gerstner, refocused IBM in a new strategic direction. He reconnected the company’s business units, shed its commodity products, and focused on high-margin businesses like consulting and middleware software. The company then introduced the iconic ThinkPad, which helped regain lost share.

To rebuild its brand image, it consolidated marketing efforts from 70 advertising agencies to one and created a consistent, universal message. In 1997, IBM’s chess-playing computer system, Deep Blue, also helped lift the company’s brand image by defeating the world’s reigning chess champion in a historic event that captured the attention of millions. At the turn of the 21st century, IBM achieved new levels of success in the wake of the dot-com bust. The company moved further away from hardware by selling its ThinkPad division to Lenovo and exiting disk drives. In addition, it embraced global consulting and data analytics by acquiring close to 100 firms, including PricewaterhouseCoopers. IBM’s strategic focus on smart technologies is reflected in its ongoing campaign titled “Smarter Planet.” The campaign highlights a few of the company’s accomplishments to date and explores its ideas for the future. IBM is now focused on solving the world’s most challenging high-tech problems, such as water management, traffic congestion, and collaborative health care.

The company continuously changes its business mix in order to embrace profitable technologies and market opportunities. For example, 27 percent of its year 2000 income came from software, and in 2012, 45 percent. IBM believes that by 2015, 50 percent of its income will come from software. Today, IBM is the largest and most profitable information technology company in the world, with almost $100 billion in sales and 431,000 employees worldwide. It employs scientists, engineers, consultants, and sales professionals in more than 170 countries and holds more patents than any other U.S.-based technology company. From 2000 to 2012, IBM spent more than $75 billion on R&D, and approximately 30 percent of its annual R&D budget has funded long-term research to prepare for major changes in technologies, global economies, and businesses. Questions

1 Few companies have had such a long history of ups and downs as IBM. What were some of the keys to its successes? Can IBM’s plans to solve some of the world’s most challenging problems succeed? Why or why not?

2 Who are IBM’s biggest competitors today, and what risks does IBM face with its current strategy?

Ch. 16:

eBay

In 1995, Pierre Omidayar, a French-Iranian immigrant, wrote the code for an auction Web site where everyone would have equal access to a single global marketplace. Omidayar couldn’t believe it when a collector bought the first item, a broken laser pointer, for $14.83.* Soon the site grew into a broader auction site where consumers could sell collectibles ranging from baseball cards to Barbie dolls. The momentum continued when individuals and small businesses discovered that eBay was an efficient way to reach new customers and other businesses, and large companies began using it as a means of selling their bulk lots of unsold inventory. The company grew from 250,000 auctions in 1996 to 2,000,000 auctions in 1997. In 1998, it hired Meg Whitman as CEO, and she helped take eBay public later that year. eBay’s success created a pricing revolution because it allowed buyers to decide what they would pay for an item.

The result pleased both sides; customers gained control and received the best possible price for the item, while sellers made good margins due to the site’s efficiency and wide reach. For years, buyers and sellers also used eBay as an informal guide to market value. Even a company with a new-product design that wanted to know the going price for anything from a copier to a new DVD player checked on eBay. The online marketplace was fascinating to economists as well, who used it to analyze pricing theories and compare them with actual buying and selling behaviors. eBay itself doesn’t buy any inventory or own the products on its site. It earns its revenue by collecting fees: an insertion fee for each listing plus a final-value fee based on the auction or fixed price. For example, if an item sells for $60.00, the seller pays 8.75 percent on the first $25.00 ($2.19) plus 3.5 percent on the remaining $35.00 ($1.23).

Therefore, the final-value fee for the sale is $3.42. This pricing structure was developed to attract high-volume sellers and deter those who list only a few low-priced items. With eBay’s expansion into a wide range of other categories—from boats, cars, and travel to health and beauty and home and garden— collectibles now make up only a small percentage of sales. eBay now offers more pricing options, including a fixed-price “buy it now” option to those who don’t want to wait for an auction and are willing to pay the seller’s price. Sellers can also use the fixed-price format with a “best offer” option that allows them to counteroffer, reject, or accept an offer. The company’s business model is based on connecting individuals who otherwise would not be in touch. It was the first example of online social networking, years before Twitter and Facebook existed, and consumer trust is a key element of its success. While skeptics initially questioned whether consumers would buy products from strangers, Omidayar believed people are innately good, and eBay’s originators did two things well: They built a strong online community, and they developed tools to help reinforce trust between strangers.

The company tracks and publishes the reputations of both buyers and sellers on the basis of feedback from each transaction. It now has four seller criteria: items as described, communication, shipping time, and shipping and handling rate. The ratings are anonymous but are visible to buyers. Sellers with the highest rankings appear at the top of search results. Over the years, eBay has expanded its capabilities, services, and partnerships to continue building its community and connecting people around the world. For instance, the company acquired PayPal, an online payment service, in 2002 after eBay members made it clear that PayPal was the preferred method of payment. The acquisition gave consumers a safe way to transfer money, lowered currency and language barriers, and helped merchants sell their products around the world.

Although eBay was a darling in the dot-com boom and has achieved tremendous success since then, it has had its fair share of challenges. These include a worldwide recession, increased competition from Google and Amazon.com, and difficulties expanding globally into markets such as China. Meg Whitman retired in 2008 after leading the company for 10 years and was replaced by John Donahoe. Under Donahoe, eBay has made 34 acquisitions— primarily e-commerce and payments businesses such as Shopping.com, StubHub, and Bill Me Later but also businesses offering back-end technologies. Donahoe is moving the company toward a business model that can compete with Amazon.com, including expanding its online marketplace to include many returnable goods at fixed prices. Only 30 percent of eBay’s sales now come from auctions.

The company has also been promoting eBay Now, which partners with big retailers like Macy’s, Target, Home Depot, and Toys “R” Us to deliver orders in about an hour for a minimum charge. Today, people can buy and sell virtually any product or service on the world’s largest online marketplace. From appliances and computers to cars and real estate, sellers can list anything as long as it is not illegal and does not violate eBay’s rules and policies. The impact of eBay’s global reach is significant. In 2014, the online marketplace had almost 150 million active users and more than 500 million items listed. A pair of shoes is sold there every two seconds, a man’s necktie every 23 seconds, a major appliance every 26 seconds, and an LCD television every six minutes. With its high volume, its acquisitions, and consumers’ increased use of mobile devices, Donahoe hopes to double eBay’s active-user count to more than 200 million by 2015 and increase revenue from $14 billion to $23 billion.

Questions

1 Why has eBay succeeded as an online auction marketplace while so many others have failed?

2 Evaluate eBay’s fee structure. Is it optimal, or could it be improved? Why? How?

3 Discuss Donahoe’s vision for eBay. Is moving away from online auctions sustainable for the company?

Southwest Airlines:

Southwest Airlines debuted in 1971 with little money but lots of personality. Marketing itself as the LUV airline, the company featured a bright red heart logo and relied on outrageous antics to generate word of mouth and new business. Flight attendants in red-orange hot pants served Love Bites (peanuts) and Love Potions (drinks). Today, it is Fortune’s seventh-most admired company in the world. How did a small-budget airline accomplish so much? Southwest’s business model is based on streamlining its operations, which results in low fares and satisfied, loyal consumers.

The company uses a point-to-point routing system, flying thousands of shuttle trips between different pairs of airports or “points” and carrying more passengers per plane than any other airline. Each aircraft averages 6.25 flights a day, flying for almost 12 hours. Southwest can accomplish such a feat because it avoids the traditional hub-and-spoke system and has extremely fast turnaround. In its early years, it turned planes around in less than 10 minutes. Today it averages 30 minutes—half the industry average. Southwest’s unique boarding process also helps expedite departure. Instead of getting assigned seating, passengers are put in one of three groups (A, B, C) and given a number when they check in. Group A boards first and in numerical order (for example, A1–A30). Once on board, passengers may sit anywhere they like. Southwest also saves by flying only Boeing 737- 700s and 737-800s. This simplifies the training process for pilots, flight attendants, and mechanics and lets management substitute aircraft, reschedule flight crews, and transfer mechanics quickly and effortlessly.

One of Southwest’s biggest cost savings techniques is its strategy of purchasing fuel options years in advance. Jet fuel is an airline’s largest expense and now accounts for 35 percent of operating costs versus 13 percent just a little more than a decade ago. Many of Southwest’s longterm contracts allowed the airline to purchase fuel at $51 per barrel, a significant savings especially during the 1990s and 2000s when oil spiked past $100 per barrel. Analysts estimate it has saved more than $2 billion this way. Southwest also improves its fuel efficiency by making its planes lighter. Crew members power-wash the jet engines each night to remove dirt, planes carry less water in bathrooms, and seats have been replaced with lighter models. Because the airline consumes approximately 1.5 billion gallons of jet fuel each year, every minor change adds up.

Southwest has expanded by entering new markets other airlines overprice and underserve. These usually include secondary cities with smaller airports, whose lower gate fees and reduced congestion promote faster turnaround and lower fares. The company believes it can reduce fares by one-third to one-half whenever it enters a new market, and it expands every market it serves by making flying affordable for more people. Southwest acquired Air Tran in 2011 for $1.4 billion, expanding its consumer base and adding new destinations like Richmond, Memphis, and cities in Mexico and Puerto Rico, its first international locations. Southwest has pioneered unique services and pricing programs such as same-day freight service, senior discounts, Fun Fares, and Ticketless Travel. The airline was the first with a Web site, the first to deliver live updates on ticket deals, and the first to post a blog. In recent years, it has added revenue through premium ticketing features like premium boarding positions at the gate and early bird check-in, which automatically assigns the best seat possible. Throughout Southwest’s history, its advertising has focused on low fares, frequent flights, on-time arrivals, and a top safety record.

The company uses humor to convey its warm, friendly personality. Its tagline, “Ding! You are now free to move around the country,” was a parody of in-flight announcements. The lighthearted attitude carries over to entertaining on-board messages, crews who burst into song in the terminal, and several personalized aircrafts, including three painted like flying orca whales. Despite its no-frills service, Southwest wins the hearts of customers. The company consistently ranks at the top in customer service for airlines and has the lowest ratio of complaints per passenger. It has been Fortune magazine’s most admired U.S. airline since 1994 and one of its five best places to work. Southwest’s financial results also shine; the company has been profitable for 41 straight years, with no layoffs despite a travel slump created by the slow economy and fears of terrorism. When other airlines started charging for baggage, drinks, and snacks, Southwest went against the tide with a “bags fly free” policy.

Although the hot pants are long gone, Southwest’s NYSE stock symbol is LUV, and red hearts are found across the company, embodying the idea of employees “caring about themselves, each other, and Southwest’s customers.” “Our fares can be matched; our airplanes and routes can be copied. But we pride ourselves on our customer service,” said Sherry Phelps, director of corporate employment. In fact, having a sense of humor is a selection criterion for hiring. As one employee explained, “We can train you to do any job, but we can’t give you the right spirit.”

Questions

1. Southwest has mastered the low-price model and has the financial results to prove it. Why don’t other airlines copy Southwest’s model?

2. What risks does Southwest face? Can it continue to thrive as a low-cost airline when tough economic times hit or other airlines mimic its business model?

Ch. 17:

Amazon.com

Founded by Jeff Bezos in 1995, Amazon.com started as the “world’s largest bookstore” and, ironically, owned no books. Bezos promised to revolutionize retailing, however, and over the years he has blazed a trail of e-commerce innovations that many executives have studied and companies have followed. Amazon initially set out to create personalized storefronts for each customer by providing more useful information and more choices than found in a neighborhood bookstore. Readers could review books and evaluate them on a one- to five-star rating scale, while fellow browsers could rate the reviews for helpfulness. The company’s personal recommendation service aggregated buying-pattern data to infer who might like which book.

Amazon also introduced its revolutionary one-click shopping, which allowed buyers to make purchases effortlessly with a single click. Amazon started to diversify its product line in the late 1990s, first with DVDs and videos and then with consumer electronics, games, toys, software, video games, and gifts. The company continued to expand its product offerings and in 2007 launched Amazon Video On Demand, allowing consumers to rent or purchase films and television shows to watch on their computers or televisions. Later that year, it introduced Amazon MP3, which competed directly with Apple’s iTunes and had participation from all the major music labels. Amazon’s most successful product launch was the Kindle, its branded electronic book reader that delivered hundreds of thousands of books, magazines, blogs, and newspapers in a matter of seconds. As thin as a magazine and light as a paperback, the device has been the company’s best-selling product since 2009. Today, you can find virtually anything you want on Amazon.com.

The company has successfully established itself as the biggest online retailer in the world by enabling merchants of all kinds to sell items on the site. In addition to its core business, Amazon also runs an “Associates” program that allows independent sellers and businesses to receive commissions for referring customers to the site in a variety of ways, including direct links and banner ads as well as Amazon Widgets, miniapplications that feature the company’s wide selection of products. Associates can create an Amazon-operated online store easily, with low risk and no additional cost or programming knowledge. Fulfillment by Amazon (FBA) takes care of picking, packing, and shipping the merchant’s products to its customers. One consistent key to Amazon’s success is its willingness to invest in the latest technology to make shopping online faster, easier, and more personally rewarding for its customers and third-party merchants.

During peak season in 2012, the company sold approximately 306 items per second, or 26 million items per day. Small wonder that it continually looks for ways to improve delivery. For a $99 annual fee, Amazon Prime provides unlimited free express shipping for millions of items. While free shipping and price cuts are sometimes unpopular with investors, Bezos believes they build customer satisfaction, loyalty, and frequency of purchase orders. In 2013, Amazon.com announced a partnership with the U.S. Postal Service to begin delivering orders on Sundays. Bezos also predicted on 60 Minutes that the company may use drones in the near future to make same-day delivery of lightweight products within short distances of distribution warehouses. (Critics find this unlikely for many reasons, though.) Amazon has also maintained competitive and low prices throughout its product expansion. The company understands how important it is to keep its prices low in order to drive the volume it needs to remain a market leader and expand geographically.

Amazon’s practice of selling books at heavily discounted prices, however, has upset some of its channel partners in publishing, as have its attempts to become a publisher in its own right. From the beginning, Bezos has said that even though he started an online bookstore, he eventually wanted to sell everything to everyone through Amazon. com. The company continues to invest significantly in technology, is focused on the long term, and has successfully positioned itself as a technology company with its wide range of Amazon Web Services. This growing collection of infrastructure applications meets the retailing needs of companies of virtually all sizes. Amazon has successfully reinvented itself time and again and created a critical channel for merchants around the world who are able to reach more than 244 million customers worldwide.

Questions

1. Why has Amazon succeeded online when so many other companies have failed? 2. Will the Kindle revolutionize the book industry? Why or why not?

3. What’s next for Amazon? Where else can it grow?

COSTCO:

Costco’s mission is “to continually provide our members with quality goods and services at the lowest possible prices.” With more than 75 million card-carrying members and $110 billion in sales, it is the largest warehouse club chain in the United States and the third-largest retailer in the United States after Walmart and Kroger. The company’s success comes from years of building consumer loyalty through its dedicated merchandising and pricing strategy, combined with no-frills, cost-cutting policies. Costco’s merchandising strategy focuses on offering a broad range of brand-name and private-label merchandise at extremely low prices. But unlike a grocery store that carries 40,000 SKUs or a Walmart that can carry up to 150,000, the company offers about 3,750 SKUs—only the fastest-selling flavors, sizes, models, and colors from a single vendor in each category. For example, it sells four brands of toothpaste compared with Walmart’s 60. This efficient product sourcing results in several outcomes: high volume of sales, rapid inventory turnover, extremely low prices, and better product manageability.

Costco buys its merchandise directly from the manufacturer. Products are shipped directly to the company’s warehouses or to a depot, which reallocates the shipments to warehouses within 24 hours. This process eliminates several steps such as using a distributor and other intermediaries, which avoids costs associated with storage, additional freight, and handling. At the warehouse, shipments are often taken directly to the floor, unwrapped, and left on the pallet, ready to sell. Over the years, Costco has expanded its products and services from simple boxed items such as cereal and paper products to fresh produce and flowers, which must be displayed attractively and managed more closely. Today, the company sells dairy, baked goods, seafood, clothing, books, computer software, vacuums, home appliances, electronics, jewelry, tires, art, wine, liquor, hot tubs, and furniture. Its service departments include pharmacies, optometrists, photo processors, food courts, and gas stations. Costco’s private label, Kirkland Signature, offers high-quality products at lower prices than the comparable branded item, ranging from diapers and bed sheets to coffee and makeup. Of the 4,000 products sold, 3,000 are staples found at Costco week after week, while the remaining 1,000 rotate as part of the company’s “treasure hunt.” These special items are offered only temporarily and can be as exotic as Coach bags, Waterford crystal, and expensive jewelry. Costco believes its treasure hunt offerings create excitement and increase consumer loyalty, bringing bargain hunters back again and again.

The company’s pricing strategy is transparent: It limits the markup of any branded item to 14 percent and any private-label item to 15 percent. (In comparison, supermarkets and department stores mark up anywhere from 25 percent to 50 percent.) If a manufacturer’s price is too high, Costco will not restock the item. Founder and former CEO Jim Sinegal explained, “The traditional retailer will say: ‘I’m selling this for $10. I wonder whether I can get $10.50 or $11.’ We say: ‘We’re selling it for $9. How do we get it down to $8?’” One staple is the $1.50 hotdog and fountain drink combo, priced the same since 1985. In 2013, Costco sold about $168 million worth of the combo in the United States alone. Costco’s cost-saving tactics extend to the interiors its 634 warehouse-style stores around the world. Most average 143,000 square feet, with floor plans designed to optimize selling space, the handling of merchandise, and the control of inventory. Decor is simple: concrete floors, bare-bones signage, and product displays that consist of pallets right off the truck. Central skylights and day-lighting controls hold down energy usage, and the company also saves by not supplying shopping bags.

Instead, consumers use their own bags or leftover boxes and crates stacked near cash registers. Costco spends little on marketing and promotions, except for the occasional direct mail to prospective new members and coupons to regular members. The one area Costco does not cut costs is in its workforce. Employees earn an average of $17 per hour, 42 percent higher than Sam’s Club salaries. In addition, 85 percent have health insurance, more than twice the percentage at Target or Walmart. As a result, employee turnover and employee theft are extremely low, and employees are better trained and dedicated to the company. Costco’s loyal consumer base appreciates the fact that its deep discounts come from strategic business planning and are not at the workers’ expense. Costco’s customers are not only loyal; many are affluent. Their average household income is $74,000; 31 percent earn more than $100,000 per year.

Membership starts at $55 a year and can be upgraded to Executive levels that provide additional benefits. Costco accepts only debit cards, cash, checks, and American Express. While consumers need membership to shop at the warehouse locations, nonmembers can shop online without it and pay an additional 5 percent fee for any purchase. Costco’s success has come from focusing on a handful of business practices: sell a limited number of items, keep costs down, rely on high volume, pay workers well, require consumers to buy memberships, and target upscale consumers and business owners. This vision has led to many achievements, including ranking number 22 in the Fortune 500 and number 23 on Fortune’s Most Admired list. Costco also was the first company to grow from zero to $3 billion in sales in less than six years.

Questions

1. What is unique about Costco’s channel management process? Which of its channel practices can other retailers borrow or implement?

2. Where can Costco improve? Should it offer more products or advertise more? Why or why not?

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