Strategic management is a critical component that decided how a company should compete in the industry. It explains the basic framework of the company’s perception and core competencies. Through strategic management, practical strategies that help to generate revenue and sales of the company are implemented (Boström & Karlsson, 2013). The consumer trends are variable, and this transition is attributable to prevailed strategies and preferences. Costco cooperation is an expanded business, founded in 1983, has many warehouses, and has core fame due to this concept. This paper is about the strategic management of Costco, and it will focus on the Vertical Integration strategy. The innovative approach is suitable for any management firm when it comes to performing smart.

Verticalization and its Significance

Due to the changed social atmosphere, the key to growth is alternating managerial approaches. A strategy for a firm is mere like a centric approach that helps determine the successive path. All the companies need sustainability, and they implement a plan that can help them thrive in the competitive industry. The role of sustainability is different for value-based companies. To follow and focus on consumer trends, vertical integration is quite significant. The way to innovation and adoption of digital tools is strengthened by implementing new and better strategies. The world of hyper-competitiveness need structures that help them stay ahead of the competition (Edmonds, 2017). Vertical integration is about two or more production of stages that are opted by two companies. It tended to focus on the quality control format with better economies of scales and a declined level of cost. This strategy works for the high competition to acquire a high market share, even in the situation when barriers to entry are high. Costco Company is experiencing a fast-growing culture and progress. The working of the company as a big retail corporation is aligned with consumer purchasing power. The perception of consumers is beneficial to stay in the competitive market.

Due to the maintenance of competitive advantage, Costco is ensuring long term viability. Currently, the company is working on expanding its growth on the basis of the quality of affordable goods and services. The mission of the company is to bring forth quality products with a specific selling point — the integral component of quality matters due to the presence of many firms. Offering a low price is specific for the company, and it acts as a significant selling point. The Costco warehouses are always available for the consumers because its strategic objective is to follow growth on the basis of its competitive strength. Due to the intent of sustenance and long term market positioning, it is bringing customers’ value. The financial objectives of Costco are to attain high profitability in the market that can help a company survive through its revenues.

The vertical integration strategy by Costco is adopted to achieve market excellence. The company is operating at low margins to provide ease of access to its consumers. The company, as a retail store, tends to face many problems, such as supply chain management. Its focus is to provide goods worldwide customers with mastery to manage supply chain practices. Any main attributes for a large supply chain company are time and costs (Gudlaugsson, 2018). Time is all about effective delivery to shelves from the store. Late delivery creates issues for customers so that shortages can affect the business process. Cost is maintained by not passing it to consumer goods always.

There are infinite possibilities in vertical integration that can help manage the supply chain effectively. Costco can apply vertical integration strategy as an innovation to run its business model without any difficulty or disruption. The vertically integrated model of business provides the basis of taking control of the supply chain full or partial. Costco is a wholesale multinational firm that needs an effective supply chain to manage small businesses and to fulfill significant family needs. The vertical integration model will control supply chain practices with active participation. It involves suppliers’ investment and any form of business. Through vertical integration, Costco can set up a separate production facility. Its annual revenue is US138.4 bn with card holder of all category 94.3 million.

The vertical integration as a new business model in Costco will not necessarily be successful, but some factors can increase the success ratio. In the US, three companies, i.e., Pilgrim’s Pride, Tyson, and Perdue, are famous for poultry. Costco is operating at low margins, so it is not able to offer Rotisserie chicken at $5 due to competition, so the vertical integration model will allow the company to set up its processing center for poultry. It will open a chicken farming operation in Nebraska that will offer the company to engage customers with 100 million chickens (Yang, 2017).

The vertically integrated business model can be successful for Costco because its financials are very strong, i.e., annual membership fees $3.14 billion and 2.27% made net sales in 2018. It is also a lean company on overheads, so pallets are filled up with products followed by bulk packaging. It is found out that annual sales of Rotisserie chicken are the US $300 million, with the estimated project cost the US $275 million. This estimate provides a fundamental tendency to get market share, and this model can be a game-changer for the industry.

Engaging in different joint ventures is not new for Costco. It is operating with enterprises since after its establishment. It has maintained hot dog and soda deal priced at the US $1.50 since the company is engaged in hot dog products at a meat plant in California. In addition to this, the Nebraska poultry plant will manage supply chain disruption by creating economies of scale. Costco, with the help of vertical integration, can affectively build up business conditions and make farmer unions. It will also jack up project outlay as well as operational costs. The partial vertical integration strategy in Costco will help develop their business further with the incorporated distribution system. It also has cross-docking distribution centers. This kind of system allows for the stability in value chains (Zhou & Wan, 2016). The cross-docking system undertakes pre-assigned inventory to the destination. The center activities are only shipping and sorting. Costco is using the sophisticated infrastructure of IT, and it has eliminated expensive functions.

Moreover, Costco has also used a backward integration method with the Kirkland brand. The strategy of Costco about vertical integration is likely to be successful because it is working to protect the famous product line by highlighting the risk of exposure. The company is strongly performing in the retail climate, with an inherent focus on in-housing sourcing, enhancing member value, and driving costs down.

References

Boström, M., & Karlsson, M. (2013). Responsible Procurement, Complex Product Chains and the Integration of Vertical and Horizontal Governance. Environmental Policy And Governance, 23(6), 381-394. doi: 10.1002/eet.1626

Edmonds, C. (2017). Can Costco Reign in Spain?. SSRN Electronic Journal. doi: 10.2139/ssrn.2934940

Gudlaugsson, T. (2018). THE IMAGE OF COSTCO IN ICELAND AND ITS IMPACT ON THE GROCERY STORE MARKET. Journal Of Academy Of Business And Economics, 18(3), 93-103. doi: 10.18374/jabe-18-3.10

Yang, C. (2017). Could Vertical Integration Increase Innovation?. SSRN Electronic Journal. doi: 10.2139/ssrn.2930780

Zhou, Y., & Wan, X. (2016). Product variety and vertical integration. Strategic Management Journal, 38(5), 1134-1150. doi: 10.1002/smj.2540