The Organizational Context
Costco Wholesale is an American company that operates in the industry of warehouse retail. The company has achieved success using its membership model and continues to attract new customers with ultra-low prices. However, Costco is currently operating at very low gross margins, and its ability to further lower its prices is limited. The low quality of customer service at Costco is its major vulnerability, and with several other warehouse chains copying Costco’s business model, Costco has to consider improving its business processes to remain competitive.
Using PESTLE framework, the following external factors which affect business operations of Costco can be outlined:
- Political factors: As Costco operates in the warehouse retail industry, it is affected by state and federal tax policies and environmental policies, as well as political stability in general. Political stability in the domestic and foreign markets where Costco operates is an opportunity for Costco to continue its growth.
- Economic factors: Slow, but steady growth of the domestic market positively affects Costco’s profitability. As Costco operates globally, the rapid growth of developing markets presents an opportunity for further expansion.
- Sociocultural factors: The pressure on businesses to adhere to such business practices that positively affect social well-being has been increasing (Brunk, 2010, p. 255). This is a major external factor that affects Costco operations. The company has been successful in using this factor as an opportunity to improve its corporate image and customers’ perception. The company has to continue to perform responsibly to remain competitive.
- Technological factors: New, innovative technology presents new opportunities for business automation and reduced costs. Technological development presents new opportunities to improve the company’s performance.
- Legal factors: Costco operates its business in compliance with local laws. The change in these laws may present both an opportunity and a threat. For example, the increase in the minimum hourly wage may affect the company’s profitability. However, it may also present an opportunity: the company may increase its hourly wages above the market average to improve job satisfaction and reduce employee retention. Such increase will, nonetheless, necessitate changes in other aspects of Costco operations to compensate for increased payroll expenses.
- Ecological and environmental factors: As a warehouse retailer, Costco relies heavily on the transportation of goods to keep its business running. The change of government regulations of those emissions which contribute to the greenhouse effect may negatively affect the profitability of the company due to increased compliance costs. Besides, climate change is another threat, since it may affect the availability of certain products. Costco has to consider strategies to expand its supply chain.
Costco’s internal issues are mainly associated with its business model. The business model of Costco is focused on generating high sales volumes of a limited number of brands at low prices. While the limited number of brands does mean that the selection of items at Costco is smaller than in other warehouse chains, it also means that prices can be kept low because an individual item can be bought in large volumes.
To sustain low prices and remain profitable, the company applies lean practices in its business operations. For example, the company designs its warehouses to allow the maximum usage of space, does not employ non-essential personnel, and minimizes the costs of operations as much as possible. The issue is the fact that due to low gross margins, the company cannot further reduce its prices without compromises in the form of cutting operational costs.
The company’s profitability depends on its ability to apply lean practices to minimize operational costs, and in the face of fierce competition, the company has to rely on other means to gain competitive advantage. The selected business model also means that the company’s ability to provide quality customer service is limited. The company cannot simply employ more personnel or allocate large budgets for social media campaigns to improve its image.
In the framework of Weisbord’s six-box model, the issues outlined above may be presented as follows:
- Purposes: Costco’s mission is “to continually provide [its] members with quality goods and services at the lowest possible prices” (Mission Statement and Code of Ethics, 2010, par. 1). Lowest possible prices limit the company’s ability to deliver high-quality service without raising operations costs.
- Structure: The company operates in both domestic and foreign markets, and has a large chain of warehouses in its possession. An integrated communication strategy is needed to maintain high-quality customer service at all organizational levels.
- Relationships: Costco has been limited in its ability to use the latest technologies to improve its customer service due to its strategy to keep operations costs at a minimum.
- Leadership: The company’s leadership efforts have not been focused on improving the quality of services, but rather aimed at providing the lowest possible prices.
- Rewards: The company provides comprehensive benefits and competitive wages.
- Helpful mechanisms: Costco’s quality management system is either non-existent or inefficient, thus reducing the company’s ability to improve its service quality.
The Management Problem
While Costco focused on driving sales, the quality of customer service became compromised. Nonprofit organization Consumer Reports evaluated the quality of customer service at Costco and rated it from “poor” to “fair” (Peterson, 2016, par. 10). Online reviews also suggest that the quality of customer service is unsatisfactory and many areas need improvement. Many customers complain about shipment delays, rude customer service representatives, strict credit card policies, tax scams, credit card bills with no statements, faulty products, etc. (Consumer Complaints and Reviews, 2016).
Currently, Costco is rated one star out of four for its customer service quality at www.consumeraffairs.com. On another website, www.trustpilot.com the company’s customer service is rated as “Poor” with a score of 3.2 out of 10 (Costco reviews, n.d.) Customers describe the quality of service as dreadful and describe the company’s representatives as rude and incompetent (Costco reviews, n.d.).
It is important to address the quality of customer service for Costco to remain competitive. Costco is not the only warehouse retailer that sells merchandise and uses a membership model. Sam’s Club, for example, uses the same model, and its membership fee is lower than Costco’s. Studies show that 40 percent of customers’ defections are the result of low-quality service (Tschohl, 2011).
Costco has to focus on maintaining a loyal customer base, which is impossible if the quality of customer service is compromised. “Loyal customers help promote business by providing a strong word of mouth, creating business referrals, providing references, and/or serving on advisory boards” (Komunda & Osarenkhoe, 2012, p. 2). Only by consistently providing high-quality customer service will Costco be able to retain and grow its membership base and business.
Improving the quality of customer service will also likely decrease administrative costs of complaints. If the company focuses on improving its customer service in the first place, this will result in fewer calls and emails from upset customers, less negative feedback online, lower costs of repair and replacement, and require much less administrative work (Tschohl, 2011). Also, increased quality of customer service will reduce marketing costs because satisfied customers will attract new members by word-of-mouth (Tschohl, 2011).
To improve customer service quality, Costco has to focus on improving the job satisfaction of its frontline employees in addition to improving business processes. As such, the strategy should include establishing integrated communications to facilitate change in different departments, creating a company-wide quality documentation and management system, establishing quality objectives, and monitoring the company’s performance to these objectives. Also, the strategy should include measures to increase frontline employee satisfaction, for example, providing special bonuses for meeting the quality objectives, increasing hourly wage, improving working conditions, etc.
The Change Initiative
The change initiative is focused on improving employee job satisfaction as well as the quality of business processes. The following is the plan for implementing change created using Kotter’s 8-step change model:
- Create urgency: To create a sense of urgency, a scenario can be developed to showcase what exactly will happen if the company ignores customer service quality. The scenario will use current data of customer defections and project revenue loss as a result of poor customer service. Besides, it will highlight the role job satisfaction plays in improving customer service.
- Build a guiding coalition: A coalition should be formed and include representatives of all departments. These representatives should influence the company and expertise they can use to create urgency. Also, they will help align internal communications to facilitate change across all departments.
- Create a strategic vision: A strategic vision is a company with high customer loyalty, employee job satisfaction, and consistent quality of customer service. It is also necessary to create a strategy to make this vision a reality.
- Communicate the vision: The vision and the strategy should be presented to stakeholders who have an impact on the process of change. These include the company’s CEO, top management, and the rest of the employees. Through marketing, the same vision should be communicated to the customers via brand messages.
- Remove barriers: Barriers could be current compensation systems that do not motivate employees to provide quality service. The proposed compensation system should be based on pay at risk concept, which suggests reducing the fixed component, but increasing the incentive component significantly above it (Biswas, 2014). The incentive component should be connected to meeting quality objectives. Besides, providing better benefits, for example, comprehensive healthcare coverage, and improving working conditions, may also improve job satisfaction.
- Generate short-term wins: Short-term targets should be established to facilitate change. For example, a smaller target might be surveying frontline employees to determine, what benefits will improve their job satisfaction.
- Sustain acceleration: Acceleration can be sustained by constantly monitoring the progress of change and documenting what worked best. The momentum can be maintained by continuously establishing new objectives after the last one was achieved.
- Institute change: It is important to invite all of the personnel to actively participate in the change process. Integrated communications can be used to facilitate cross-functional communication and align corporate messages between different departments.
For the change initiative to succeed, it is important to consider the role of the readiness for change. Readiness for change can be defined as a resolve to actively participate in facilitating change. Armenakis, Harris, and Field’s model of change includes five change beliefs: discrepancy, principal support, efficacy, appropriateness, and personal valence. Readiness for change can be created by addressing these five beliefs in the following way:
- Discrepancy: On different management levels the company has to convey a message that change is necessary and that it will bring benefits to the employees as well as the company.
- Appropriateness: Short-term objective results can be used to show the appropriateness of change.
- Principal support: Key employees in all of Costco’s departments which have a degree of influence inside the organization should be converted into active supporters of the change process to facilitate change.
- Efficacy: The personal contributions of all the employees involved in the change process should be praised.
- Personal valence: Change should be framed as a means to achieve personal gain for all of the employees. For example, better quality service will result in higher revenue and increased wages by the following year.
The proposed change initiative is the best alternative because it addresses the underlying causes of poor quality support – low job satisfaction of employees and poorly designed business processes. Research suggests that one of the factors which cause poor customer satisfaction is the quality of interpersonal interactions between the customers and the frontline employees (Groth & Grandey, 2012, p. 208). Specifically, mistreatment of the customers by the company’s representatives as a result of strain or anger is directly related to lower customer satisfaction (Groth & Grandey, 2012, p. 209). People play a central role in the success of process improvement. As such, the focus of the change initiative is on improving employees’ job satisfaction.
Some of the specific outcomes of the change initiative are:
- A reduction in customer defections;
- A reduction in administrative costs;
- Higher scores on customer review sites;
- An increase in membership base;
- An increase in revenue;
- Lower frontline employee retention rate;
- An increase in employee satisfaction, etc.
Some of these outcomes can be measured using statistical data, for example, a reduction in customer defections can be evaluated by comparing pre-change and post-change numbers. Other outcomes, such as an increase in employee satisfaction, can be assessed using questionnaires.
Today’s business environment requires organizations to constantly deliver innovative responses through the optimization of business operations and the implementation of new, more efficient business practices (Ates & Bititci, 2011, p. 5601). This fact is especially true for the ferociously competitive warehouse retail industry, which is dominated by several large corporations using all means possible to gain competitive advantage.
Costco has to commit to the idea of service quality improvement to remain competitive. High-quality customer service results in higher customer satisfaction, which means that fewer customers would discontinue their membership. At the same time, the membership base would likely increase due to the positive word-of-the-mouth. Increased membership base would result in higher profits and allow the company to expand to foreign markets to facilitate growth.
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Biswas, B. (2014). Employee Benefits Design and Compensation (Collection). New Jersey, United States: FT Press.
Brunk, K. (2010). Exploring origins of ethical company/brand perceptions — A consumer perspective of corporate ethics. Journal of Business Research, 63(3), 255-262.
Consumer Complaints and Reviews. (2016). Web.
Costco reviews. (n.d.). Web.
Groth, M. & Grandey, A. (2012). From bad to worse : Negative exchange spirals in employee−customer service interactions. Organizational Psychology Review, 2, 208-233. Web.
Komunda, M., Osarenkhoe, A. (2012) Remedy or Cure for Service Failure?: Effects of Service Recovery on Customer Satisfaction and Loyalty. Business Process Management Journal, 18(1): 82-103. Web.
Mission Statement and Code of Ethics. (2010). Web.
Peterson, H. (2016). Consumer Reports put Costco and Sam’s Club head-to-head — here’s the verdict. Web.
Tschohl, J. (2011). Achieving Excellence Through Customer Service. Issaquah: AudioInk Publishing.