Customer Satisfaction and Innovation Management

at Costco Corporation.

Table of Contents

Summary. 3

1. Introduction. 4
2. Customers 4
3. Survey Research to Measure Customer Satisfaction at Costco. 6

3.1: Presentation of Findings 7

3.2 Analysis of Findings 9

4. Innovation Management at Costco. 9
5. Conclusions and Recommendations 11

BIBLIOGRAPHY.. 12

Appendix. 13

Summary

This paper was aimed at studying customer satisfaction and innovation management at Costco Wholesale Corporation which is specialised in retail. The study began by reviewing the company’s history/profile and its customers. The study then employed a sample of 19 respondents to determine their level of satisfaction with Costco’s products and services. The findings suggest that Costco is a company that is committed to providing customers with high quality products and services. However, the company needs to improve on its online services to customers.

1.    Introduction.

Costco was founded in 1983 by Mr Sinegal who is currently the Chief Executive Officer (CEO) of the company. Beginning with a single store in Issa Quash, Washington, outside Seattle, it was the fourth largest retailer in the United States and the ninth largest in the world. It had a total of 460 warehouses in 37 U.S States; Puetorico and other countries around the globe including the Canada, the UK, Mexico, Taiwan, South Korea and Japan. (Cascio, 2006). Costco has been the market leader of the Warehouse club category of retailing since its formation in 1983. It has witnessed steady growth under its CEO and founder James Sinegal. Costco has an exceptional business model among retailers. The model is based on “Sol Price”, which means that it sells a limited number of products, cuts cost significantly, rely on high volume, pays workers well, have customers buy memberships, and aim for upscale customers, especially small business owners. (Cascio, 2006). In addition, Cosco does not advertise, which enables it to save approximately 2 percent in costs annually. (cascio, 2006). This business model has contributed significantly to Costco’s growth. (Vemuri and Madhav, 2004). Costco’s main competitor is Sam’s Club, which is owned by Wal-Mart. Despite this challenge, Costco has maintained an average sales per store above that of Sam’s Club. (Vemuri and Madhav, 2004). The objective of this paper is to present a discussion about Costco’s customer satisfaction as well recommendations on how the company can innovate the products and services offered to customer so as to increase customer satisfaction and thus increase its market share and thus profitability and long-term growth prospects. The rest of the paper is organised as follows: section 2 provides an overview of the company’s customers, and how it ensures they are satisfied; section 3 provides a survey research conducted on a sample of the company’s customers to determine their level of satisfaction with the customer and section 4 provides a discussion on how Costco can innovate its products and services so as to improve its commitment to customer satisfaction.

2.    Customers

Costco’s main customers include upscale customers. These are customers who buy wholesale items in bulk. Costco targets mainly small businesses that serve as retailers of the items bought from Costco. Costco depends on word of mouth (WOM) communication as a means of marketing its products to customers. The company’s products are of the highest quality and are provided to customers at discounted prices. By offering high quality products to customers at high quality prices, the company is committed to providing customers with high quality. Through high quality service, customers carry a positive word of mount about the company and the company keeps on attracting profitable customers. To become a customer at Costco, one has to become a member. A member pays a membership fee of $50. (£25 in the U.K). Upon payment of the membership fees, a customer is provided with a membership card that entitles him/her to shop at Costco. The membership card carries the members ID and must be presented for inspection when entering the Shop. There are two types of membership status: Goldstar members and business members as shown in figure 1 below. One can observe that Goldstar members increased from 15,018,000 in 2004 to 20,181,000 in 2008 representing a 34.37 percent increase. Business members increased from 4,810,000 in 2004 to 5,594,000 in 2008 which represents an increase of 16.2 percent between 2004 and 2008.

Figure 1: Costco, Membership

Source: Costco Annual Report (2008).

Executive members are entitled to a 2% reward on all purchases that are greater than or equal to $500. To attain this status, the member is expected to upgrade by simply paying an additional $50. The table below shows the different rewards that an executive member can get based on different amounts spent at Costco.

Table 1: Reward for

Source: http://www.costco.com/Browse/Productgroup.aspx?Prodid=11175590

As part of Costco’s commitment to customer satisfaction, the company pays one of the highest rates in the retail industry. (Business Week, 2004).

Costco compensates its employees generously and one-fifth of its workers are unionised. By so doing it benefits from lower employees turnover and higher productivity. Employees especially front-end employees are the ones who interact directly with the customers. Keeping employees satisfied in effect keeps the customer satisfied. Compared to Wal-Mart, Costco’s labour cost is lower than that of Wal-Mart as a percentage of sales. For example, Costco’s 68,000 hourly workers in the U.S generated $34billion in sales in 2003 as opposed to Wal-Mart’s Sam’s Club’s 102,000 employees who generated only $35billion dollars. (Business Week, 2004). This indicates that Costco’s labour cost of sales are significantly lower than that of Sam’s Club whereas Costco pays higher wages to its employees than Sam’s Club. While Sam’s Club pays hourly rates of $11.52, Costco pays $15.97 per hour. In addition, Costco provides employees with health and retirement contributions and includes most of them in its health care 401(k), and profit sharing plan. (Business Week, 2004). According to the CEO James D. Sinegal: “Paying your employees well is not only the right thing to do but makes for good business”. (Business Week, 2004).

This generosity has a positive effect on Costco’s employees who are described as one of the most productive and loyal workforces in all retailing. Costco has a very low employee turnover as compared to Sam’s Club. Only 6% of Costco employees are likely to leave the company one year following their recruitment as opposed to 21 percent for Sam’s Club. This saves Costco a lot of money in terms of recruitment cost. Moreover, employees at Costco sell more than Sam’s Club. Costco’s employees generate $795 of sales per square foot as opposed to $516 per square foot for Sam’s Club. (Business Week, 2004).

The above track wage strategy does not just work like that. There are strategies that must be put in place to ensure that the strategy works effectively. What has Costco done to sustain high wages? The answer is simple: Costco constantly look for ways to repackage goods into bulk items, which reduces labour, speeds up its just-in-time inventory and distribution system, and boosts sales per square foot. (Business Week, 2004). It also caters for the needs of small business owners and more affluent customers who are likely to buy in bulk and purchase high-margin goods. Costco has an innovative packaging and merchandising mix that no rival has been able to match. (Business Week, 2004). A very high percentage of customers are satisfied with Costco’s goods and services. As shown in appendix 1 a good number of customers say they were very satisfied with Costco’s online delivery services. For example, one customer said he was very satisfied because the products are easy to shop and delivery is always fast. Moreover, when he raised a complain about an item, he was quickly given the opportunity to return it at a local store for a full refund. (http://www.resellerratings.com/store/Costco). As noted by one of the customers in Appendix 1, Costco offers a 2 years warranty on all electronics. (http://www.resellerratings.com/store/Costco).

3.    Survey Research to Measure Customer Satisfaction at Costco

A questionnaire was designed to help understand how customers perceive the products and services offered by customer. 30 customers were originally targeted but only 19 agreed to respond to the questionnaire. The questionnaire was designed in such a way as to attract customers to agree to respond to it. To ensure that customers were actually Costco customers, only people with a Costco membership card were administered the questionnaire. The questionnaire was administered to customers in one of Costco’s stores in Nichells Birmingham.

3.1: Presentation of Findings

The first question asked respondents how they heard about Costco. Table 1 below shows the frequency distribution table for the different responses.

Table 2: Frequency Distribution Table for How Customers heard about Costco.

Table 2 above shows the frequency distribution table on how customers heard about Costco. It can be observed that out of 19 respondents, none of them heard about Costco from the Television, non saw Costco in a Newspaper 16 respondents said Costco was recommended to them by a friend, none saw Costco in a Magazine, while 3 saw Costco in the internet. Basically, 84 percent of the respondents heard about Costco from a friend while 16 percent saw Costco on the internet.

Table 3: Most Important Attribute For Purchase Decision

As shown in table 3 above, respondents were also asked to state what determines their purchase decision. 13 respondents representing 68 percent said their purchase decisions were determined mostly by the price, 4 respondents representing 21 percent said quality was their most important attribute, 2 respondents representing 11 percent said their most important attribute was customer service and no respondent selected store location as an important attribute.

Table 4: Overall Satisfaction with products

Customers were asked about their overall satisfaction of the products offered by Costco. 16 customers representing 84 percent said they were very satisfied with the products offered by Costco, 2 customers representing 11 percent said they were satisfied, 1 respondent representing 5 percent said they he/she was somewhat satisfied with the products offered by Costco. No respondent said he/she was either dissatisfied or very dissatisfied with the products offered by Costco.

Table 5: Overall Satisfaction with customer service

Table 5 shows that 74 percent of respondents were very satisfied with the level of customer service at Costco, 21 percent were satisfied, and 5 percent were somewhat satisfied. None of the customers was either dissatisfied or very dissatisfied with the level of customer service.

Table 6: Overall Satisfaction with Store Location

58 percent of respondents were satisfied with the store location, 32 percent were somewhat satisfied, 11 percent were somewhat satisfied and none was either dissatisfied or very dissatisfied.

Table 7: Will you recommend Costco to a Friend or Colleague?

Asked whether they will recommend Costco to a friend, all customers in the sample said they will recommend Costco to a friend or colleague.

3.2 Analysis of Findings

The above findings indicate that Costco is doing very well as far as customer satisfaction is concerned. A significant portion of the customer surveyed said they were very satisfied with the services and products offered by the company. Moreover, no customer expressed any sign of dissatisfaction and all customers said they were willing to recommend the company to others. Costco’s success can be attributed to its business model, which is based on stocking a few items and targeting large volume sales. In addition Costco pays one of the highest rates in the retail industry as we saw earlier. However, based on the findings presented in appendix 1, some customer expressed dissatisfaction with the online services provided by the company.

4. Innovation Management at Costco.

In those days a company could remain competitive by optimising performances relative to costs, delays and quality criteria. (Tomala and Sénéchal, 2004).  However, maintaining competitive advantage today depends more on a company’s capacity for innovation. (Tomala and Sénéchal, 2004; Crawford, 1996).   Cooper (1998) asserts that any company that does not innovate today, or fails to develop new products, “disappears immediately”. Innovation enables companies to meet new customer needs in today’s customer and technology-driven business environment. Innovation also enables companies to provide a wider range of products, increase the quality and reliability of existing products, win new markets, reduce environmental destruction,  satisfy legislation, regulations and standards, increase production flexibility, reduce costs (including wages, raw materials and energy consumption), and improve the performance of the various product-linked services. (Tomala and Sénéchal, 2004). Design departments must innovate constantly if a company is to stay competitive, although many of the resulting innovations will be relatively small, ‘‘incremental’’ innovations – slight modifications of existing services or product characteristics, such as a new injection technique in a car engine, for example – rather than the radical innovations mentioned above. (Tomala and Sénéchal, 2004).

Innovation and change are difficult to achieve in any organisation. They are processes that must be managed appropriately. Innovation gives rise to a host of new problems. It causes change reactions throughout the company. These reactions may adversely affect production systems, logistics, administration, information flow, sales departments, accountants, financial services. (Tomala and Sénéchal, 2004). Liberatone and Stylianou (1995) cited by Tomala and Sénéchal (2004) suggest that only 14% of innovations have significant success; the majority of new ideas never even reach the market. the above issues lead to a number of questions as regards how successful innovation can be achieved in an organisation. Again like developing new products, innovation requires the collaboration of all the different departments of Research and Development (R&D), product design, manufacturing and marketing. According to Langerak et al. (1997: p. 283) in order for an organisation to develop products that provide value for customers in a timely way, R&D, product design, manufacturing and marketing need to improve their cross functional communication and understanding of customer needs. Consequently, it is important for other managers to gain insights from the marketing department on how customers perceive the innovative products. Factors such as design, colour, volume, price, etc. Langerak et al. (1997: p. 283) stipulate that the first benefit of cross functional communication is the reduction of time to market. The challenge is to adopt a new mode of thinking in an effort to master this new practice of innovation management. (Tomala and Sénéchal, 2004). Innovation management requires knowledge of: the actors involved in the project;  organisation of the project team and/or company; and the framework within which the inovation project works. (Tomala and Sénéchal, 2004).

Xuereb (1991) cited by Tomala and Sénéchal (2004: p. 282) divides the permanent staff of a company into seven different categories according to their roles in the innovation process:

• Product sponsor. This person defends the proposed innovation against all attacks during its development and is ultimately responsible for convincing company management to accept the new product/service.
• External decision-makers. Outside of the development team, these people are responsible for strategic management. They perform a variety of tasks, including but not limited to soliciting subsidies, protecting the company’s interest and establishing company objectives.
• Internal decision-makers. These development team members are appointed by the external decision-makers to manage the innovation process. They are also involved in the overall decision-making process.
• Administrative personnel. Such personnel perform the administrative tasks (follow up, documents, etc.) required for any innovative development process.
• Researchers. These people explore possible applications for existing technologies or for those currently under development.
• Developers. They transform new technology into marketable products.
• Expert advisors. Their role is to advise and evaluate members of the development team.

The above staff must work in collaboration to ensure that the innovation process is successful.

Other issues to consider, which would not be developed further in this paper include the “framework”: organisational parameters for innovation; and the “Organisation”: coordinating the project teams. To maintain its current strategic position Costco needs to continue aiming at improving the products and services offered to customers. The organisation needs to be on the lookout for opportunities to innovate. Customer’s preferences change as time goes on and the changes are often faster than anticipated. This paper therefore recommends that Costco should be on the look-out to innovate its products and services in a manner that will be perceived by customers as being of a higher quality than those offered by competitors.

5.  Conclusions and Recommendations

Based on the above discussion, one can conclude that Costco is one of the best companies in the retail industry with a great commitment to customer satisfaction. However, the company’s online services are perceived to be poor by some customers. The company needs to do more in improving its online services. As discussed above, innovation entails identifying the different actors and assigning each actor with the tasks necessary to be carried out to ensure that the organisational goals are achieved. Strategic, tactical, and operational goals need to be set and strategic, tactical and operational plans designed to meet these goals.

BIBLIOGRAPHY

Business Week (2004). The Costco Way: Higher wages mean higher profits. But try telling Wall Street. Available online at: http://www.businessweek.com/magazine/content/04_15/b3878084_mz021.htm

Cascio, W. F. (2006) Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club. Academy of Management Perspectives; August 2006; Available online at: http://web.ebscohost.com/ehost/pdf?vid=2&hid=3&sid=bbd240be-8bc4-418d-ae67-c4bda04e6353%40sessionmgr109.

Crawford CM. (1996). New products management. Fifth ed. Chicago: Irwin.

Cooper R. G. (1998). Product leadership: creating and launching superior new products. Perseus Books; 1998.

Costco Wholesale (2008) Annual Report 2008. Available online at: http://media.corporate-ir.net/media_files/irol/83/83830/2008_AR_Cost.pdf

Tomala, F, Senechal, O. (2004). Innovation management: a synthesis of academic and industrial points of view International Journal of Project Management 22 (2004) 281–287.

Vemuri, K., Madhav,T. P. (2004). Costco: The Leader’s Challenges. Available online at: http://www.ibscdc.org/Case_Studies/Strategy/Troubled%20Times/TRT0013.htm

http://www.resellerratings.com/store/Costco