Target Corporation
1. What is the primary industry your firm operates in? How would you characterize the level of competition in this industry, and with what data support?
Background/History
Target Corporation is a multi-billion dollar firm that operates in the retail industry (specifically in the variety/discount mass merchant segment of retail). Target was founded in 1902 as the Dayton Dry Goods Company in Minneapolis, Minnesota. Founder George Dayton was determined to provide “a higher level of stewardship” to consumers, and possessed an innovative mind that benefited the firm until his death in 1938. For example, during a freight-handlers strike in the 1920s, Dayton forever changed the way goods were transported when he decided to have merchandise flown by plane to retail locations to avoid backlash from the strike (A Bullseye View).
In the 1960s, Target as we know it began to take shape. Company executives wanted to offer a new experience of discount retailing that focused on high quality. The firm made the transition from department store to discount store and rebranded as “Target.”
Competition in the Discount/Variety Retail Industry
The discount mass merchandiser industry is a highly competitive oligopoly. Also known as “big box retailers,” these retailers occupy an enormous amount of physical space and offer a variety of products to consumers. These stores achieve economies of scale by focusing on large sales volumes (Investopedia).
Other key firms in the industry include Walmart, Costco, and Dollar General. Target’s main competitor is Walmart, which is nearly five times the size of Target.
Interestingly, these mass merchandisers must compete with one another as well as outside, specialized firms that offer the same goods. Since Target offers so many different products, many other retailers (whether in Target’s specific industry or not) sell the same merchandise. For example, Target may compete with Ulta Beauty for makeup products and JC Penney’s for clothing. The abundance and identical nature of many products sold at Target places an emphasized need on Target’s differentiation through customer service, prices, and store experience.
Although Amazon is does not a brick-and-mortar retailer, it is certainly a strong source of online competition for Target. Like Walmart, Amazon’s ability to negotiate with manufactures and consequently provide unbeatable prices poses an issue for Target. Additionally, Amazon provides convenience that Target must compete with.
2. Perform a Five Force Analysis of the Industry.
Market Rivalry
Although the discount retail industry has a few key players, the industry is highly competitive and firms must fiercely compete on prices. Walmart poses the biggest threat to Target in terms of internal market rivalry due to its ability to offer extremely low prices that Target’s volume simply does not allow.
Since these retailers offer many products that are not differentiated, buyers are extremely price sensitive and this makes the market highly competitive.
Threat of Entry
Although it would be quite simple to start a small mom-and-pop retail shop, it is highly unlikely that any new entrant to the market could easily build a distribution and inventory that was in any way competitive towards Target. The start-up capital would simply be astronomical. Since firms like Target and Walmart operate so efficiently due to their economies of scale, this would be extremely difficult for a new entrant to mimic these big-box retailers.
Supplier Power
Target uses many different suppliers since it sells so many different products, so it does not create a dependency on a certain supplier. Many suppliers likely depend on their relationship with Target to survive, so this provides Target with power over suppliers. No single supplier accounts for more than 5% of Target’s sales (Market Realist).
Buyer Power
Since most products at Target lack differentiation, buyers hold a high level of power and can easily switch to other retailers offering better prices. Consumers have multiple other options for purchasing the goods Target offers. A worthy example is a comparison of Charmin Ultra Soft Toilet Paper Mega Rolls (12 pack). This product retails for $14.99 at Target, compared to $12.97 at Walmart. Target must find other ways to attract customers since it cannot compete on pricing strategy alone due to Walmart’s unbeatable volume.
Substitutes
Once again, the lack of differentiation in Target’s products makes the products prone to easy substitution by buyers.
Internal Rivalry: HIGH
Seller Concentration: A few large competitors
Industry Growth: Low
Cost differences among Firms: Moderate (Walmart’s prices are historically lower than Target’s.)
Excess Capacity: No
Cost dependent on scale: Yes
Degree of Product Differentiation: Slim to none for most products, with the exception of branded lines such as Target’s clothing lines.
Switching cost for buyers: Virtually zero; customers will purchase from Walmart or Costco if their prices are cheaper. (Unless the consumer is extremely loyal to Target.)
Prices clear to all participants: Yes
Ability to adjust prices quickly: Yes, to an extent. Target can only offer prices so low in order to not cut into profits, but they can quickly offer sales on items in order to remain competitive with other firms.
Frequency of orders: High
Barriers to exit: None
Threat of Entry: LOW
Economies of Scale: Yes
Brand Loyalty: Moderate; applies primarily to certain products such as Target’s branded lines. Most consumers are not loyal to a certain type of deodorant, for example. For the store as a whole, Target boasts a high degree of brand loyalty.
New entrant access to key resources: Low
Experience advantages: High; consumers look favorably upon established brands. Additionally, experience in this industry can help firms negotiate lower prices with suppliers.
Network Externalities: Having more loyal Target fans creates a cult-like community and therefore attracts more members to join the community.
Substitutes and Complements: HIGH
Availability of Close Substitutes: High; Walmart and Costco offer nearly identical products, so consumers can easily purchase items at other retailers.
Comparative price and value of substitutes:
Availability of Close Complements: High
Supplier Power: LOW
Market concentration: Low
Threat of forward integration: Low
Ability to price discriminate: Yes, to an extent
Buyer Power: HIGH
Market concentration: Low
Price elasticity: Low for most undifferentiated household products that are necessities; moderate for items such as clothing and entertainment
3. What is the value proposition of the firm? What elements of the firm does the value proposition of the firm rely on?
Ever since the 1960s when Dayton Dry Goods became Target, the firm focused on creating a "new idea in discount stores." Target offers value to consumers rather than simply low prices, in comparison to Walmart. Target offers high quality, stylish goods, low prices, and desirable customer service in order to create a positive experience for consumers. At its inception, Target was created as "a store you can be proud to shop in, a store you can have confidence in, a store that is fun to shop and exciting to visit (A Bullseye View)."
Simply put, Target is a high-quality discount store that maintains certain benefits of its time as a department store in the early 1900s. Consumers enjoy shopping at Target for its stylish, high quality products that are all available in one convenient place. Additionally, customers experience more organized, pleasant stores at Target in comparison to competitors. Target offers stylish, affordable clothing and other branded products through its own popular private-label brands such as A New Day and Wild Fable.
In order to provide excellent customer service, the firm must maintain a well-trained team of employees and recruit well-qualified individuals who will work not only as employees but as ambassadors of Target’s key values. This is important for the firm to focus on because so many of the products sold in Target are not differentiated from competitor products. Therefore, Target must find ways to differentiate the experience rather than solely the products.
In order to provide stylish products, Target must invest in the development of its own private brands as well as maintain relations with popular manufacturers.
In order to offer low prices, Target must efficiently negotiate with suppliers, streamline distribution, and find other ways to cut costs in order to maximize shareholder value and compete with Walmart, who has the ability to offer the lowest prices on the market due to its massive size and relationship with suppliers.
4. Based on your answers to the above questions, what do you believe about the short term (3-5 years) and long term (10+ years) prospects of the firm? Will the firm gain, lose, or maintain market share over these two periods given their current strategy, and why?
Target shows a clear strategy that focuses on improving product differentiation through the expansion of branded, exclusive lines of clothing, home goods, and more. Additionally, the firm shows a clear focus on improving customer experience and providing top-notch services to customers such as drive-up ordering, free shipping, loyalty programs, and incentives to purchasing large quantities of products (such as free gift cards).
Essentially, Target must focus on these factors in order to remain competitive with Walmart and Costco. If a consumer is looking at price alone, Walmart will win every time. Target must focus on the consumers who care about more than solely price and who desire a pleasant experience. Target must use its differentiated lines to get these middle-class consumers in the door, and use effective in-store marketing in order to fill the consumers’ carts with more than just the exclusive lines.
Since Target focuses on building an experience for the customer, I believe the firm will at least maintain market share over both the short and long term. The expansion of more exclusive lines and an increase in sales volume would help to attract more consumers by further differentiating Target’s offerings and allowing Target to negotiate lower prices through supplier relationships.
Works Cited
A Bullseye View. Behind the scenes at Target. (n.d.). Retrieved November 28, 2018, from https://corporate.target.com/about/history
Kuang, C. (2018, November 20). Who are Target's Main Competitors? (TGT). Retrieved December 1, 2018, from https://www.investopedia.com/ask/answers/051915/who-are- targets-tgt-main-competitors.asp
Analyzing Target's Competitive Positioning. (n.d.). Retrieved December 3, 2018, from https://marketrealist.com/2016/04/porters-five-forces-analyzing-targets-competitive- positioning