Strategic Management Term Paper

Lyssette Salazar BUSI 4369.61 Dr. Steve Lovett April 20, 2006

Target Corporation Strategies for Tomorrow

Executive Summary The purpose of this paper is to present an executable and practical strategy for Target Corporation. A variety of factors influenced strategy formulation. The company’s mission coupled with a SWOT analysis provided the basis for the recommendation. The differentiation strategy selected supports the company mission and addresses issues from the SWOT analysis. An implementation plan is provided for the suggested strategy as well.

Background Introduction Target Corporation’s history began in 1902 as a department store chain. The actual Target brand was created in 1962 as a discount retailer. This history has provided Target the basis for its differentiation. With department store roots, Target has always been consumer-oriented. The brand includes Target stores, Super Target, Target Greatland, and Target.com. Other operations include ownership of the Associated Merchandising Corp., financial services, and commercial interiors.

Environment The retail industry is highly competitive and saturated. Moreover, Target’s unique upscale, discount-store approach broadens its competitor list. Major competitors include: Wal-Mart, Kmart, Dollar General, Sears, and JC Penney. Another aspect of the retail environment is the online shop. Like Target, Wal-Mart also offers online shopping convenience. The online shopping realm is equally intense with competitors like Old Navy, offering $5 shipping. Target.com is still, however, in its rudimentary stages. Retail competition is fierce, but the greatest risks are interest rates. Interest rates affect both debt and market returns. Given Target’s debt to total assets ratio of 64%, any change could be considerable.

Management Target’s top executives include Robert Ulrich (CEO) and Gregg Steinhafel (President). Ulrich has had the most impact on Target. Arriving in 1984, he set on differentiating Target from competitors. He has set the industry standards on quality and value. Steinhafel previously headed Target’s merchandising operations. He is known for taking a more hands on approach. He frequently visits Target stores and competitors to compare. The duo has set a clear vision for Target: always provide the greatest value to the consumer.

Recent Performance Today, Target Corp. operates about 1400 Target stores and Super Target’s. The Target chain has been prosperous, representing 90% of annual revenues. Sales have increased steadily the past three years, ending at $46.839 billion in 2004. Ratio analysis shows a drop in overall debt and increases in liquidity. Despite positive indicators of growth, other company finances show poor asset utilization. This is particularly true when compared to industry averages. (Appendix A)

Future Prospects In 2004, the company disposed of the Mervyn’s and Marshall Field’s brands. This was the result of lackluster performance. The effects of this decision have yet to materialize. However, analysts agree that the outcome will be a more focused direction. The Target.com website is still very promising and most agree that Target has, “arguably the best brand name in retail.” (Grom). Additionally, store growth is projected to increase 50% within the next decade. The eastern United States still represents much growth potential. Target has yet to exploit many of these opportunities.

Mission Introduction Target has long been a trendsetter in the retail industry. It all began with the idea of, “fashionable, smart design . . . delivered at competitive discount prices.” (Target). Target strives to deliver to customers a unique shopping experience. This can be seen in its innovative merchandising and design. Moreover, the company has always been dedicated to social responsibility. This includes commitments to charity, diversity, and the environment. In brief, the company has always been an innovator. This innovative spirit is incorporated in the company’s vision, values, and goals.

Vision The essence of Target’s vision is, “Expect More. Pay Less.” (Target). This is embodied through a mission to create value for Target guests. Value is created by providing customers with the right combination of quality products. It is also a commitment to provide a unique product. Quality at Target means a variety of things. In summation, quality means providing a superior product. Customers have come to expect great design at affordable prices. Overall operations are guided by fulfillment of this expectation.

Values Target is committed to its customers. This commitment entails endeavors in and out of the workplace. This means a passion for delivering just what the consumer wants. It is achieved with dedication to delivering great quality and value. In addition, Target has always been active in philanthropy. The tradition began with Target’s founder, George D. Dayton. Today, the tradition has grown into national partnerships, local initiatives, and store programs. Additionally, Target is committed to diversity. This is apparent in store design and merchandise as well as employees. Target is also committed to protecting the environment. As part of this commitment, Target has reduced waste by at least 70%. This is accomplished with extensive recycling and becoming more energy efficient.

Goals The main goal at Target is to maintain a competitive advantage. Accomplishment of this goal is measured through increased shopping frequency. The challenge includes creating and identifying opportunities for continual growth. This is ultimately accomplished with persistent innovation. Innovative design, technology, and supply chain management all support this goal. Innovative design entails all business aspects. This includes merchandise and stores, which are frequently updated. This creates greater customer appeal and convenience.

SWOT Analysis The analysis of Target Corporation’s strengths, weaknesses, opportunities, and threats exposed key areas for improvement. The analysis revealed a robust company affected mostly by easily controllable factors. Addressing these issues would result in greater productivity and strengthen Target’s competitive advantage.

Strengths Target is a company of several internal strengths. However, its main strength is its differentiation. This differentiation has been achieved through continued customer responsiveness. This enables Target to maintain a loyal consumer base. Differentiation has enabled Target to create one of the most recognized brands. It is the epitome of what Target represents. Continued differentiation is still possible through the use of new and existing technologies. Exploiting this strength would reduce some weaknesses.

Weaknesses Two aspects of operations were considered flawed. These were logistics and asset utilization. In recent years however, Target has steadily tried to improve its supply network. This entailed construction of additional regional distribution centers. In addition, three more DC’s and two import warehouses are planned within the next two years. In light of this, the company’s biggest weakness remains asset utilization. Of specific concern is receivables turnover. The company is overwhelmed by receivables. Further, it has exhibited poor collection of these receivables. Inventory and asset turnover have also been consistently lower than industry averages. Additionally, productivity comparisons with competitors show lower performance. Target had the lowest sales per square foot ratios in the industry.

Opportunities Opportunities for Target are mostly growth based. This includes a variety of growth mechanisms. First, Target has yet to fully saturate the U.S. retail market. Second, credit card operations are still in the infancy stage. Third, the company’s website represents a strong complement to instore growth. Fourth, international markets are a viable market for Target’s ultra-chic products. The area with the largest growth potential is the company’s website. In fact, the website could be used as an international penetration mechanism. Moreover, costs and risks associated with increasing focus on the website are substantially lower than the other options.

Threats The retail industry poses many barriers to entry that help reduce threats to Target. The biggest threats to Target are existing competitors and economic conditions. However, the threat of existing competitors is limited. This is because of Target’s strong consumer base and brand. This makes economic downturns the biggest threat of all. The retail industry is highly dependant on consumer spending. This in turn is highly dependent on prevailing economic factors. Further, these economic factors affect interest rates. This affects Target in both its investments and debts. The company’s 2005 debt to equity ratio of 64% puts it in a risky position. This is compared to the industry average of 48%. (Appendix A)

Strategic Alternatives Target has built a strong reputation through differentiation. This is what separates it from its competitors. It is what customers have come to expect. For this reason, any strategy must further enhance this competitive advantage. Differentiation strategies to increase efficiency, innovation, and customer responsiveness present good opportunities. These are also most suitable in satisfying the company’s vision.

Efficiency Differentiation through efficiency leads to a more productive company. Efficiency is the most basic method of decreasing costs. At Target this means addressing poor asset utilization. In addition, it means closing the productivity gap. This is particularly important in the retail industry. This benchmarking ratio determines the company’s vitality. Addressing these issues would enhance performance. This would lead to savings that could be passed on to the consumer. The main benefit to customers is lower prices or value. Aiming to increase turnovers benefits the customer. For example, inventory turnover reflects the right combination of products. Focusing more on this inadvertently addresses customer responsiveness. More interestingly, it could mean investment in value creation activities. For example, savings could be diverted to design or marketing.

Innovation Differentiation through innovation leads to a more competitive company. Target has long been a leader in creating unique products. Innovation is not germane only to products however. Other areas exist in which creativity and innovation could flourish. The Target website is the best opportunity for innovation. The site is currently powered by Amazon.com. While the site is visually appealing, navigation tends to be troublesome. Moreover, the cluttered look does not reflect Target stores. Developing the website in house has some key advantages. First, it allows greater control over the company image. Second, it could enhance store sales by providing instore pickup options and just browsing features. Third, new technology can enhance the shopper experience. These include virtual dressing rooms and product ratings. Fourth, website statistics could be manipulated to produce usable information. These web analytics could determine future site design and even product decisions.

Customer Responsiveness Differentiation through customer responsiveness is the key to building loyalty. At the core of customer responsiveness is understanding and predictability. A variety of methods exist to address these two concerns. New technologies are able to collect and analyze consumer information. Target’s credit cards offer a means of tracking consumer data. However, it fails to track the habits of non-card guests. Indiscriminately providing guests with store cards would yield much valuable information. Demographic and consumer shopping trends could be more easily traced. This would also enhance loyalty when linked to shopping rewards. The information collected could then be used to address customer’s needs. This would also simultaneously address turnover inefficiencies.

Recommendation Only one differentiation strategy truly addresses the company’s mission. Concentrating on the company’s website would further advance company goals. In addition, it fully addresses the concerns raised in the SWOT analysis. The redesigned website would be a differentiating mechanism unlike any other. Further, the website addresses the needs for better asset utilization by creating virtual inventories and economies of scale. The internet also provides a wealth of opportunities for the company to reach new customers and achieve growth. Finally, the internet as a growth mechanism is less susceptible to economic risks due to economies of scale and substantially lower investment. This strategy is befitting to the company’s overall mission and provides the only all encompassing solution. For these reasons it is the best option.

Implementation Strategy The purpose of the company website is to advance the company’s strategy. For this reason the newly created division should institute its own structure and controls. The structure and controls are to support the culture and overall company objective. However, the same companywide culture must be preserved.

Structure Current website operations are entirely outsourced to Amazon.com. (Appendix B) This structure is in opposition to the company mission. The setup does little to advance the company’s strategy to be a differentiator. The redesigned website should be treated as a new division with its own group of functions. Because the website’s purpose is to be at the forefront of company innovation, a decentralized, flat structure is most appropriate. It should enhance coordination and teamwork between functions. This structure would be easy to maintain given the low coordination needed as opposed to coordinating nationwide stores.

Controls The nature of the new division’s operations demands personal, output, and behavioral controls. Because the website is a portal of innovation, personal control is mandatory. This provides managers with the best feedback about customers, emerging technologies, and trends. The website operation can provide two forms of measurement. These are online presence growth and in-store complimentary growth. Both of which are measured by sales. To be truly effective and measurable, output controls need to be coordinated with goals set by headquarters. Behavior controls apply to customer service support functions of the division. Standardization is necessary to guarantee superior customer service. It is also necessary to gauge goal accomplishment.

Culture The same culture needs to be maintained throughout the organization. Customers are the focal point of business. Target website operations are no exception. The atmosphere must allow customer responsiveness, initiative, and creativity to flourish. The structure and controls employed should support this culture. Management needs to ensure ingenuity will be rewarded and failures will be a source of reflection. Moreover, the culture should be one of unity. It must not portray an image separate from the Target Corporation umbrella.

Expected Difficulties The biggest foreseen difficulty involves structure. Target is a highly centralized company. All decisions are made at headquarters in Minnesota. The proposed division with its own decentralized authority could meet much opposition. Coordination with headquarters over goals and strategies would help alleviate the problem. An approval mechanism for major decisions not necessarily related to the immediate scope of website operations may be necessary. In addition, rewards must be tied only to Target.com transactions, to include in-store pickup. This is to prevent difficulties between employees of Target.com and store associates. Another possible area of concern is the cannibalization of in-store sales. To prevent this, Target.com managers must precisely implement the prescribed culture of unity.

References "About Target." Target.Com. 23 Feb. 2006 . Associated Press, The. "Exit of Target CEO Candidate Puts President in Running." USA Today 5 Oct. 2005. 7 Apr. 2006 . Desmarteau, Kathleen. "Organic's Andrew Frank Discusses ETailing Technologies." Apparel Magazine 1 Sept. 2005. 17 Apr. 2006 . Halverson, Richard. "Bob Ulrich: Chairman, CEO, Dayton Hudson and Target; DSN's 1995 Discounter of the Year Takes DH by the Reins - the Power Players." Discount Store News 4 Dec. 1995: 1-3. Find Articles. Business & Finance. 4 Apr. 2006 . Hill, Charles W.L., and Gareth R. Jones. Strategic Management Theory: an Integrated Approach. 6th ed. Boston: Houghton Mifflin Company, 2004. "Target Corporation: Key Ratios." MSN Money. 4 Apr. 2006 . Yerak, Becky, and Susan Chandler. "Gamble Seen in Go-Alone Target: Department Store Savvy Polished Discounter Image." Chicago Tribune 14 Mar. 2004. 4 Apr. 2006 .

Appendix A Growth Rates %

Compan y 11.5

Industr y 9

S&P 500 12.6

-24.7

1.8

16.6

16.4

12.2

19.4

6.93

6.65

5.24

18.74

17.95

14.94

11.17

19.15

7.82

Compan y 0.64

Industr y 0.48

S&P 500 1.04

Current Ratio

1.5

1.1

1.4

Quick Ratio

0.8

0.3

0.9

Interest Coverage

9.3

13.4

3.3

Leverage Ratio

2.5

2.4

5.7

16.31

12.51

13.37

Management Efficiency Income/Employee

Compan y 7,000

Industr y 7,000

S&P 500 30,000

Revenue/Employee

156,000

187,000

Receivable Turnover

9.8

56.1

362,00 0 7.7

Inventory Turnover

6.2

7.3

8.5

Asset Turnover

1.6

2.4

0.4

Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Financial Condition Debt/Equity Ratio

Book Value/Share

Table 1 Data from MSN Money

Appendix B

Figure 1

Figure 2