Managing Operations to Create Competitive Advantage

Alexander Green, Michael Peters, and Mitchel Roman

Dr. C. Davies Operations Management BUS 440 Thursday, December 2, 2010

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Background History Target Corporation did not start with the dream of becoming one of the largest discount retailers in the world, or ranked thirtieth among the Fortune 500 companies, but instead it began as a small store in Minneapolis, Minnesota. George Dayton started Target, then called Dayton Dry Goods Company, in 1903, but at that time the company was just another small store. It was not until John F. Geisse pictured Target as an upscale discount chain that Target started to look like the company we know and recognize today. In 1962, the company changed its name to Dayton-Hudson and opened its first official store, but in the months before the first store opened its doors, former Daytons Director of Publicity, Stewart K. Widdess , was tasked to name and define the new retail store. Widdess and his staff debated more than 200 names. In a burst of red-and-white inspiration, they came up with the Target and immediately envision a classic bulls-eye logo. The reasoning behind the choice was, As a marksmans goal is to hit the center bulls-eye, the new store would do much the same in terms of retail goods, services, commitment to the community, price, value and overall experience. For four years, these discount stores lost money, but in its fifth year it had sales of thirty-nine million dollars, which allowed the company to open a fifth store.
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By 1967, Dayton-Hudson became Dayton Corporation and started offering common stock after going public. In the years that followed, the company reported its first decrease in profits since its initial years, as a result of the chain's rapid expansion and the top executives' lack of experience in discount retailing. After multiple quarters of losses, the company began contemplating closing its Target Discount Stores. After management changeover, the decision was made to sell of its overstock with huge sales, to keep the inventory at manageable levels. This move led the Target Discount Stores to over 600 million dollars in sales. Target then began to grasp its true mission to its customers, so that in 1994 Target Stores unveiled its brand promise, Expect More. Pay Less to reflect the unique retail experience offered at Target. The brand promise was a natural evolution of Targets commitment to
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Target.com,Target: Through the Years. Wikipedia, Target Corporation.

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community giving and offering guests value, quality and great guest service, all in a fun and inviting store environment.
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Target continued to expand and grow over the next few years, until Dayton-Hudson recognized how profitable Target had become and changed the name to Target Corporation and became the discount store. Dayton-Hudson would still run, but would be under Marshall Fields, the leading department store. In 2004, the Marshall Fields brand was sold, allowing Target to concentrate on its discount stores. Since then Target has followed only WalMart in its dominance of the United States Discount Stores.

The Target Service Experience Besides the main discount retail stores, Target offers other programs such as Target Financial Services, Target Sourcing Services, Target Commercial Interiors, and Target Brands. All of these subsidiaries help Target Corporation give better service to its customers. Target Financial Services issues the Target REDcard, Targets credit card, through Target National Bank for its customers. Target created the Target Check Card, a debit card for its customers that withdraws money from their account to pay for their purchases. Every use of the Check Card allows for up to forty dollars back and earns points for Target Rewards. Target Financial Services also manages Customer Gift Card balances. Target Sourcing Services has two jobs: to locate merchandise around the world that fits Target standards and to guarantee quality in the factories that do work for Target Corporation. This quality assurance helps to guarantee that customers are getting the best product. Target Sourcing Services also locates products from across the globe so that Target Stores can be sure to give its customers the products that they want. Target Sourcing Services has 27 full-service offices, 48 quality-control offices, and seven commissionaires located throughout the world. TSS employs 1,200 people. Its engineers are responsible for evaluating the factories that do business with Target Corporation for quality, as well as labor rights and transshipment issues. But Target Sourcing Services also helps to import these products and merchandise and ease the process to get the products on the store shelves. Target Commercial Interiors are showrooms that display different styles of Target furniture in
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Target.com,Target: Through the Years. Wikipedia, Target Corporation.

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an effort to exhibit all that Target has to offer. This enables Target to raise customers attention and bring more customers into the store that have an idea of what all they can buy from Target at discounted prices. Target Brands are some of Target Corporations companies that they own and so sell their own products internally. Some of these brands are Sutton & Dodge, Archer Farms, Market Pantry, and Trutech. By selling their own brands, Target increases its sales and allows them to have a product that can compete to name brand items giving alternative options to its customers. Each of these subsidiaries adds a substantial amount of value to Target Corporation by giving more options and services to its customers.

The Target Shopping Experience Targets 1,743 locations are more than just normal discount stores, but instead contain Target Caf, Target Pharmacy, Target Photo, and some fast food restaurants. The result is a complete discount store that the customer can satisfy all their needs at. As Targets website says:

We create our stores to be easy and intuitive to shop, with related departments conveniently placed next to each other (Dcor next to Home Improvement, Toys next to Sporting Goods) and a racetrack central aisle to speed you on your way. Thanks to our department-store roots, we concentrate on aesthetics. We 5 know that things like artistic seasonal displays can turn a weekend shopping trip into a fun family outing.

Target Caf is Target Corporations attempt to demonstrate to its customers that they can fulfill all their wants at Target, even eating there before shopping, or coming to Target for their fast food needs. Target Pharmacy is a common addition at most discount stores that are looking for the complete store idea and can divide their store into different sections to appease all their customers. Customers want a personalized experience when they shop and having a pharmacy at the store allows customers to fill their prescription while they shop. Target Photo has evolved over the years, and instead of bringing in outside photo specialists, Target now does its own pictures in house, thus enabling them to keep all of their products to themselves and keeping the customers constantly involved with Target, giving Target Corporation the top of mind awareness it needs to succeed. The fast food restaurants are another benefit for customers who want to get the most out of their shopping experience. Whether the customer wants to grab a Starbucks coffee, a Pizza Hut Pizza, or something else, the customer can get
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Target.com,Target: Our Focus on Design.

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that at their Target Store. Target also has their Super Target, which has an enhanced grocery section at discount prices, allowing the customer to grab their necessities and food items, while being able to grab other items for around the house. This great service helps make Target Corporation a company that cares more for its customers needs, so that it incorporates all aspects of the customers shopping experience into one giant store.

Operations Management Target Corporations management prioritizes customers needs. This type of mentality is instilled in all the regional and store managers, and they implement the philosophy in their specific stores. One of the most effective ways Target does this is through its VRIN Testing, making sure that the company is effectively managing its products, customer service, and business philosophy.

VRIN VRIN is an acronym for valuable, rare, costly to imitate and non-substitutable. For valuable, Target understands consumer needs and desires allowing the company to modify the product mix to cater to the changing demands of consumers. The secret cabinet provides insight to help the company adapt to the changing market. This ability to gain such varied insight is a rarity among competitors. Rare encourages employees to be individuals. Target is an organizational culture that encourages and rewards the creativity of each individual. Costly to imitate speaks to its brand image and reputation. The Target brand is uniquely valuable and would require extensive marketing and philanthropic activities to imitate. Finally, non-substitutable refers to Targets ability to maintain both a cost leadership and differentiation strategy is a unique core competency. Other companies attempting to implement the same strategy have failed.

Value Chain & Logistics Target operates by using an efficient value chain that is built upon its outbound logistics and marketing and sales. Logistically, the Target stores all aim to provide its customers with an overall positive experience. This starts with aesthetics. As of the last few years, Targets management did marketing research on what customers wanted in

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their retail store experience, and then studied its major competitor Wal-Mart to see what could be done better. Target then came to the conclusion that they needed a new store layout, one that was convenient and inviting. Target stores now have wide aisles, kept very orderly by the employees. The products were divided into segments that were geared to making it a more convenient experience for the customers shopping experience, including the price scanners. There are scanners in the grocery, pets, bedding, household decor, toys and clothing sections. They are also very helpful because each one has a customer service phone that you can use if you need assistance. The recent demand for service has been satisfied by Targets ownership, which has made it a priority.

Marketing & Sales As for marketing and sales, the expect more, pay less slogan exemplifies Targets marketing message. Consumers, according to Targets marketers, should find joy in the purchase of everyday items. These items should not look cheap even if purchased for discounted prices. Target is able to market through its localized promotional campaigns. Targets marketing research department consists of a secret cabinet of individuals across the nation. The members never gather together but rather contribute on an individual basis concerning trends in the market place and the activities of the company. This allows Target to respond faster to each stores specific community and demographical environment. Localizing each store helps its ability to penetrate the market and increase its sales.

Brand Image The brand image and reputation is also controlled too make sure to have consistency and quality. The marketing activities of the company are strictly controlled by the marketing department. Every item bearing the logo must be approved by the department. This micromanagement has allowed for greater control of the brand. Since Targets brand is so valuable, this management ensures that the brand equity remains intact. This allows the management to quickly react to changes in the environment. For example, during the economic downturn, Target chose to emphasize its price leadership, especially in the case of food and commodities, to accommodate the changing customer needs and demands.

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Internally, Target segments itself into three different groups, which when operating as a whole, is able to achieve maximum efficiency inside the store. The three categories are Targets tangible resources, intangible resources, and capabilities.

Tangible & Intangible Resources Its tangible resources consist of financial, organizational, and physical resources. Financially, Target has access to a large amount of capital. This is due to a very high cash flow in recent years. The company has experienced such a high influx of capital that it has been able to pay down long-term debt, making them very flexible for future purchase decisions. Organizationally, Target has a culture that emphasizes creativity with a vision and end goals that are regulated by the managers. It is a very top-down company meaning that the CEO and other managers are very involved in many aspects of the business. For example, the CEO participates in the hiring of the top 600 employees. This is just one example of how involved the top-tier management is in defending the quality, efficient brand name that Target has. By being so involved, the current CEO Gregg Steinhafel has created an organizational structure which will not only survive his retirement but also that of his successor. Its physical resources are its 1,488 Target locations which are located within the United States. The large number of stores gives the company valuable access to many markets across the country along with a diverse, experienced workforce.

Targets intangible resources consist of human, innovation and reputation resources. Target contains a wealth of human resources. There is a high level of retention among the talented and experienced upper level employees. Robert Ulrich, the former CEO, provided the company with vision and expertise within the retail industry that current CEO Gregg Steinhafel has continued. As for its innovative resources, Target prides itself on creativity and innovation. Managers must compete for budget amounts based on creative ideas because inventive product designs are crucial for the company. Top designers are recruited to create products in a wide range of categories. To find such creative individuals, the company sponsors design competitions across the nation. As for its reputation resources, Target has created a household brand name that stands for consistent quality and service among retailer brands. When starting its social networking endeavours on Facebook.com, users have even created groups dedicated to declaring members love of the company. Such a positive image is a result of many factors.

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One of these is the philanthropic efforts of the company in which Target donates 5% of all pre-tax profits to the community, schools, or the arts (Schlosser, 2008). This translates into over $3 million given per week. This giving totalled 6.5 million meals, 1,700 free days at museums and theatres, and thousands of dollars every week to schools. (Schlosser, 2008). This furthers Targets positive reputation, especially among its large target market of family households.

Capabilities As for capabilities, Target relies on its management, product design, research and development, and organizational culture. Targets management team has been able to identify market trends and adapt the company accordingly. Through understanding the desire of the customers to simultaneously fit in and stand out, the company has created an innovative line of products which cater to this desire. This is especially evident in the top level management who are encouraged and actually prefer to focus to be on the company rather than themselves. As for product design, Target constantly searches for original, innovative ideas to adapt to an ever changing market. For example, in the apparel section, a new designer creates a clothes selection every 90 days. This follows the merchandising strategy of expect more, pay less, where customers can find quality, new products at reasonable cost. For research and development, Target has steered away from traditional market research method. It has rather created a secret cabinet of individuals to weigh in on strategic moves of the company. A diverse group of all ages, nationalities and interests vary among the cabinet members providing Target with many perspectives of current customer demands and trends. Lastly, organizational culture, according to senior VP of Marketing, Karen Gershman, The energy that flows through here is amazing, and its fun. Target continually pushes to maintain the element of surprise, through competitive budget increases to efficient and ambitious managers who perform well, rewarding their creativity. By rewarding innovative thinking and passion, the company continues to surprise customers and inspires its employees to come up with the next best idea.
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Jennifer Reingold, Targets inner circle. Ibid.

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Leadership The CEO, Gregg Steinhafel, is a vital part to Targets success and the culture of the company. On Targets 2009 Responsibility Report, Steinhafel states that at Target, we are constantly striving to improve every aspect of our business... And, this focus on continuous improvement also extends to our dedication to corporate responsibility, which began more than six decades ago when our company founders established an unwavering commitment to ethical business practices and generous community support. Their passion became more than tradition; it became the foundation for how we conduct our business every day. The vision and passion instilled by the CEO trickles down through the company and creates a very unified, ambitious group of employees. In addition, the company was recognized in 2008 as one of the worlds most ethical companies for the third consecutive year. This is a great internal core competency that Target uses to attract and keep top talent.

Competitive Advantage

Cost Advantage There are three ways in which a firm can achieve a cost advantage: through variable costs, through operating costs, and through marketing costs. Variable cost advantage comes in the form of scale effects, scope effects, and learning effects. Scale effects refer to a discount on cost resulting from quantity. Because Target stocks such a large amount of inventory and offers a wide array of products in such large quantities, the price that Target pays per unit to wholesalers and manufacturers is significantly reduced, especially when compared with smaller nondepartment stores. Scope effects become a factor in variable cost advantage in so much as firms are able incorporate widely used components into their organization. For Target, we see that many of the same products are stocked and sold at numerous different locations and in multiple Target stores. Different stores can therefore supplement each other when it comes to shortages and surpluses, creating a network of dependency and a scope effect. Thirdly, variable cost is gained through learning effects. These are means through which Target becomes more efficient through experience, and includes labour efficiency, technology-driven learning, product redesign, better use of equipment, changes in the resource mix, network effects, and shared experience effects. Through

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running a massive operation in both depth and breadth for over 100 years, Target has managed to reduce waste and gain efficiency through trial and error and industry experience.

Advantage derived through marketing costs comes primarily through the advertising cost efficiency of a brand extension strategy. Many of the brands that Target offers are the banner brands for vast lines of products. Each time one of these individual products is advertised, it is reinforcing top-of-mind awareness for the given banner brand and other products in the product line. The scope effect created herein lowers the advertising dollars spent per unit of product sold.

Operating cost advantage is largely a product of cost efficiency and minimizing what it costs to function on all levels. This is especially important when analyzing competitors as operating expense is reflected in overall cost and therefore price. For 2010, Targets operating expenses total around $15.1 billion. With revenue of about $65.36 billion, Targets operating-expense-to-sales ratio is about 23%. Though this is a decent ratio, Target is still trailing compared to their number one competitor, Wal-Mart, whose ratio is around 21%. Though this is a small percentage difference, the billions of dollars of revenue that become income make a significant impact on the companies respective profitability. One way that Target can continue to improve its profitability through reduced operating expenses is through the use of standardized buildings designs. Because Target stores are assets that need to be depreciated, this source of operating expense is drastically lower than it would be if each building had a unique design. The utilization of standardized building designs and rapid store expansion (about 70 new locations per year) can therefore contribute to Targets earnings and shareholder value.
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Differentiation Advantage When seeking to gain competitive advantage through differentiation, the advantage comes chiefly in the following three types: product differentiation, service quality, and brand reputation. Product advantage is derived through products with features that offer relative superiority to those of competitors. This may take the shape of performance, reliability, features, durability, or appearance. According to Target.com, the company has a focus
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Wikinvest, Target (TGT): Total Operating Expenses.

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on form and function, and explains that When we talk about our dedication to good design, we dont just mean how something looks, but also how it satisfies a need, how it simplifies your life and how it makes you feel. Target is a company that focuses on its ability to differentiate based on design.
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American business writer

Daniel Pink explains that Academics often describe graphic, interior, and industrial design as a combination of utility and significance. Utility means that the product or service must work. Significance means that it must have some other, more transcendent quality. Proposing a solution, he continues with the following:
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So the alternative is to compete not on left-brain attributes like price and functionality, but on right-brain qualities such as emotion, meaning, and look and feel. Case in point: Target sells toilet brushes and vegetable scrubbers designed by superstar architect Michael Graves. Even the most mundane, utilitarian 12 objects in our lives have been turned into objects of desire.

So Targets primary means of product differentiation, therefore, originates in its ability to combine reasonable price, performance, and, most significantly, design.

Service quality is an advantage afforded through superiority contingent on perception relative to competitors in the industry. According to their website, Great Guest Service is a pinnacle aspect of Targets focus, and they explain that, Our fast, fun and friendly team works to make every Target shopping trip an exciting and enjoyable experience. Our team members are always ready to help guests find what theyre looking for. We pride ourselves on making sure the items guests want are in stock and the checkout process is fast. Through service, Target contributes to a positive perception of its atmosphere and the total shopping experience for customers. This is something ordained by Target leadership and specifically emphasized through Targets strategy. Target avoided competing against Wal-Mart head-to-head, explains Patrick Barwise, business writer for Harvard Business School, and was perceived as outperforming it on specific dimensions: cleanliness of stores, shopping environment and
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Target.com, Target: Innovations. Daniel Pink, Good Investing by Design. 11 Ibid. 12 Ibid. 13 Target.com, Target: Store Experience.
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experience, and shorter waiting time to pay. Through these, Target creates a distinct service quality differentiation advantage.

Lastly, brand reputation advantage comes through the ability of a company to attract target customers to its product. For companies like Target, the stature of its brand name adds a dimension of appeal that is an important customer benefit for many less price-sensitive, more image-conscious consumers. According to Barwise, The company has successfully associated its name with a younger, hipper, edgier, and more fun image than its competitors. The demographic that Target generally appeals to is also more well-educated than that of its competitors. Barwise expounds upon the effectiveness of Targets efforts to construct a concrete, positive brand reputation with the following:
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Target's business objective was to create an alternative to Wal-Mart's price leadership. It planned do so through upscale discounting, a concept associating style, quality of products, and price competitiveness. This cheap-chic strategy enabled Target to become a major brand and consumer-shopping destination, articulated around two main interrelated branding activities: designer partnerships and clever, creative 17 advertising.

The reputation that Target carries with it in terms of brand is founded on its ability to balance price and prestige. Brand reputation is created by consumer perception of value, and so Target continues to manufacture brand repute that is in keeping with its fundamental vision statement, Expect More, Pay Less.

Marketing Advantage Marketing advantage for a company is taken from its ability to dominate share of market, to offer a large product line, and to find the best means to gain a distribution advantage. For market leaders, competitive advantage is derived from market dominance. The better the brand name awareness, the larger the share of market the company will gain. Barwise explains that this top of mind awareness has come through consistent marketing and communication, indicating that, Target has transformed its signature bulls-eye logo into a lifestyle symbol. The
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Patrick Barwise, Bullseye: Target's Cheap Chic Strategy. Ibid. 16 Wikipedia, Target Corporation. 17 Patrick Barwise, Bullseye: Target's Cheap Chic Strategy.

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bulls-eye is recognized by 96 percent of American consumers and considered a brand icon in a class with Nike's swoosh and McDonald's arches. Brand recognition combined with a value message creates brand loyalty, a key component in profitability. There is a high level of market awareness and identity surrounding Target which it has developed with creative ad copy, pervasive promotion, and heavy advertising. Targets name, logo recognition, and top-of-mind awareness enable Target to attract customers to its existing products, offer product line extensions, or introduce new private label lines.
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Offering more products for sale enables a business to attract and satisfy customers in more ways. A larger product line gives a company opportunity to sell more to each client; thus higher sales and profits. This pertains specifically to the selling opportunities afforded to the sales force and channel partners. By offering a broad product line, more prospective customers end up shopping at Target and the potential for adjacent purchases is increased. Target currently sells a very wide variety of products which includes clothing, shoes, jewelry, health and beauty products, electronics, compact discs, DVDs, bedding, kitchen supplies, sporting goods, toys, pet supplies, automotive supplies, and hardware supplies. On account of the breadth of its product lines, Target is more profitable during the emerging and growing stages of a product life cycle, and it is then particularly important for the company to expand its product line during these stages of the product life cycle.

Finally, Target has a channel advantage because manufacturers strongly desire to sell their products at Targets stores and because they have penetrated many different locations so as to create a presence in numerous regional markets. There is a high correlation between distributor share of market and product share of market, so Targets distribution advantage is necessarily intertwined with its product advantage. As of the beginning of 2010, Target Corporation operated 38 distribution centers across the United States which ship items directly to Target stores. Unlike Wal-Mart, however, Targets grocery selection does not come from their own distribution centers, but instead from the companies that Target has partnered with. Along with food distribution centers, import warehouses, and fulfillment centers, these regional distribution centers work to make sure products are in stock
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Patrick Barwise, Bullseye: Target's Cheap Chic Strategy. Wikipedia, Target Corporation Ibid.

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where they are wanted when they are wanted and in the condition that they are wanted. The goal is to dominate the channels, thereby limiting competitor market access, and Target has managed to accomplish this through the constructing strong, effective distribution channels for their products. Target, as a market leader, sells well-known, trusted brands, with many variations in their product lines and very effective distribution systems.

Conclusion For the future, there are two primarily things that Target can do to expand and improve. Firstly, they must find a way to develop an international presence and penetrate the international market, as their locations are currently contained entirely in America. Wal-Mart has stores throughout North America and worldwide, and this is a huge source of their market dominance and competitive advantage over Target and the rest of the retail market. Second, they need to continue to innovate and ensure operations efficiency so-as to keep reducing price and stayed competitive cost-wise with competitors, especially Wal-Mart. As the corporation continues to ameliorate these issues, they will surely succeed, prolonging and increasing the immense success that they have enjoyed for the past several decades.

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Works Cited:

Barwise, Patrick. Bullseye: Targets Cheap Chic Strategy. Harvard Business School (2004). Online. Internet. 29 November 2010. http://hbswk.hbs.edu/archive/4319.html Pink, Daniel. Good Investing by Design. Yahoo! Finance (2006). Online. Internet. 27 November 2010. http://finance.yahoo.com/expert/article/trenddesk/7674 Reingold, Jennifer. Targets inner circle. Fortune (2008). Online. Internet. 27 November 2010. http://money.cnn.com/2008/03/18/news/companies/reingold_target.fortune/index.htm Target Corporation. Wikipedia, The Free Encyclopedia. Wikimedia Foundation, Inc. 26 November 2010. Web. 27 November 2010. http://en.wikipedia.org/wiki/Target_Corporation Target: Innovations. Target, Inc. (2010). Web. 27 November 2010. http://sites.target.com/site/en/company/page.jsp?contentId=WCMP04-031794 Target: Store Experience. Target, Inc. (2010). Web. 29 November 2010. http://sites.target.com/site/en/company/page.jsp?contentId=WCMP04-031793 Target (TGT): Total Operating Expenses. Wikinvest. Wikinvest, Inc. 27 November 2010. Web. 27 November 2010. http://www.wikinvest.com/stock/Target_(TGT)/Data/Total_Operating_Expenses Target (TGT): Key Metrics. Wikinvest. Wikinvest, Inc. 27 November 2010. Web. 27 November 2010. http://www.wikinvest.com/stock/Target_(TGT)/Data/Key_Metrics