Business Analysis: Target Vs. Kmart

Strategy final project
Target vs. Kmart
Shai Zamir
Dan Saguy

Introduction
Kmart Corporation, incorporated in May 1916, is a chain of discount retail stores and a general merchandise retailer, headquartered in the United States, with store locations in all 50 states, as well as Puerto Rico.
Kmart went through significant changes in the last 10 years: In 2002 a scandal similar to that of Enron, Kmart’s management was accused of misleading information.
In 2003, after filing for chapter 11, it emerged as a new corporation, closing hundreds of stores. In 2005, it acquired Sears, forming a new corporation under the name Sears Holdings Corporation. Ever since, it has continuously reported sales decreases,
On December 27, 2011, after
a poor showing from holiday shoppers, it announced that 100 to 120 of Sears/Kmart stores will be closing.

Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Target operates general merchandise stores for discount retail goods, in the United States.
Target operated 1,750 stores in 49 states. Further, it offers general merchandise products through its Website, Target.com. The company distributes its merchandise through a network of distribution centers, as well as third parties and direct shipping.
Target also suffered from increasing competition from the market’s leader (Walmart). However, it continues to grow, opening new stores in new locations (recently announced it’s expension into Canada), and showing excellent sales results.
Even though both companies operate in the same market, selling similar merchandise, suffering from the same competioin, one company, Target corporation, managed to maintain a steady increase in sales and to open many stores, while the other is slowly dying. This paper will attempt to answer why
External Analysis- Porter’s 5 forces
Below is the application of this business analysis tool to Target and Kmart.
Rivalry/Competition: Competition is intense. Several businesses operate in the retailing industry and targeting similar audience. The main rivals include the leader Wal-Mart, Home Depot, Kroger, Kmart Corp., and Costco. All of these competitors produce similar products as well as offer same services to consumers.
Threat of new Entrants: One of the barriers is the large capital necessary to operate a retail company with a considerable number of stores and employees. In order to acquire the right workforce, supplies and distribution channels, the starting company must have a high initial capital. Another barrier is the difficulty of accessing distribution channels abroad. Corporations in the retailing business must have an effective globalization strategy and apply the right international practices. These Certain requirements like business stability, market and revenue must be met. Thus, not all retailers are able to distribute their products abroad and acquire large international markets. We conclude that the threat of new entrants is rather low.
Bargaining power of buyers: Buyer power is high. First, there are many other retail store competitors available, as well as online. For Target Corp. the target market is perceived to be more sophisticated. In a survey conducted, Target Corp. shoppers fall on a 46 years old age median, more educated and well-off clientele as to compare with its rival. For Kmart, the bargaining power is even higher, since the Kmart brand is going through difficulties for the last decade.
Suppliers: Prime suppliers are used for production and product line. The companies rely on suppliers to deliver products that are of high standards, and there is a great importance for an existing high quality chain of suppliers. On the other hand, both companies sell nationwide and offer store locations in prime shopping locations. Suppliers are also abundant. Thus, the power of the suppliers in the industry is fair. Kmart’s supplier power will be higher than Target because Kmart has had payment problems in the relatively near past (see above introduction).
Substitutes: For retail companies, the substitutes would be shopping in brand name stores for a certain item, rather than going into a huge store with everything. For example going into a Levi’s store for a pair of jeans or into a Barnes & Noble store for a book. This threat is relatively low. Another substitute is shopping online. The threat in this case is low since both Kmart and Target have an online store.
Summary: The two corporation operate in the same market and offer similar products.
This leads to similar performance regarding porter’s 5 forces. Certain differences exist, mainly due to Kmart’s difficulties and struggles to develop its brand and add value to the company, which is reflected in the higher bargaining power of both suppliers and buyers.

VRIO Analysis
Resource 1: I.T. Competence
Value: Target has a core competence in its use of information technology that can support its management operations and just in time inventories (one of the best SCM in retail industry). Continues improvement in technology by intelligent IT spending. Valuable.
Kmart showed IT incompetence which made it inferior to its rivals. It changed five CIO’s in seven years. Not valuable.
Rarity: Competence in information technology is also an asset of other competitors (Wal-mart, Amazon.com, Costco, to name some), The resource is not rare.

Resource 2: Distribution Network
The companies rely on suppliers to deliver products that are of high standards, and there is a great importance for an existing high quality chain of
suppliers.
Value: Both brands operate in an arena that requires a nationwide and diversified net of suppliers. The resource of a distribution network is absolutely essential to thrive for both companies. Valuable.
Rarity: The distribution network, selling so many different products to millions of different customers throughout the country, is a vast network, and one of the key resources in the discount retail industry.
There are other nationwide brands like Gap, Barns&Noble, Stop’n’Shop, etc. but they sell a smaller line of products, and not necessarily discounted. Therefore we consider it as being rare.
Inimitability: The distribution network is very difficult to imitate due to the cost disadvantage that competitors will face in acquiring or substituting this resource.
Organization: As for Target, the corporation has the organizational capability to exploit the resource that they developed, capture more share of the market and grow. Kmart, on the contrary, had some difficulties with supplier relations, along it’s history of financial disorders. Martha Stewart for example, terminated her contract with Kmart, selling her line of home products (She is now actually turned against Kmart).
Resource 3: Brand Name
Value: Target has a strong brand name, it is known as providing quality products for low price. The brand is related to a positive and even fun experience which is a result of Target's intensive investment in the store's design and shopping experience. Their mission statement focuses great guest service, clean stores and speedy checkouts. Fast fun and friendly
stores.
Kmart's brand name is related to the lowest prices. It is highly popular with minorities groups, especially afro-Americans and Hispanics. Both brand names are valuable.
Rarity: Target's brand represents quality and low prices, along with an enjoyable shopping experience. The slogan is "expect more, pay less", and they live up to it. The combination of these factors together is rare in the industry.
In Kmart's case for example, the brand represents very low prices, but of lesser quality. Kmart strategy focuses mostly on pricing, and has not differentiated itself from Walmart's strategy. Kmart's brand is not rare.
Inimitability: Target's brand name is hard to imitate. A competitor will incur high costs, and face a significant cost disadvantage in acquiring or substituting this resource (advertising, customer service, product diversification, etc). To reproduce Target's brand recognition a huge amount of time money and commitment will be required. Kmart- not applicable (not rare).
Organization: Target has successfully incorporated the resource into their organization. Target's brand recognition is hugely important to success. The firm identified that this resource is a competitive advantage.
Resource 4: Human Capital
Value: Target recognizes the value of human capital. They understand that low wages never equal a satisfied employee which can reflect negatively on the company. The company keeps a requisition account that is used for company sponsored events for employees.
While Kmart also invests in human capital, its payrolls are usually smaller and the workforce is not as qualified, shorter training program. Kmart's resource is not valuable.
Rarity: Many companies recognise the importance of human capital, and this resource is not rare for Target.
Resource 5: Location
Value: Target Corporation operates 1,750 stores in 49 U.S. states and the District of Columbia. Further, it offers general merchandise products through its Website, Target.com.
Kmart, operates a total of 1,205 stores (as of December 2011). Kmart stores are across 49 states, Guam, Puerto Rico, and the U.S. Virgin Islands, and through its e-commerce shopping site, www.kmart.com. Both companies are operating on a nationwide level- valuable resource.
Rarity: Unlike any of Target's competition, many stores have been placed in accordance with trendy malls. This gives and advantage of convenience, being connecting to numerous other stores. Kmart stores are located in easily accessible areas, especially in urban areas where they are able to get a large multi-cultural consumer group. We conclude that the resource is rare for both companies.
Inimitability: Many big players in the arena (like Walmart, Costco) can shift their stores from one location to another. It may generate costs but this will not create a great cost disadvantage. Resource is imitable.

Sustaining Superior Performance
Competitive advantage: Diversity of products
Only a few players in the discount retail industry hold such a large variety of products (Kmart, Target and Wal-Mart), so this is a competitive advantage for both companies. 1. Imitation
Both companies operate on a nationwide level (Size economies), spreading their stores to every major city in the U.S. (Target's also in Canada) and reaching customers with products that appeal to different needs. The management of inventory and distribution channels requires knowhow (private information). Inventory management and trend predicting is constantly being upgraded. 2. Substitution
The substitutes are the brand name stores that sell specific items (like buying a toy in Toys R' Us). Target and Kmart are not responding to the threat of substitution because it's not a risking the value that the diversity of products generates for Target and Kmart. 3. Holdup
The large scale of products has allowed the companies’ to contract a wide range of suppliers, giving high bargaining power, creating stable, trustful relationships with long term contracts, and a holdup advantage. 4. Slack
It seems Target is doing a better job in exploiting this valuable advantage. It is utilizing technology and implementing it into its information systems, to control inventory stock, checkout systems, etc. One of its strength is its ability to anticipate the demands of the customers ahead of time. Target is exploiting and maximizing fully its’ competitive advantage and continue to show growing sales.

Competitive Advantage 2: Quality in discount retail: Target
Target is able to provide customers with quality products at everyday affordable prices. Because the quality is relatively higher than it's competitors, Target was able to appeal to a market with a higher income, thus differentiating itself from Walmart and others, and creating a competitive advantage. 1. Imitation
By buying in bulk quantities, and choosing excellent suppliers, Target is able to offer affordable prices (size economies). A competitor in the market will have to reach a large scale of sales in order to compete. Target is doing an excellent job with technology and improving the inventory system, as well as analyzing their clients preferences (private information). In terms of switching costs, the quality products at low prices policy makes it difficult for competitors to compete. Threat of retaliation is therefore low. Target is constantly upgrading it's services and products, working on new supplier relations as well as making sure quality assurance is reached. 2. Substitution
Substitution is to buy in regular brand name stores. Quality might or might not be higher, but normally the price will be. Target is defending by offering its clients upscale trendy and innovative products which keeps their customers returning. It is also recombining: Top designers have signed agreements with Target to sell their items at affordable prices, for example: Victoria's Secret has a line of lingerie that is sold at Target. Although Target's competition offer some designer brands as well, Target provide a higher quality selection. 3. Holdup
Target's large scale has allowed it to contract with a great range of suppliers, with extraordinary bargaining power. It has built mutual dependence with long term suppliers who offer quality products, developed trust to create stable cooperative relationships, giving it a holdup advantage. 4. Slack- It seems Target was able to catch a significant market share by appealing to a younger, more educated crowd with a higher income, through its quality products and shopping experience. It has been depicted as "the discount store with attitude – where department store customers feel very comfortable shopping". This has created loyal returning customers, and continually makes the business become a tough competitor among its rival. Very limited slack.
Competitive Advantage 3: Brand name: Target
As mentioned, Target has a strong brand name, it is known as providing quality products for low price. The brand is related to a positive and even fun experience which is a result of Target's intensive investment in the store's design and shopping experience. Target's brand name is valuable, relatively rare, inimitable and well exploit by the company, what leads to a competitive advantage over most of competitors. Unlike Target, Kmart brand name is not rare because it is not generating significant value for the company other than discount retailing. 1. Imitation
In terms of switching costs, imitating Target's brand name will require high advertising and marketing expenses. Target is constantly upgrading it's brand name by establishing high standards of quality and customer service, working on new supplier relations as well as making sure quality assurance is reached. Threat of retaliation is therefore low. 2. Substitution
Target is constantly developing its brand name and not responding to smaller unrecognized brands as it focuses on competing with the big rivals. 3. Hold up
Wisely, Target is collaborating with quality suppliers and builds mutual dependence and long term contracts. Along with the trust development, Target is able to preserve it's unique brand. 4. Slack
Target is aware to the significant impact of a unique and solid brand name and therefore exploits it by attracting different socio-economic groups and collaborating with quality suppliers. The slack regarding brand name is limited for Target.
Competitive Advantage 2: Promotions (Kmart )
Kmart is well known for its special promotions. The slogan "attention Kmart shoppers" is well known in the U.S. it started with Kmart's blue bell promotion- once every hour, a certain product would be cut down in price. This gave shoppers an incentive to return. For years, Kmart heavily advertised lower prices on selected items using coupons and sales. Its advertising budget as a percentage of sales far exceeded rivals, Target and Wal-Mart. This policy successfully brought customers to its stores. 1. Imitation: Kmart was successfully with targeting its audience in markets located in the urban areas which settled by minorities (Hispanic, Afro-Americans) and used it's private information to avoid imitation. In addition, Kmart kept upgrading it's reputation among those communities. 2. Substitution: Substitution is retailers who use other methods to attract customers. Kmart did not respond to this threat. Eventually other retail stores used technology and size economies to lower their costs, while Kmart stayed with their promotion strategy and lost their advantage. 3. Holdup: Kmart had built mutual dependence with its clients in the urban areas (minorities) and made it difficult to its rivals to promote there (defending). 4. Slack: Kmart did not understood fully it's competitive advantage regarding promotions. It was the first player in the arena to use this ethnic-social promotion but other retailers also offered promotions, and used other methods to lower costs, eventually Kmart lost their advantage. Relatively high slack.
Competitive Advantage 3: Pricing: Kmart
For years Kmart had a competitive advantage of being perceived as the lowest price retailer. That was very attractive for all customers, but especially among minorities who was loyal customers. 1. Imitation
Kmart sold in bulk quantities and its economy size was hard to imitate. Nevertheless, the threat of retaliation was high, and when a competitor offered similar pricing scheme (Wall-Mart) Kmart lost its advantage. 2. Substitution
Substitution is retailers who sell for higher prices (sometimes higher quality items). Kmart's strategy was to focus on lower prices, and they did not respond to this threat. 3. Holdup
At its good times, Kmart had built mutual dependence with its clients regarding the price of products. The customers knew that they might not experience excellent customer service, but the price will be the lowest in the discount retailing industry. Kmart had developed trust to create stable relationships with it's customers, giving it a holdup advantage. 4. Slack
Kmart understood it's competitive advantage regarding pricing and exploited it by communicating audiences that this value is most significant to. Nevertheless, in retrospect we can say that Kmart did not exploit this advantage fully. Kmart did not use the low pricing for more quality products (as oppose to Target). Also, it remained behind in terms of lowering cost production and eventually lost its competitive advantage.

Conclusion
The discount retailing industry in the U.S is mainly controlled by three "gorillas": Wall-Mart, Target and Kmart. The market characteristics leave no room for strategic mistakes. In terms of external threats, the buyers & suppliers power among with the rivalry is the main threats to pay attention to and while Target made significant moves in order to differentiate itself from the rivals and lowering the bargaining power of suppliers and buyers, Kmart experienced stagnation in terms of business development, focusing mainly on pricing and target market.
In terms of internal analysis Target kept on developing its resources and capabilities, primarily focusing on its brand name and collaborations, as well as innovative technology to control store management that gave it competitive advantages that positioned the company as one of the two leaders of the arena. On the contrary, Kmart had poor performance according to the VRIO analysis. The company did not respond or defend itself from other threats and lost the advantages that it had over time. The problematic outcome for Kmart is damage to the company brand name that drives away suppliers, buyers and quality employees. This is a death sentence for Kmart in the long run if it will not change its strategy.

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[ 1 ]. Wikipedia: http://en.wikipedia.org/wiki/Kmart
[ 2 ]. CBS news: http://www.cbsnews.com/8301-505145_162-57348594/sears-to-close-100-to-120-kmart-sears-stores/?tag=cbsContent;cbsCarousel
[ 3 ]. Yahoo finance: http://finance.yahoo.com/q/pr?s=TGT
[ 4 ]. Target Corp. annual financial report http://media.corporate-ir.net/media_files/irol/65/65828/AP_Hi.pdf
[ 5 ]. Martha Stewart says Kmart is a bad thing: http://www.dailyfinance.com/2009/09/16/martha-stewart-says-kmart-is-a-bad-thing/
[ 6 ]. Advertising age: www.adage.com/article/news/kmart-shifts-approach-ethnic-markets/146784/
[ 7 ]. www.target.com
[ 8 ]. Yahoo finance: http://finance.yahoo.com/q/pr?s=TGT
[ 9 ]. Sears Holding Company Financial Report 2010. United States Securities and Exchange Commission.