business strategies of discount retailers: a …indusedu.org/pdfs/ijrmec/ijrmec_839_57547.pdf ·...
TRANSCRIPT
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 27
Business Strategies of Discount Retailers: A
Comparative Study of Target Corporation
and Costco Wholesale Corporation
Naser Alshakhoori1, Ahmed Alkenaizi
2, Nadeem Ebrahim
3, and
Dr. Shaju George4
1, 2, 3(MBA Student, University of Bahrain, Kingdom of Bahrain)
4(Assistant Professor, Department of Management & Marketing, College of Business Administration, University of
Bahrain, Kingdom of Bahrain, email: [email protected])
Abstract: The purpose of this study is to identify and compare the Business strategies and Business models adopted
by two big discount retailers in the United States which are Target Corporation (“Target”) and Costco Wholesale
Corporation (“Costco”). The study also examines the characteristic of the competitive environment in which both
companies operate in. The SWOT analysis shows that the discount retail industry is highly competitive and is
affected by key strategic factors as Technology improvement, innovation in product design and promotion, employee
welfare, internet, multi-channel distribution and communication. Target follows an Integrated Cost Leadership and
Differentiation strategy expressed in its promise of “Expect More, Pay Less”. It provides high quality, trend -
forward merchandize with lower margin. Target achieves its strategies with core competencies and resource such as
superior guest experience, corporate culture, systems, strong supply chain, technology infrastructure, innovation,
and disciplined management approaches. On the other hand, Costco adopts a Cost Leadership strategy. It uses
economies of scale to buy in bulk at low cost and pass the discount to the customer. Costco achieves its strategy with
core resource and competencies that include efficient supply chain management, pleasant shopping experience ,
strong bargaining power, motivated highly paid employees.
Keywords: Strategy, Business Model, Environmental analysis, Innovation, Discount Retailers
I.INTRODUCTION Businesses of all kinds are facing tough, uncertain environment characterized by rapid ch anges, fierce
global competition, open market and continuous technology breakthrough and advancement. In order to survive and
succeed, businesses need to be in good fit with such environment by carefully designing and adapting critical
aspects of the business of which strategy and business model are key success factor(Khan & Khalique, 2014).
Strategy is seen as a mult idimensional concept that relates many important aspects of an organization
which dictates the latter‘s long term direction and purpose and enables the organization to adapt to the changing
environment (Hax & Majlu f, 1986).A well-defined strategy should integrate an organization‘s major aspects such as
plans, objectives, policies, and programs to ensure one corporate-wide direction(Dobson, Starkey, & Richards,
2004).
Business Strategy serve different purposes and provide various benefits including: providing direct ion and
guidance, developing and maintain ing competit ive advantage, efficiently managing business resources, planning and
managing business expansion, and responding to the environment challenges, threat and opportunities (Olsen, 2016;
Albu Consulting, 2016; Ghaly, 2009).
Mainly there are three types of strategies in Businesses; each one is concerned with certain level of
organizational matters. The first type is Corporate-level strategy, which deals with the overall direct ion and scope of
an organization and how value will be added to the different business units of the organization. The second type of
level of strategy is the Business-level strategy, which deals with the improvement of the competit ive position of
particular product or service in a specific market segment served by a business unit. The third type of strategy is the
Functional strategy, which is concerned with developing a distinctive competence to provide a company or business
unit with a competit ive advantage (Johnson & Scholes, 2005).
A related concept to Strategy is the Strategic Management, which is considered as a science and art that
include environment analysis , strategy formulat ion, strategy implementation, and strategy evaluation (Daft, 2008;
Wikipedia, 2016). Researchers argued that strategic planning generates information, promotes long -term p lanning,
forces the firm to adapt to its environment, provides a s ystem a tic way for identifying and evaluating strategic
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 28
opportunities, stimulates new ideas, increases motivation and commitment, and reduces focus on operational details,
all of which improve firm performance(Hopkins & Hopkins, 1997).
Wheelen & Hunger (2012) suggested four approaches for strategic decision making; Entrepreneurial
approach where strategy is made by one powerful individual and it focuses on opportunities, Adaptive approach
which is reactive in nature and seeks to provide solutions to existing problems, Planning approach which is
characterized by systematic gathering of information to analysis the situation and to generate alternative feasible
solutions, and finally Logical incremental approach which is a mix of the other approaches and is fo rmed as a result
of debates and experimentations.
II. REVIEW OF LITERATURE
Business Strategy According to Nickols (2016), the concept of strategy was firstly used in the military field then it was
adapted and use in Business. He suggested that strategy is about bridging the gap between means (e.g. programs,
tactics and policies) and ends (e.g. mission and goals). Nickols (2016) summarized the definitions of strategy of
other researchers as ―a complex web of thoughts, ideas, insights, experiences, goals, expert ise, memories,
perceptions, and expectations that provides general guidance for specific actions in pursuit of particu lar ends‖.
Johnson, Scholes, & Whittington (2008) defined strategy in a comprehensive term as ―the direction and
scope of an organization over the long term, which achieves advantage in a changing environment through its
configuration of resources and competences with the aim of fulfilling stakeholder expectations‖. This advantage is
referred to as Competitive advantage which includes all the moves and approaches taken to gain an edge over
rivals(Porter, 1996; Porter, 1980).
Mintzberg (1994) suggested that strategy can be defined in multiple ways such as plan to reach targets, a
pattern of actions over time, a product positioning in part icular market and as a perspective that set the direction of
the organization. Porter (1996) argued that strategy is also about creating strategic fit among a company‘s activities,
which will complement one another which make it very difficult for rivals to imitate as they have to match the
whole system. On this context, matching a competitor‘s strategy is harder if we put into consideration that a fit
between a company‘s activities is usually coupled with a series of operational effectiveness programs.
In a competitive environment, firms follow a number of generic strategies which include cost leadership,
differentiation, and market focus strategy. A firm will be performing lower than its competitors if it does not adopt
any of the generic strategies (Porter, 1980).
Daft (2008) defined Strategic Management as ―the set of decisions and actions used to formulate and
implement strategies that will provide a competitively superior fit between the organization and its environment so
as to achieve organizational goals‖. It is a process that includes identifying external opportunities and thread and
internal strengths and weaknesses, setting the organization mission and objectives, formulat ing strategies and
policies, developing operational plans, setting budget and procedures, evaluating the end results and making
correction based on the dynamic feedback between the all components of the strategy management (Wheelen &
Hunger, 2012).
Johnson et al (2008) suggested a model of three main elements that constitute the strategic management.
The first element is about understanding the strategic position which includes identifying the key environmental
impacts on the organization and the organization‘s resources and core competencies. The second element of the
model is the strategic Choices which involve understanding the bases of the competitive advantage and future
strategy. The third element of the strategic management is about putting strategy into action and make sure it is
working as indented.
Stevenson (2014) suggested a number of guidelines to ensure successful strategy execution and translate
the strategies into great performance; first, formulate and communicate clear, focus strategy. Second, align strategy
with the current market demands. Third, make sure strategy is matching and supported by the organization culture.
Forth, ensure the behaviors of both executives and middle management are in line with the strategy. Fifth, align
hiring, train ing, rewards, and the individual and operational goals with the company strategy(Stevenson, 2014).
Business Model Casadesus-Masanell & Ricart (2010) attributed the origin of the Business Model to Peter Drucker. The
terms ―Strategy‖ and ―Business Model‖ are used interchangeably in art icles and literature and therefore confusio n
may arise between the two interrelated concepts because of the wide use of the term business model in many crit ical
areas of the business such as business purpose, processes, offerings, customers, segments, structure, policies and
culture(Wikipedia, 2016). Therefore, Strategy and Business Model may look similar; however, they are distinct
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 29
concepts. Business Model refers to the business logic of the organization and the way it operates and creates value
for its stakeholders, whereas, Strategy includes choosing a business model that fit the organization situation. Thus,
business model is part of the firm overall strategy and is considered a direct result of the chosen strategy(Casadesus -
Masanell & Ricart, 2010) and it should embodied the management‘s hypothesis about customers demand and the
management philosophy about the organization‘s design and structure that will translate demands into values for all
stakeholders(Teece, 2010).
Amit & Zott (2006) stated that ―a business model depicts the content, structu re, and governance of
transactions designed so as to create value through the explo itation of business opportunities‖. .Casadesus -Masanell
and Ricart (2010) suggested that business model can be exemplified with a machine which is configured and
programmed to operate in certain way (logic) to create a value for its user.
Drucker (1954) argued that a successful business model should provide answers to two strategic questions;
―Who is the customer and what does the costumer value?‘ and ‗What is the underlying economic logic that explains
how we can deliver value to customers at an appropriate cost?‘. Moreover, a well -designed business model can leads
to a sustainable competitive advantage especially if it is designed with high differentiation, innovative ideas and
technological competencies. Such model will be d ifficult to be imitated by the competitors (Teece, 2010).
Osterwalder, Pigneur, &Tucci (2005) identified nine important building blocks of any business model;
Product‘s Value Proposition, Target Customers, Distribution Channel, Customer Relationship, Resources
Configurat ion, Core Competencies, Network with Partners, Cost Structure, and Revenue Model.
Today‘s diverse and dynamic environment requires both business strategies and business models to be
monitored and evaluated continually and adjusted as and when necessary, what used to be an advantage may turns to
be a disadvantage and the firm become the v ictim of its model or and strategy (Mourdoukoutas, 2016).
III. OBJECTIVES OF THE STUDY
1. To identify the business strategies and business model adopted by Target Corporation and Costco
Wholesale Corporation.
2. To examine the characteristic of the competitive environment in which Target Corporation and Costco
Wholesale Corporation operate in.
3. To compare the business strategy and business model of both Target Corporation and Costco Wholesale
Corporation.
IV. METHODOLOGY A comparative case study was conducted which relied on collecting, comparing and analyzing secondary
data about Target Corporation and Costco Wholesale Corporation. The analysis aims to identify the similarit ies,
differences and patterns in the business strategies and business models of the companies.
All data were sourced from published journal articles, books, online articles, case studies, an d companies‘
specific published contents including annual reports, marketing materials, profiles, news and the web sites of the two
organizations.
Background of the companies
Target Corporation Today Target Corporation (―Target‖) is considered the second-largest discount retailers in the United
States. Founded by George Dayton as Good fellow Dry Goods in 1902 in Miineapolis, Minnesota, the company was
renamed several times and became Target Corporation in 2000. The first Target discount store was es tablished in
1962 as subsidiary of Dayton Dry Goods Company. The name ―Target‖ was chosen to distinguish the discount store
from the department stores(Wikipedia, 2016).
As of 2015, Target operates in more than 1790 stores across the United States with aro und 347,000 fu ll and
part time team members(Target, 2016). On January 2011, Target started expanding internationally in Canada
through purchasing the leaseholds of the 220 Canadian retail chain stores ―Zellers‖. However, the expansion plan to
Canada was not successful due to several problems including the supply chain issues. As a result, the company
recorded net losses from the Canadian store since then until all stores in Canada have been closed by April
2015(Wikipedia, 2016).
A wide range of products are offered to customers in stores and online, Target offers clothing, accessories,
toys and games, home appliances and furniture, electronics, health and beauty products, movies and books, sport and
fitness product, school and office supplies, garden products and more other products.
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 30
Target stated their purpose and beliefs as ―We fulfill the needs and fuel the potential of our guests. That
means making Target their preferred shopping destination by delivering outstanding value, continuous innovation
and an exceptional guest experience—consistently fulfilling our Expect More. Pay Less.® brand promise‖(Target,
2016).
Costco Wholesale Corporation Costco Wholesale Corporation (―Costco‖) is considered the largest membership -only warehouse club in the
United States. The company was established in 1983 in Seattle by James Sinegal and Jeffrey Brotman. In 1993,
Costco and Price Club merged to form PriceCostco which was renamed to Costco Wholesale Corporation in 1997
(Wikipedia, 2016).
Costco has nearly 700stores and a workforce of 117,000 employees. In 2015, Costco was ranked as the
18th largest firm in the Fortune 500 with a market capitalization of $66 b illion and sales revenue of $116.2 b illion
(Soni, 2016). Costco was also ranked as the third largest retailer in the United States in 2015(National Retail
Federation, 2015). In stores and online, Costco offer a wide selection of merchandise which includes home
appliances, auto and tires, toys, computers and printers, electronics, furniture, grocery, health and beauty, jewelry
and watches, office supplies, fitness products and more other categories.
Costco claims their mission to ―provide our members with quality goods and services at the lowest possible
prices‖(Costco, 2016). The philosophy is to keep the costs down and pass the savings on to members.
Competitive environment of the companies The discount retailing industry in the United States is dominated by few large companies which include
both Target and Costco. The rivalry is so strong between competitors who offer wide range of products and services
through online and physical channels. Competitive advantage is maintained and sustained through consistent low
price offering, differentiation, innovation, supply chain efficiency and superior shopping experience. The profitable
track record o f Target and Costco since their inception is a testament to the successful business strategy and business
model adopted by the both companies which have capitalized on certain internal strengths and external
opportunities. However, beside their success also come the challenges, SWOT matrix is demonstrated below for
both companies to analyze the important environmental factors for both businesses (US Top 100 retailers, 2015).
Target Corporation Target‘s main strength over the competition is the capability of appealing to younger generation customers.
This is due to the innovative approach that the company follows in delivering a fun and creat ive experience to its
shoppers. Unlike competitors such as Wal-Mart and Costco, Target displays a creative and fashionable ambience,
which appeals to middle class customers who look down on cheap discount stores. (Lee, 2013)
On the other side, being a retail chain, the company faces high competition from small stores in convenient
locations at smaller neighborhoods. The company has far less locations when compared with the biggest
competitors. Although many customers would prefer Target for their retail shopping, many would choose a closer
alternative if the nearest store was hard to reach (Wahba, 2015). Further, Target Corp. expansion into the internal
market has not been successful.
Being one of the leaders in the retail industry, Target faces many external challenges that need to be
addressed and mitigated in order to assure successful business continuity. The company faces intense competition
both physically and online. Although Target offers e-commerce facilit ies, it is not as strong and reputable as
Amazon, which offers online shopping solutions to the customer‘s doorstep. Additionally, the lack of many physical
stores affects the ability of Target to capture a strong market share. (Garcia, 2015)
On the other hand, the company explo its some opportunities such as growing of the business in the US by
exploring the possibilities of adding more locations and catering to a wider audience. Further, g lobalization can be
studied and the company can explore tapping into other potential markets since the brand already enjoys preference
and excellent reputation. (Hahn, Kwak, & Palys, 2005)
Target Corp. SWOT matrix (SWOT analysis of Target Corporation, 2015)
Strengths
Well-established and a recognized brand that is
highly respected by consumers as middle class,
exclusive deals with high profile designers.
more appealing to young customers
Weaknesses
Business model based on supercenters and
many shoppers prefer convenient neighborhood
stores
Slow expansion. Target planned to open 8
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 31
Partnership with h igh profile designer
Innovative product designs and store
atmosphere.
Use of analytical tools to create personalized
digital experience, loyalty programs, and
promotions
small Target stores while competitors such as
Wal-Mart opened over 270 locations within the
same time frame
Online shopping experience not on par with
market leaders
Opportunities
Globalization through physical expansion or by
offering better e-commerce shopping
Declining incomes in the country can increase
Target‘s customer base as they are more likely
to shop at discount stores
Providing improved or additional services such
as offering same day delivery option
Threats
Increased minimum wage of employees can
affect the company‘s profits as majority of the
workforce are hired for low income jobs
Intense competition by both large retailers and
small stores that can offer superior service or
better locations
Costco Wholesale Corporation
Costco is main ly known for its low pricing and all-in-one shopping. This concept has proven successful over the
past as the retail chain offer many daily consumables at low profit marg ins to attract the customers t o their
warehouses and profit on higher margin products. This approach has led to a huge customer loyalty base which head
to Costco for the purpose of a no-frill shopping, an approach used by the company to remove unwanted expenses of
designing and unnecessary additions that are usually factored in the pricing of other retailers. (Logan & Beyman,
2012)
On the other hand, most of the loyal customers of Costco are old and tend to spend less compared to the
younger generation. The basic concept of warehouse selling has been followed by number of retailers worldwide but
do not currently pose a threat to Costco‘s operations. The company profits are mainly limited to North America
(87% of sales) and this limitation expose the company to changes within that region.(Ryan, 2014)
Like Target, Costco also faces online shopping threats such as Amazon, which started to offer a fu ll
shopping experience (including groceries within selected areas of the US), which allows the customers to shop at
their comfort from home. The competition is also increased by threats from other retail giants such as Wal-Mart,
which has over 3,000 locations in the US and is more accessible in many areas of the US. (Why Costco Needs To
Watch Out For Amazon, 2014)
The opportunities lie within the capability of the company to attract youngsters by creating a more
innovative experience and offering discounts on products that appeal to the young generation. Moreover,
globalization is now an opportunity for most of the successful companies around the wo rld and this approach has
already proven successful by many companies in the past. (Dalavagas, 2015)
Costco SWOT matrix (Dalavagas, 2015)
Strengths
Established a pricing authority, wherein the
customers believe that the cheapest products
are available at Costco
Low profit marg ins on many products, which
drives high volumes and help sell higher
margin products
Costco has an extremely loyal customer base
due to offering great value at competitive prices
Highly paid motivated employees
Weaknesses
Geographic dependence on North American
market and particu larly Californ ia, which
represent over 30% of the company‘s sales
Customer base are generally g rown-ups, which
tend to be rational at spending compared to the
younger generation
Online shopping experience not on par with
market leaders
Limited variety of the same product
Opportunities
Attracting younger generation; the company
already started offering services such as Google
Express &InstaCart. Also, the company started
offering healthy products, which appeal to the
young health conscious customers
Globalization and expansion to more markets
Threats
Online grocery shopping; companies such as
Amazon already started offering sale of similar
products at the convenience of shopping at
home while offering affo rdable shipping
options
Intense competition from top retailers and
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 32
as the concept of low priced products will
likely be successful in many countries wholesale stores. There are several brands that
also started the concept of warehouse shopping
V. STRATEGIES AND BUSINESS MODELS OF THE COMPANIES
Target Corporation Target evaluated three generic business strategies; either to focus on certain markets, to be low-cost leader,
or to be differentiated from other discount retailers. Target believed that the first option will h inder its future growth,
and the second option could not be achieved as Wal-Mart was already a low-cost producer and they did not want to
compete head to head with them, therefore, a differentiat ion strategy was the option that Target opted. Targe t
follows what is called ―Cheap-chic‖ strategy which associates three important aspects; style, quality, and price
competitiveness (Barwise & Meehan, 2004).
Target stated its business model as ―to offer customer everyday essentials and fashionable, differentiated
merchandise at discounted prices‖. Target ability to deliver preferred shopping experience is supported by their
strong supply chain management, technology infrastructure, continued innovation, disciplined management
approaches, and investment in future growth (Target Corporation, 2014).
Target differentiates itself from competitors by offering high quality, trend -forward merchandize at lower
margins. Therefore, Target offers slightly higher-priced product but inexpensive and greater in value compared with
those offered by other retailers (Raheja, 2013).
As a result, Target‘s customers tend to be younger, richer, and better educated. Target‘s referral to its
customers as ―guests‖ is part of its strategy to show that customers are a top priority and to show commitment to
establish beneficial relationship with them(W ikipedia, 2016).
In addition to the value for money promise ―Expect More, Pay less‖, Target focus on customers‘ full
experience to differentiate itself and to gain a competitive advantage over other retailers, therefore, Target
emphasize on the design of both store and products to achieve the desired differentiat ion strategy(Tongue,
McDonald, Doutkevitch, Midgley, & Munro, 2012).
Target designs its stores and environment to ensure cheerful, attractive shopping experience by
emphasizing certain dimensions including; clean, well maintained stores, fun shopping atmosphere, short waiting
time to pay, easy to shop layout, convenient locations. Target greatly relies on two important branding functions;
design partnership and creative advertising (Barwise & Meehan, 2004).
Target has exclusive deals with high profile designer across different lines of product. For example, Target
partners include Michael Graves (architect); Converse (athletic wear company); Fiorucci (Italian fashion label); Liz
Lange (fashion designers), Mossimo Giannulli, and Isaac Mizrahi. Target also enters into deals with designer to
create Target‘s own upscale fashion product(Wikipedia, 2016).
As a strategy to grow, Target emphasizes on specific differentiation areas; prioritizat ion, innovation, and
guests. Target relied on cost saving to feed its growth initiatives and profitability plans. Cost saving are achieved
from operations and technology improvements; supply chain management and corporate restructuring. Target
enforced the differentiation by stronger merchandizing power and shopping experience characterized by easy
shopping and innovation(Target, 2015).
Target focused on providing mult i-shopping channels so guest can shop on stores, online and on mobile
with the aim to have mobile as the new front door. Target also utilizes data analytical tools to create personalized
digital experience, loyalty programs, and promotions. Target believes continued enhancement in technolog y and
supply chain management would result in attractive shopping experience(Heller, 2015).
Target is refocusing its investment on certain products it used to be known for namely; Style, Baby, Kids,
and Wellness. The emphasis is on providing the newest product and on differentiat ion. Target is creating a more
―guest-centric‖ experience by tailoring the product mixture, product offering, store layout and advertising with the
demographics, culture, climate, location and other guest-led factors affecting the guest shopping decision. Target is
also opening new, more flexib le format o f stores such as Target Express and City Target to reach guests living in
crowded urban areas(Wikipedia, 2016; Target, 2015).
Target has a number of resources and competencies that are inimitable, rare and extremely valuable
elements in their business model and are considered to be the sources of Target‘s competitive advantage. Key
resources include; employees (‗team members‖), store atmosphere, offering, campaign design and charity
contributions. Target‘s main competencies can be summarized into three broad areas; superior guest experience,
corporate culture, and systems which involve many resources, processes and analytical tools (Golberg, Mereck,
Hardy, Hoeft, & Noetzel, 2005).
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 33
Costco Wholesale Corporation Costco is following a cost leadership generic strategy. The strategy is to offer very low priced products that
entice customers and encourage them to be a loyal member/customer in Costco‘s stores.
Costco adopts a membership-only warehouse club business model where members pay an annual fee of
$55 to gain access to the low priced products available at Costco stores. Costco utilize its economies of scale to buy
in bulk at low prices and pass on the discount to the customers. Costco also focus on achieving low operating cost
by increasing the supply chain efficiency and inventory turnover in order to pass on such saving to the members.
Costco adopts three specific strategies; Low capped markup, Limited items selection and a ―Treasure-hunt‖
shopping experience (Thompson, 2009; Gregory, 2015).
First, Costcohas a strategy to place a cap on the markup of brand -name products at 14% which is
considered very low compared to that of other retailers (20-50% markups). Suchcap on markup results in very low
prices that are just above the breakeven point, such prices lead to high sale volume and very short inventory to cash
cycle (Rombang, 2008).However Costco also sells top-quality brands at prices that are predominantly below
wholesale or retail average prices. To achieve cost leadership, the company stocks only the items that in fact can be
sold at a bargain prices which provides a significant cost saving for Costco's members. The same holds true for
items that are repeatedly requested by the customers. Costco's sells it own high quality private brand - named
"Kirkland" signature –which is charged higher markups however still remain lower than comparab le items.
(Thompson, 2009).
Second, Costco follows a strategy to limit the number of selectable items at its stores. Items offered to
members cover a broad spectrum of products however the selection is deliberately limited to those models that sell
fast, with the more appealing sizes and colors. This strategy is aimed at ensuring that Costco's members visiting
more frequently since they would view Costco as a one-stop shopping arena (Rombang, 2008).These limited
selection offered span a wide variety of areas which allows Costco to manage its costs at significantly lower price
levels. This is assured given the smaller number of orders which lead to reduction in delivery costs and on -site
handling costs of these high volumes albeit limited types of merchandise (Roegiers, 2011).
Third, Costco implements a strategy called Treasure-hunt Shopping experience. W ith the objective to
increase the number of its customers' visits to its warehouses, Costco provides a "treasure-hunt" experience to its
customers which is a technique to offer high-end product ranges at significantly/shockingly low prices . (Roegiers,
2011).The treasure hunt experience encourages customers to spend more than what they would usually spend with
the aim to achieving a bargain. In order to keep its roster fresh, the list of treasure-hunt items is consistently changed
in order to have customers returning to discover the new bargains which could be achieved (Rombang, 2008).
Costco's low prices and the aforementioned treasure-hunt have reduced the market ing initiat ives and
therefore the marketing cost. Marketing is consequently limited to advertisement in direct mail that is being sent to
existing Costco members, the mail to prospect members, and special advertisement for new expansions of Costco.
Once a customer base is established, any new additions to the members‘ base are genera lly limited to word of mouth
and direct mail marketing. Costco's marketing strategies are therefore limited due to the business model of the
company which led to lower costs than comparable retailers, discounters and hypermarkets (Thompson, 2009).
Costco also utilizes employee retention as pivotal strategy to drive down costs. While this is usually
achieved through controlling the costs of Costco's employees, Costco approaches it differently by increasing the
salaries of its employees. The rationale is that Costco through increasing the salaries of its employees has incredible
cost savings due to reduction of employee turnover. Having highly paid motivated employees would create a
pleasant environment and shopping experience for the members who will be encou raged to return for shopping
(Investopedia, 2015).
Costco has historically opened 20 to 25 new locations on an annual basis, mostly being in the United
States, however with an international focus as well. Towards this international expansion, Costco had e ntered into
joint venture arrangements in which it owns close to 50% of the opened warehouses. With growth being a general
strategy of the company to increase its sales, the same is achieved through the increasing of new warehouses.
Comparison of Strategies and Business Model of the companies While Costco focus on Cost Leadership through supply chain and operations efficiencies to drive cost
down and pass on saving to customers in the form of the low priced product, Target adopts Target an integrated Cost
Leadership and Differentiation strategy. Therefore, Target offers slightly higher-priced product but inexpensive and
greater in value compared with those offered by other retailers
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 34
Target offers a wider variety of high quality, trend-forward merchandize with lower margin, whereas
Costco limited selection of products to reduce the operational cost and increase the sales volume. Both retailers offer
branded and private-label product, however, Target has more exclusive deals with high profile partner and
designers.
Pleasant shopping experience in Costco stores is main ly achieved through consistently providing low price
product and retaining motivated employees, whereas, in Target, shopping experience is carefully looked for from a
much more holistic view where many factors are taken into consideration such as; clean, well maintained stores, fun
shopping atmosphere, employee welfare, short waiting time to pay, easy to shop layout, convenient locations,
innovation, product design and offers.
While both retailers emphasize on the supply chain management efficiency to drive cost down, it is clear
that Target invest much more in technology improvements, systems, innovations, advertising.
Target and Costco have some common core competencies and resources such as pleas ant shopping
experience, supply chain management, and employees. However, each company has additional unique
competencies, for example Costco has strong bargaining power, while Target has innovative culture and design,
system improvements, and disciplined management approaches. The following table summarized a number of
similarities and differences between Target and Costco.
Target Costco
Generic Strategy Integrated Cost Leadership and
Differentiation. ―Expect More, Pay Less‖.
Cost Leadership. Use economies of scale to
buy in bulk at low cost and pass the discount
to the customer.
Business Model To offer customer everyday essentials and
fashionable differentiated merchandise at
discounted prices.
Membership warehouse club, consumers pay
membership fee to gain access to low cost
products offered at Costco stores.
Objectives -Provide superior customer experience.
-Retain and increase employees‘ welfare.
-Provide quality products.
-Maintain and promote Target brand
awareness.
-Provide customers with quality goods at low
price.
-Provide p leasant shopping experience.
-Retain highlight motivated employees to
attract and keep customers.
Product Wide variety of high quality, trend-forward
merchandize with lower margin.
Limited selection of products to reduce the
operational cost and increase the sales
volume
Customer Referred to as Guest, tend to be younger,
richer and more educated.
Referred to as Members, tend to be mature
and rational. With 85% retention rate
Distribution
Channel
In-store and online. In-store and online.
Brand Well-established and a recognized brand
and logo. It offers also other well-known
high quality brands.
Branded and private-label product.
Core Competencies Superior guest experience, corporate
culture, systems, strong supply chain,
technology infrastructure, innovation,
disciplined management approaches
Efficient supply chain management, pleasant
shopping experience, strong bargaining
power, motivated highly paid employees.
VI. RESEARCH FINDINGS AND COMMENTS Business success and survival is highly dependent on vigilant strategy design, creative strategy formulat ion,
careful implementation and continuous monitoring and adaptation. It is crucial for a successful strategy to be in
good fit with the company‘s internal and external environment, cu lture, and technology. There is no single format of
strategy, business can follow one of three generic business strategies; Cost Leadership, Differentiat ion, and Focused
strategy. Companies may develop different programs and business model to implement one generic strategy. Despite
the type of the strategy chosen, it has to provide a sustainable competitive advantage which will allow the company
to survive and succeed in highly competitive environment. Target and Costco, as discount retailers, have adopted
different strategies and business models and both companies proved to be successful. Recent trends to achieve
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 35
competitive advantages in today‘s turbulent environment include; personalized, d istinctive marketing and offering to
gain long term loyal customers, creative product design and advertising, innovative attractive shopping that consider
many aspects including store layout and employee welfare, partnerships and cooperative strategies, multi -channel
distribution and communication and technology improvement and innovation.
Financial Data of the companies Financial comparison is conducted to demonstrate the difference between both retailers. Overall, the
findings indicate Target Corp. was outperforming Costco prior to 2014. However, due to significant changes and
economic downturns, Costco remarkable g rowth has reached Target Corp. levels. Key financial data fo r both Costco
& Target were as follows:
Amounts in USD millions Costco Target Corp
12 Month Period Ending * Aug 31,
2015
Aug 31,
2014
Aug 31,
2013
Jan 31,
2016
Jan 31,
2015
Jan 31,
2014
Income Statement
Total Revenue 116,199 112,640 105,156 73,785 72,618 71,279
Gross Profit 15,134 14,182 13,208 21,788 21,340 21,240
Operating Income or Loss 3,624 3,220 3,053 4,910 4,535 4,779
Net Income 2,377 2,058 2,039 3,363 -1,636 1,971
* Costco‘s fiscal year end is Aug 31 while Target‘s fiscal year end is Jan 31
Balance Sheet Costco Target Corp
Current Assets 17,299 17,588 15,840 14,130 13,624 11,573
of which Cash & Equivalents are 4,801 5,738 4,644 4,046 2,210 670
Non-current Assets 16,141 15,436 14,443 26,132 27,548 32,980
Total Assets 33,440 33,024 30,283 40,262 41,172 44,553
Total Current Liab ilit ies 16,540 14,412 13,257 12,622 11,736 12,777
of which ST Debt is 1,283 -- -- 815 91 1,143
Non-current Liab ilities 6,283 6,309 6,193 14,683 15,439 15,545
of which LT Debt is 4,864 5,093 4,998 11,945 12,634 11,429
Total Liab ilities 22,823 20,721 19,450 27,305 27,175 28,322
of which total debt is 6,147 5,093 4,998 12,760 12,725 12,572
Total Stockholder Equity 10,617 12,303 10,833 12,957 13,997 16,231
Ket Financial Ratios
Gross Margin 13.0% 12.6% 12.6% 29.5% 29.4% 29.8%
Operating Margin 3.1% 2.9% 2.9% 6.7% 6.2% 6.7%
Net Margin 2.0% 1.8% 1.9% 4.6% -2.3% 2.8%
Current Ratio 1.05x 1.22x 1.19x 1.12x 1.16x 0.91x
Net Gearing
[(Total Debt - Cash) / Equity]
0.13x -ve 0.03x 0.67x 0.75x 0.73x
Leverage
[Total Liabilit ies / Equity]
2.15x 1.68x 1.80x 2.11x 1.94x 1.74x
Source: http://finance.yahoo.com
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 36
- As can be seen above, Costco outperforms Target Corp. in total revenue and growth. Revenue of Target
remained almost at the same level for the past 4 years, whereas Costco has shown a growth from $ 99
billion in 2012 to $ 116 billion in 2015, i.e. CAGR of 29%.
- Out of the two retailers, Target Corp. en joys a better operating margin than Costco. Although Costco shows
ongoing growth, the low-cost strategy compromises the margin potential in comparison with their
competitors.
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 37
- Stock performance of both retailers was head to head from 2012 to mid -2013; however, despite few
downturns, Costco showed more stable growth in comparison with Target Corp. During 2014, Target Corp.
discontinued their operations in Canada due to failure of penetrating the Canadian market. This effect is
clear from the declining stock prices in 2014.
- Costco earnings per share demonstrate a steady growth in comparison with Target Corp. This is due to
reporting of net losses from the Candian operations expansion of Target Corp.
VII. REFERENCES Agustin, D., Islam, D. U., Fadillah, F. M., Nastiti, L., & Setyawidaputra, N. (2012). Costco Wholesale in 2012 : Mission, Business Model and
Strategy.
Albu Consulting. (2016). 5 Reasons Strategy is important . Retrieved March 9, 2016, from http://albu-strategymanagement.com/5-reasons-
strategy-important/
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 38
Amit, R., & Zott, C. (2001). Value Creation in E-Business. Strategic Mangement Journal, 22 : 493-520.
Barwise, P., & Meehan, S. (2004, August 16). Bullseye: Target's Cheap Chic Strategy . Retrieved April 02, 2016, from Harvard Business School
Working Knowledge: http://hbswk.hbs.edu/archive/4319.html#3
Casadesus-Masanell, R., & Ricart, J. (2010). From Strategy to Business Models and onto Tactics. Long Range Planning, 43 : 195-215.
Costco. (2016). The Costco Story. Retrieved March 20, 2016, from Costco: http://www.costco.ca/about-us.html
Daft, R. (2008). New Era of Management, 2nd ed. Mason: Thomson South-Western.
Dalavagas, I. (2015, February 9). SWOT Analysis: Costco Wholesale Corporation. United States.
Dobson, P., Starkey, K., & Richards, J. (2004). Strategic Management: issues and cases. Retrieved March 02, 2016, from https://goo.gl/154nfp
Drucker, P. (1954). The Practice of Management. New York: Harper and Row Publishers.
Garcia, T. (2015, November 20). Why Wal-Mart, Target aren’t growing online as quickly as Amazon. United States.
Ghaly, R. (2009, July 17). Why Strategy is so important in Today's Business Decision Making? Retrieved March 02, 2016, from http://business-
strategy.over-blog.com/article-33928997.htm
Golberg, K., Mereck, N., Hardy, C., Hoeft, T., & Noetzel, J. (2005, December 15). Wal-Mart and Target: Strategic Industry Analysis. Retrieved
from http://www.d.umn.edu/~ggbell/mgts4481/Sample%20papers/Walmart%20n%20Tgt.pdf
Gregory, L. (2015, October 30). Costco's Mission, Business Model, Strategy & SWOT. Retrieved from Panmore Institute:
http://panmore.com/costco-mission-business-model-strategy-swot
Hahn, L., Kwak, L., & Palys, J. (2005). Target Corporation.
Hax, A., & Majluf, N. (1986, August). Strategy And The Strategy Formation Process. Retrieved March 02, 2016, from
http://dspace.mit.edu/bitstream/handle/1721.1/2149/SWP-1810-15686178.pdf
Heller, L. (2015, April 7). Target's transformation roadmap makes mobile the front door. Retrieved April 02, 2016, from FierceRetail:
http://www.fierceretail.com/story/targets-transformation-roadmap-makes-mobile-front-door/2015-04-07
Hopkins, W., & Hopkins, S. (1997). Strategic planning-Financial performance relationships in banks: a causal examination. Strategic
Management Journal, 18(8), 635-652.
Investopedia. (2015, April 09). 3 Reasons Costco Is a Great Company. Retrieved from Investopedia: http://www.investopedia.com/stock-
analysis/040915/3-reasons-costco-great-company-cost.aspx#ixzz428lmNmmb
Investopedia. (2016). Who are Target's (TGT) main competitors? Retrieved March 03, 2016, from Investopedia:
http://www.investopedia.com/ask/answers/051915/who-are-targets-tgt-main-competitors.asp
Johnson, G., & Scholes, K. (2005). Exploring Corporate Strategy: text and cases, 7th ed. FT/Prentice Hall.
Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring Corporate Strategy, 8th ed. FT/Prentice Hall.
Khan, M., & Khalique, M. (2014). A Holistic Review of Empirical Studies of Strategic Planning and Future Research Avenues. International
Journal of Academic Research in Economics and Management Sciences, Vol. 3 : 53-72 Available at:
http://dx.doi.org/10.6007/IJAREMS/v3-i6/1291.
Lee, T. (2013, August). At Target, innovation begins from within. US.
Logan, L., & Beyman, M. (2012, April). Costco: Breaking All the Retail Rules. US.
Lutz, A. (2014, September 30). Costco's Simple Strategy For Outperforming Wal-Mart And Target. Retrieved from Business Insider:
http://www.businessinsider.com/costcos-simple-strategy-2014-9
Mintzberg, H. (1994). The Rise and Fall of Strategic Planning. Free Press.
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 39
Mourdoukoutas, P. (2016, January 16). Who Killed Wal-Mart's Business Model? Retrieved March 08, 2016, from Forbes:
http://www.forbes.com/sites/panosmourdoukoutas/2016/01/16/who-killed-wal-marts-business-model/#14ebec6c153a
National Retail Federation. (2015). Top 100 Retailers in the US. Retrieved March 20, 2016, from National Retail Federation:
https://nrf.com/2015/top100-table
Nickols, F. (2016). Strategy: Definitions & Meanings. Retrieved March 07, 2016, from http://www.nickols.us/strategy_definitions.pdf
Olsen, E. (2016). Why is s Strategic Plan Important. Retrieved March 10, 2016, from Dummies.
Osterwalder, A., Pigneur, Y., & Tucci, C. (2005, May 7). Clarifying Business Models: Origins, Present, and Future of the Concept.
Communications of the Association for Information Systems, pp. Vol. 16, Article 1 Available at:
http://aisel.aisnet.org/cais/vol16/iss1/1.
Porter, M. (1980). Competitive Strategy: Techniques for Analyzing Industries and. New York: Free Press.
Porter, M. (1996, November-December). What is Strategy? Harvard Business Review.
Raheja, N. (2013, June 10). Target: The Best Discount Store. Retrieved March 02, 2016, from Seeking Alpha:
http://seekingalpha.com/article/1492022-target-the-best-discount-store
Roegiers, T. (2011). Report to Jim Sinegal, CEO of Costco, of the competitive analysis of Costco Wholesale vs. Sam’s Club and BJ’s Wholesale.
Roegiers Consulting Firm.
Rombang, S. (2008). Strategic Management (64 International A). Indonesia: Universitas Gadjah Mada.
Ryan, T. (2014, March). Does Costco have a youth problem? US.
Soni, P. (2016, January 19). An Investor's Guide to Costco Wholesale: A Growing Retailer. Retrieved March 12, 2016, from Marketrealist:
http://marketrealist.com/2016/01/swot-analysis-costcos-strengths-opportunities/
Stevenson, C. (2014, May 1). The Keys to Successful Business Strategy Execution. Retrieved March 9, 2016, from i4cp:
http://www.i4cp.com/trendwatchers/2014/05/01/the-keys-to-successful-business-strategy-execution
SWOT analysis of Target Corporation. (2015, November). Retrieved from Pestle Analysis: http://pestleanalysis.com/swot-analysis-of-target/
Target. (2015, March 03). Target Shares Roadmap to Transform Business. Retrieved April 01, 2016, from Target:
https://corporate.target.com/press/releases/2015/03/target-shares-roadmap-to-transform-business
Target. (2016). Coporate Fact Sheet. Retrieved March 22, 2016, from Target: https://corporate.target.com/press/corporate
Target Corporation. (2014). Target 2014 Annual Report. Target.
Teece, D. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43 : 172-194.
Thompson, A. (2009). Strategia aziendale - Formulazione ed esecuzione. The University of Alabama: The McGraw-Hill Companies srl.
Tongue, K., McDonald, K., Doutkevitch, R., Midgley, K., & Munro, T. (2012, November 19). Target Corporation: Case Synopsis. Retrieved
March 04, 2016, from http://www.sfu.ca/~sheppard/478/syn/1123/SynopsisB.pdf
US Top 100 retailers. (2015). Retrieved from National Retail Federation: https://nrf.com/2015/top100-table
Wahba, P. (2015, March). TARGET HAS A NEW CEO: WILL HE RE-ENERGIZE THE RETAILER? US.
Wheelen, T., & Hunger, D. (2012). Strategic Management And Business Policy. Pearson Prentice Hall.
Why Costco Needs To Watch Out For Amazon. (2014, October). US.
Wikipedia. (2016, March). Business Model. Retrieved March 08, 2016, from
https://en.wikipedia.org/wiki/Business_model#Business_model_design
Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,
ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40
Page 40
Wikipedia. (2016, March 20). Costco. Retrieved March 22, 2016, from Wikipedia: https://en.wikipedia.org/wiki/Costco
Wikipedia. (2016, March). Strategic Management. Retrieved March 02, 2016, from Wikipedia:
https://en.wikipedia.org/wiki/Strategic_management#cite_note-Chandler.2C_Alfred_1962-9
Wikipedia. (2016, Mar 03). Strategy. Retrieved March 04, 2016, from Wikipedia: https://en.wikipedia.org/wiki/Strategy
Wikipedia. (2016, March 21). Target Corporation. Retrieved March 22, 2016, from Wikipedia:
https://en.wikipedia.org/wiki/Target_Corporation#1960s_and_1970s
Wikipedia. (2016, March 30). Target Corporation. Retrieved April 02, 2016, from Wikipedia: https://en.wikipedia.org/wiki/Target_Corporation