Project 2: Tool Analysis (Week 4)

Selecting Business-Level Strategies
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:

  1. Why is an examination of generic strategies valuable?
  2. What are the four main generic strategies?
  3. What is a best-cost strategy?
  4. What does it mean to be “stuck in the middle”?
    The Competition Takes Aim at Target
    On January 13, 2011, Target Corporation announced its intentions to operate stores outside the United
    States for the first time. The plan called for Target to enter Canada by purchasing existing leases from a
    Canadian retailer and then opening 100 to 150 stores in 2013 and 2014. [1] The chain already included
    more than 1,700 stores in forty-nine states. Given the close physical and cultural ties between the United
    States and Canada, entering the Canadian market seemed to be a logical move for Target.
    In addition to making its initial move beyond the United States, Target had several other sources of pride
    in early 2011. The company claimed that 96 percent of American consumers recognized its signature logo,
    surpassing the percentages enjoyed by famous brands such as Apple and Nike. In
    March, Fortune magazine ranked Target twenty-second on its list of the “World’s Most Admired
    Companies.” In May, Target reported that its sales and earnings for the first quarter of 2011 (sales: $15.6
    billion; earnings: $689 million) were stronger than they had been in the first quarter of 2010 (sales: $15.2
    billion; earnings: $671 million). Yet there were serious causes for concern, too. News stories in the second
    half of 2010 about Target’s donations to political candidates had created controversy and unwanted
    publicity. And despite increasing sales and profits, Target’s stock price fell about 20 percent during the
    first quarter of 2011.
    Chapter 5 from Mastering Strategic Management was adapted by The Saylor Foundation under
    a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
    by the work’s original creator or licensee. © 2014, The Saylor Foundation.
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    Concern also surrounded Target’s possible vulnerability to competition within the retail industry. Since its
    creation in the early 1960s, Target executives had carved out a lucrative position for the firm. Target offers
    relatively low prices on brand-name consumer staples such as cleaning supplies and paper products, but it
    also offers chic clothing and household goods. This unique combination helps Target to appeal to fairly
    affluent customers. Although Target counts many college students and senior citizens among its devotees,
    the typical Target shopper is forty-one years old and has a household income of about $63,000 per year.
    Approximately 45 percent of Target customers have children at home, and about 48 percent have a college
    degree. [2] Perhaps the most tangible reflection of Target’s upscale position among large retailers is the
    tendency of some customers to jokingly pronounce its name as if it were a French boutique: “Tar-zhay.”
    Target’s lucrative position was far from guaranteed, however. Indeed, a variety of competitors seemed to
    be taking aim at Target. Retail chains such as Kohl’s and Old Navy offered fashionable clothing at prices
    similar to Target’s. Discounters like T.J. Maxx, Marshalls, and Ross offered designer clothing and chic
    household goods for prices that often were lower than Target’s. Closeout stores such as Big Lots offered a
    limited selection of electronics, apparel, and household goods but at deeply discounted prices. All these
    stores threatened to steal business from Target.
    Walmart was perhaps Target’s most worrisome competitor. After some struggles in the 2000s, the
    mammoth retailer’s performance was strong enough that it ranked well above Target on Fortune’s list of
    the “World’s Most Admired Companies” (eleventh vs. twenty-second). Walmart also was much bigger
    than Target. The resulting economies of scale meant that Walmart could undercut Target’s prices anytime
    it desired. Just such a scenario had unfolded before. A few years ago, Walmart’s victory in a price war over
    Kmart led the latter into bankruptcy.
    One important difference between Kmart and Target is that Target is viewed by consumers as offering
    relatively high-quality goods. But this difference might not protect Target. Although Walmart’s products
    tended to lack the chic appeal of Target’s, Walmart had begun offering better products during the
    recession of the late 2000s in an effort to expand its customer base. If Walmart executives chose to match
    Target’s quality while charging lower prices, Target could find itself without a unique appeal for
    customers. As 2011 continued, a big question loomed: could Target maintain its unique appeal to
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    customers or would the competitive arrows launched by Walmart and others force Target’s executives to
    quiver?
    [1] Target Corporation to acquire interest in Canadian real estate from Zellers Inc., a subsidiary of Hudson’s Bay
    Company, for C$1.825 billion [Press release]. 2011, January 13. Target Stores. Retrieved from
    http://pressroom.target.com/pr/news/target-corporation-to-acquire-real-estate.aspx
    [2] Target fact card. 2007, January 2007. Retrieved from
    http://sites.target.com/images/corporate/about/pdfs/corp_factcard_101107.pdf

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138
5.1 Understanding Business-Level Strategy through “Generic
Strategies”
LEARNING OBJECTIVES

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  1. Understand the four primary generic strategies.
  2. Know the two dimensions that are critical to defining business-level strategy.
  3. Know the limitations of generic strategies.
    Why Examine Generic Strategies?
    Business-level strategy addresses the question of how a firm will compete in a particular industry (Figure
    5.1 “Business-Level Strategies”). This seems to be a simple question on the surface, but it is actually quite
    complex. The reason is that there are a great many possible answers to the question. Consider, for
    example, the restaurants in your town or city. Chances are that you live fairly close to some combination
    of McDonald’s, Subway, Chili’s, Applebee’s, Panera Bread Company, dozens of other national brands, and
    a variety of locally based eateries that have just one location. Each of these restaurants competes using a
    business model that is at least somewhat unique. When an executive in the restaurant industry analyzes
    her company and her rivals, she needs to avoid getting distracted by all the nuances of different firm’s
    business-level strategies and losing sight of the big picture.
    The solution is to think about business-level strategy in terms of generic strategies. A generic strategy is a
    general way of positioning a firm within an industry. Focusing on generic strategies allows executives to
    concentrate on the core elements of firms’ business-level strategies. The most popular set of generic
    strategies is based on the work of Professor Michael Porter of the Harvard Business School and
    subsequent researchers that have built on Porter’s initial ideas. [1]
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    Figure 5.1 Business-Level Strategies
    6
    Images courtesy of GeneralCheese, http://en.wikipedia.org/wiki/File:Remodeld_walmart.jpg (top
    left); unknown author, http://en.wikipedia.org/wiki/File:Nordstrom.JPG (top right);
    NNECAPA, http://www.flickr.com/photos/nnecapa/2794736274/(bottom left); Debs,
    http://www.flickr.com/photos/littledebbie11/4537337628/ (bottom right).
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    140
    According to Porter, two competitive dimensions are the keys to business-level strategy. The first
    dimension is a firm’s source of competitive advantage. This dimension involves whether a firm tries to
    gain an edge on rivals by keeping costs down or by offering something unique in the market. The second
    dimension is firms’ scope of operations. This dimension involves whether a firm tries to target customers
    in general or whether it seeks to attract just a segment of customers. Four generic business-level strategies
    emerge from these decisions: (1) cost leadership, (2) differentiation, (3) focused cost leadership, and (4)
    focused differentiation. In rare cases, firms are able to offer both low prices and unique features that
    customers find desirable. These firms are following a best-cost strategy. Firms that are not able to offer
    low prices or appealing unique features are referred to as “stuck in the middle.”
    Understanding the differences that underlie generic strategies is important because different generic
    strategies offer different value propositions to customers. A firm focusing on cost leadership will have a
    different value chain configuration than a firm whose strategy focuses on differentiation. For example,
    marketing and sales for a differentiation strategy often requires extensive effort while some firms that
    follow cost leadership such as Waffle House are successful with limited marketing efforts. This chapter
    presents each generic strategy and the “recipe” generally associated with success when using that strategy.
    When firms follow these recipes, the result can be a strategy that leads to superior performance. But when
    firms fail to follow logical actions associated with each strategy, the result may be a value proposition
    configuration that is expensive to implement and that does not satisfy enough customers to be viable

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