Creating and Sustaining Competitive Advantages
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There are several companies competing in the retail industry, but there are two that have managed to become industry leaders, each pursuing its own business-level strategy. The first of the two companies is multinational retailer Walmart, which owes its monumental success to the continuous application of a business strategy that focuses on reducing costs in order to maximize capitalization on margins. This strategy is generally referred to as the cost leadership business strategy, and it can be formally defined as “an integrated set of actions taken to produce goods or service with features that are acceptable to customers at the lowest cost, relative to that of competitors” (Hitt, Ireland, & Hoskisson, 2012, p. 108). Walmart is a company that has always strived to offer its customers goods and services of good quality at the lowest possible cost. In other words, when customers go and buy at Walmart, they are not looking for the highest quality or the best service. They are looking for decent products at low costs, they are looking for economy. Walmart’s slogan is “save money, live better” and its previous slogan read “always low prices, always,” meaning that the company’s angle is to sell at lower costs.
The company makes hundreds of billions of dollars every year, and this is because it does save customers’ money. In fact, it was confirmed through research that Walmart’s low prices saved consumers $287 billion in 2006 (Zenith Management Consulting, n.d., p. 17). This has all been the result of a tireless effort to decrease costs at all of the company’s levels and divisions. For example, in recent years the company has reduced its packaging and energy costs dramatically. For example, a decision was made to eliminate excess packaging on the Kid Connection toy line in order to save $2.4 million per year. Besides, the company has opened its own electric company (Branded Texas Retail Energy) to supply its own stores. This endeavor is expected to save the company $15 million per year in energy costs (IBS Center for Management Research, 2004, p. 21).
By consistently and continuously bringing down operation and production costs, the company has managed to offer its customers a wide array of goods and services at exceedingly low prices. Thus, it becomes clear that the company has managed to get a sustainable competitive advantage over its chief competitors using its cost leadership business strategy. The company’s size has made it possible to build an economy of scale that allows it to produce millions of products (which enables the company to minimize marginal costs). Moreover, the company’s initiatives to optimize resources and minimize transaction costs are unparalleled in the retail industry. Finally, it should be noted that Walmart produces most of the products it offers its customers (something that most retailers do not do), and this has allowed for the consolidation of a sustainable competitive advantage that revolves around cost minimization.
The second company is Target Corporation, which is commonly known as Target. This is another major retailer operating in the United States, and even though it has managed to grow and succeed in its market niche, it has done it pursuing a different strategy from Walmart’s cost leadership strategy. Instead of focusing on reducing costs, Target has strived to differentiate its products as much as possible. Surely, the company is also mindful of costs, but its priority is to offer higher quality products at relatively low prices. This is the way in which the company manages to differentiate itself from its chief competitors, including Walmart. Target’s strategy is generally referred to as the differentiation business level strategy, and it basically incorporates “an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them” (Hitt, Ireland, & Hoskisson, 2012, p. 112). This is exactly what Target seeks to do. The company is aware of the fact that people look for economy when purchasing products, but it is equally true that they seek quality and service as well. Target’s angle, then, is to provide quality that is slightly superior to that offered by its chief competitors at a slightly superior cost (but making sure that it is still relatively low).
Target has succeeded using this business strategy, and it has done so basically by reducing its margins on the merchandize that it sells. It should be also noted that the company instead of producing most of its own products (like Walmart does) has decided to make deals with important fashion designers (including Mossimo Giannulli and Isaac Mizrahi) and other name brands (including Converse and Sony) (Drbul, O’Donnell, & Owens, 2002, p. 33). These products are higher in quality than those offered by the company’s chief competitors, and this in itself has accounted for the company’s success in differentiating itself from other retailers. In addition, a major aspect that the company has focused on in order to maximize differentiation is customer service. Target customers are referred to as “guests” and the idea behind this is that customers feel that they are being taken care of while in the store. Other retailers focus exclusively on lowering prices (Walmart being the classic example) and sacrifice service and commodity for customers. Target, however, is all about delivering higher customer service and higher quality products at competitive costs.
Finally, it can be said that Target has also managed to succeed in getting a sustainable competitive advantage over its chief competitors using its differentiation business strategy. The company has sacrificed profit margins in an attempt to offer high quality at costs that are still very much competitive. Furthermore, through its multiple deal with established brands and designers, the company has impressed its own brand with a more stylish image that appeals to a wider segment of society (as it not only offers economy, but quality and style as well). Being the first retailer to pursue such a focus, Target has taken a major lead, and it is proving difficult for its competitors to equal what Target has done throughout its history.