Target vs. Target: Clashing Strategies

When we think of Target, we usually visualize a middle market company that executes a low cost, high volume product strategy. To be sure, the chain does maintain a stylistically distinctive brand image, but it offers a very basic value proposition: to provide a modestly comfortable shopping experience while maintaining low sales prices.

Recently, though, Target announced a pair of highly unusual business initiatives that will dramatically differentiate it from the competition. First, it announced that it is collaborating with a major consumer electronics firm to form a joint venture; then, it reached out to its suppliers in an aggressive attempt to respond to a challenge from Amazon.

It remains to be seen, of course, which approach will prove to be the more effective one. Interestingly, though, each of Target’s initiatives appears to be based on a different assumption about its primary core competency.

The War On Showrooming

Last week, Target reached out to its suppliers and asked for help in combating the practice of showrooming. It’s an activity that has blossomed with the emergence of internet-based shopping; it refers to consumers who “scope out” products in a bricks-and-mortar store and then use the internet to purchase them from discount web sites like Amazon.

Because web-based retailers do not incur the costs of maintaining store networks, they can undercut the sales prices of chains like Target. And in many states, web-based retailers can avoid collecting sales taxes from customers as well.

Frustrated by the practice of showrooming, Target’s executives asked their suppliers to consider designing special edition products that would be exclusively sold through their stores. The executives also implied that they would welcome discount pricing arrangements with their suppliers, and would (presumably) pass along the lower costs to their customers.

By making such requests, Target’s executives signaled that they intend to continue battling Amazon and other online retailers. At the same time, though, Target is also taking a drastically different approach to managing the competition.

If You Can’t Beat ‘Em, Join ‘Em

Two weeks ago, Target and Apple jointly announced an innovative new venture. Apparently, Apple will soon begin to utilize Target’s floor space to create “store within a store” boutiques for its products and services.

Apple boutiques within Target stores? That might become a very uncomfortable arrangement! After all, the two firms compete directly with each other to sell computers, mobile phones, and other electronics merchandise.

Furthermore, with Apple dramatically expanding its own global retail store network, the two firms are probably heading for more intense competition in the future. And yet Target has decided to turn over a significant amount of its floor space to the world’s most admired company.

The Core Competency

How can we make sense of this dramatic divergence in competitive strategies? One approach, perhaps, is to understand the two different perspectives by which Target may be defining its primary core competency.

If a retailer focuses its efforts on the creation of an attractive shopping environment, then it wouldn’t necessarily be alarmed by the prospect of more intense product competition. Starbucks, for instance, comfortably sold Top Pot doughnuts in its stores for many years because it has always defined its primary competency as the creation of a social “third place” between home and work. It has never simply defined itself as a vendor of coffee and doughnuts.

On the other hand, if a retailer focuses on the maximization of sales volume, then it would always be concerned about more intense product competition. Automobile companies, for instance, often prohibit their dealers from affiliating with rival manufacturers because they define their primary core competencies as “selling cars” and not “creating an attractive environment for automobile buyers.”

If we apply these concepts to Target, it’s easy to categorize the retailer as a sales focused organization in order to understand their Amazon initiative. But is it reasonable to simultaneously define them as a “social environment” organization in order to understand their Apple initiative?

Welcome To Magnolia!

You may be struggling to envision an Apple boutique within a Target store, one that provides a typical Apple store environment to its customers. But other low cost, high volume retailers are successfully executing this strategy; Best Buy, for instance, has been hosting hundreds of similar Apple boutiques for several years.

In addition, Best Buy has been partnering with Magnolia Design Centers to host hundreds of high end electronics boutiques within their stores. The partnership continues to be a successful one; it may well have served as a model for Best Buy’s (and now Target’s) expanding joint venture with Apple.

In other words, although many may believe that Target would be better served by focusing on a single core competency of low cost, high volume sales, Best Buy has actually been doing so and simultaneously pursuing a successful boutique business strategy for several years. Apparently, Target shoppers will soon learn whether the retailer can manage to focus on two core competencies at once.

Online Advertising: Allied Against Google!

How many global internet firms does it take to challenge Google in the online advertising industry nowadays?

The answer, apparently, is three: Microsoft, AOL, and Yahoo. Although no formal agreement has yet been announced by the three firms, credible news organizations reported last week that the trio had agreed to coordinate their efforts to sell advertising space on their web pages.

Google, meanwhile, has chosen not to respond to the reports, preferring to maintain its focus on challenges like the positioning of its Android mobile telephone franchise against Apple’s iPhone. That says something about how the once-dominant market positions of the three partners have waned, doesn’t it?

They Once Were Giants

Microsoft, AOL, and Yahoo, of course, exemplified the growth of the contemporary knowledge economy during each of the final three decades of the twentieth century. Each firm revolutionized an existing technology and then found a way to profit from it, eventually yielding to the next firm in line, which then accomplished a progressively similar feat.

Microsoft was the first in line in this series, incorporated in 1975 by the now-legendary development team of Bill Gates and Paul Allen. The men modified the operating system DOS, which had previously been created by a firm named Digital Research, to operate IBM’s emerging line of Personal Computers (PCs). Later, they introduced the groundbreaking Windows line of operating systems to the world.

But despite its dominance of the desktop computer operating systems sector, Microsoft was never able to dominate the internet age that emerged during the 1980s. That accomplishment was achieved by Steve Case of America Online (now AOL), originally incorporated in 1983 under the name Control Video Corporation. The firm dominated the Internet Service Provider (ISP) business at a time when the vast majority of all Americans accessed the web through dial-up telephone lines that were connected to their PCs, at the dawn of the internet age.

Later, in 1994, Stanford University engineering students Jerry Yang and David Filo launched the Yahoo site as a reference tool, one that was designed to help web surfers find information once they were connected to the internet. Their portfolio of virtual services soon diversified into search engine, email, and other functions, which eventually grew into the most highly trafficked collection of web sites in the world. Even today, Yahoo holds the #2 position (behind Google, of course) in web traffic in the United States.

Each of these three firms thus arose to enhance and then supplant the innovations of the previous firm. None, though, possess a successful track record for establishing mutually profitable joint ventures with other organizations, which is why some analysts are dubious about their prospects for success in their newly announced three way partnership.

Failed Relationships

Those skeptical analysts, in fact, can point to any number of instances in which the three firms have fallen out of joint business relationships with other prominent organizations. Microsoft’s original business relationship with IBM, for instance, ended with angry recriminations and subsequent retaliatory attempts by IBM to establish its own operating system and productivity suite to rival Windows and Office. And the NBC television network’s MSNBC cable channel still carries an acronym within its name that memorializes its original failed plan to jointly operate the news service with Microsoft.

Meanwhile, AOL’s merger with Time Warner continues to be universally regarded as one of the greatest fiascos in the history of corporate mergers. Consummated at the very height of the internet bubble economy in the millennial year 2000, the AOL half of the merged entity later collapsed in value and was fully jettisoned (i.e. spun off) by the firm in 2009. More recently, AOL’s recent acquisition of the highly successful Huffington Post is reportedly confronting similar challenges.

Finally, Yahoo was recently embroiled in a complex ownership dispute with Alibaba of China, an organization in which it owns a 40% interest. Some believe that the stake represents Yahoo’s most valuable strategic asset, but earlier this year Yahoo charged that Alibaba’s Board spun off its Alipay subsidiary without seeking its advance approval. Although the disagreement has since been settled, the public argument was described by some as having reached “soap opera proportions.”

Why would these three firms, with so many resources at their (individual) disposal and so little successful experience in collaborative joint ventures, try to pull off a three way venture against a far more accomplished rival? It is, indeed, difficult to avoid the conclusion that the three firms have reached a level of desperation where no alternative options are feasible.

In the meantime, the historical cycle of innovation and evolution continues, with Facebook having launched in 2004 as a pioneer of the social networking revolution, and with fledgling location based services such as foursquare now hoping to become the success stories of the upcoming decade. It is indeed difficult to image how AOL, Microsoft, and Yahoo, working together or independently, will be able to succeed against the inexorable tide of history.