Five Forces of Competition: Target - Report Example

Five Forces of Competition: Target

Target operates its business in a highly competitive retail industry in the U.S. full of retail brands, both domestic and foreign. Target has a good market position, financial strength and market share to be able to compete effectively; but it faces stiff competition from other large and established retailers such as Costco and Walmart, and several other small retailers. Online retailers such as Amazon and eBay also offer competition for the company. In such a competitive and dynamic environment in an age of advanced technology, it is necessary to create and maintain competitive advantage. The ability of Target to achieve competitive advantage in the market can be analyzed using the five forces of competition.

Threat of New Entrants

The retail industry where the company operates is widely open to entry of new competitors because it is relatively easy to start a retail company due to limited government regulations and requirements. There are no special property rights to operate a retail business (Farfan, 2017). However, targets enjoys a strong brand equity and economies of scale that may be used to create barriers to entry. Target is among the large retailers that have created economies of scale through favorable supply contracts and leases (Datamonitor, 2000). Due to the economies of scale, the company enjoys cost advantage because large economies reduces the costs of production.

The company also has effective marketing strategy and good customer services to enhance customer satisfaction and promote competitive advantage for the company to overcome the threat of new entrants. As one of the largest companies in the category of Walmart and Costco, the company enjoys a large brand loyalty as barriers to threat of new entrants. Retail businesses also require large capital to establish, yet the market growth is slow. Target has differentiated its products and established strong brands, so switching costs for new entrants are high (Farfan, 2017). Despite the barriers created by the company, large foreign retailers that hold enough capital offer a significant threat of entry into the U.S. retail market. Therefore, the threat of new entrants for Target and the retail industry is moderate.

Bargaining Power of Buyers

The retail industry has a high buyer concentration to firm concentration ratio. Therefore, customers have a wide range of alternatives to choose when they want to buy a product (Thomas, 2017). Soni (2016) suggests that customers have several choices in physical and online stores, so they can bargain for high quality and low prices. Furthermore, the industry has low degree of product differentiation because many retail companies sell similar product. Retail companies compete significantly through prices and customer service. In this regard, Target maintains competitive prices to boost sales.

Customers have the bargaining power to demand high quality of service and low prices, because there are several competitors in the industry from which the customers can choose from. Therefore, the bargaining power of buyers for Target and the retail industry is high. However, the company reduces the bargaining power of buyers through wide range of products and low prices. Furthermore, the company’s reputation and brand image that increase the company’s bargaining power. Customers are attracted by the company’s fair prices and quality of services, leading to increased competitive advantage.

The Bargaining Power of Suppliers

Due to its large size and financial strength, Target faces a low bargaining power of suppliers. None of the suppliers in the U.S. holds a major influence to affect the bargaining power of retailers. There several suppliers including manufacturing and agricultural companies which compete to sell their products to the large retailers in the U.S. market (Thomas, 2017). Target buys products in large quantities; hence attracting many suppliers, bargaining for lower costs, and reducing the suppliers’ bargaining power. The suppliers also lack unique products to increase their bargaining power.

Retailers usually sign contracts with suppliers who provide the best quality at the least cost possible in order to satisfy their customers. For instance, Target has signed deals with big electronics manufacturers to distribute quality electronic products that attract high demand from customers. However, there are many substitute suppliers in the retail industry, leading to low bargaining power of suppliers (Abboud-Opsitnik, 2001). There are low switching costs, although contracts may bind a company to specific suppliers for a given period of time e.g. three years. There are few large and dominant companies like Target against many suppliers including farmers, manufacturers and service providers. Therefore, the bargaining power of suppliers is low.

Threat of Substitutes

The retail industry is characterized by a high number of substitutes because several retail products are available for customers to use for the same purpose. Such substitutes increase the upper limit on the potential returns of the retail industry; hence causing low profitability in the industry. Customers also face low switching costs between various retailers because there are many sellers in the industry offering similar products. Due to the large number of substitutes in the retail industry, retailers reduce their prices to improve their competitive advantage, leading to reduced profitability in the industry.

There are also online stores such as Amazon and e-bay that deliver substitute products to customers. However, the location and product differentiation of retailers such as Target may reduce the threats of substitutes (Soni, 2016). Target also sells a wide range of products so that customers can have enough choices to avoid looking for substitutes in other retail stores. Furthermore, threat of substitutes is reduced by the low prices offered by Target. Therefore, the threat of substitutes for Target is moderate.

Level of Competitive Rivalry

The retail industry is characterized by intense competitive rivalry from new firms, small firms, existing firms, large retailers, physical, and online retailers who compete for the same market segments. Discount retailers like Target compete with wholesalers, online distributors, distributors of manufacturing companies, supermarkets, small retail stores, and specific category retailers (Thomas, 2017). Because most products are homogenous, these competitors compete in terms of price. To earn profits in the competitive retail industry where prices are low, Target must spread its costs across a large volume of output. Retailers must achieve huge volumes of sales to increase profits and maintain a large market share.

Target faces competition from other large retailers such as Walmart, Costco, Kroger, Amazon and e-bay. Walmart is the company’s largest physical retailer while Amazon is the leading online competitor. The first-quarter financial results indicate that Walmart and Amazon recorded a total of $5.4 billion revenue growth. The share prices of Walmart and Amazon are 86.4 and 986.61 respectively. Both companies have a stable and high share price compared to Target’s 60.43 of share price.

Target

Walmart

Amazon

Costco

Sales ($)

69,495 M

485.14 B

135,985 M

129,025 M

Profit ($)

2,778 M

17 B

1,922 M

2,679 M

Market Share

2%

25%

8%

Figure 1: Comparison of Major Competitors in 2016 (Morningstar, 2017)

From the figure above, Walmart also recorded high sales of 485.14 billion in 2017 (MarketWatch, 2017) compared to 69,495 million of Target (Morningstar, 2017b). The sales revenue of Amazon and Costco were $135,985 million and 129,025 million respectively. In terms of profits, Walmart earned a net income of $17 billion while Target earned $2,778 million (Morningstar, 2017a, b). Amazon and Costco earned $1,922 and $2,679 million respectively. In this regard, Target is performing poorer than giants such as Walmart, Amazon and Costco Wholesalers financially. In terms of market share, Walmart is the largest followed by Amazon, Target and Costco respectively (Farfan, 2017). Therefore, Target faces a high competitive rivalry in the retail industry.