9 – 1 0 9 – 0 1 0
R E V : J A N U A R Y 1 9 , 2 0 1 1


Professors Krishna Palepu and Suraj Srinivasan, and James Weber, Senior Researcher, Global Research Group, prepared this case. This case was
developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2009, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-
7685, write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.




Target Corporation: Ackman versus the Board

On behalf of Target’s Board of Directors and management team, we thank our shareholders for their
overwhelming support throughout this process. Today’s outcome demonstrates the confidence Target
shareholders have in our Board’s qualifications, diversity and experience to provide effective and independent
oversight and direction to the company . . . .

— Gregg Steinhafel, Target chairman and CEO, May 28, 20091

On May 28, 2009, Target Corporation announced that a preliminary vote count at its just
completed annual shareholders meeting showed shareholders had re-elected “by a comfortable
margin” the four directors up for board seats. This meant that Target had won its proxy fight with
activist shareholder William Ackman and that Target executives could get back to running the
company and addressing the operational challenges brought on by a difficult economy.

Gregg Steinhafel had taken over as CEO one year earlier upon the retirement of his highly
successful predecessor, and colleague of 30 years, Robert Ulrich. Under Ulrich, between 1994 and
2008, Target had grown store sales from $11.7 billion to $61.4 billion and store count from 554 to
1,591. Its stock price increased at an annual rate of nearly 17% over this period. Target had become
the second largest discount retailer in the U.S. and the 31st largest company on the Fortune 500. It had
successfully competed head-to-head with industry leader Wal-Mart at a time when many other
discount competitors had failed. Target differentiated itself in part through its “expect more pay less”
philosophy which sought to offer everyday customers from across a wide income range higher
quality, unique products that frequently carried designer labels alongside standard discount store
offerings in a clean upscale environment.

Under Steinhafel, however, Target faltered. Perhaps its biggest challenges were related to a
slowdown in the U.S. economy that began in 2007 and by late 2008 had become widely
acknowledged as the biggest economic and financial crisis since the Great Depression of the 1930s. In
good economic times, customers were willing to pay what they perceived as higher prices at Target
in return for better products and an overall higher-level customer experience. As the economy
slowed, job insecurity increased, food and energy prices rose dramatically, and many homeowners
faced foreclosure due to a housing market crisis. This caused consumers to leave Target to shop at
more traditional discounters, such as Wal-Mart, that they perceived to have lower prices.

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109-010 Target Corporation: Ackman versus the Board


In 2007, Ackman had acquired 10% of Target’s stock for $2 billion and began pushing for changes;
some of which Target had agreed with and implemented. In 2008, however, Ackman proposed a
major real estate sales-leaseback plan that Target rejected. In early 2009, Ackman asked for two board
seats and again Target refused. Then, in March, Ackman nominated his own slate of candidates to
run in opposition to the reelection of four Target directors. While Target had prevailed, it still faced
significant challenges relating to the economy and whether it could develop a strategy that worked in
both good times and bad.

Early History

Target traced its roots to George Dayton, a banker and real estate developer who opened a
department store in Minneapolis, Minnesota in 1902. By 1903 he was running the business with his
sons with a philosophy to “buy and sell only merchandise of dependable quality and honest value at
its level.” In 1909, Dayton opened a basement store to serve customers who could not afford the
higher prices found in the department store. Over the following decades, Dayton and his descendents
built a successful business and by the late 1940s they operated the second largest family owned
department store in the U.S. The Daytons did not open a second department store until 1954, and in
the following years they built several major shopping centers including some of the earliest shopping
malls in the U.S. Other than the basement store, these businesses focused on upscale shoppers.2

Discount Stores

Discount stores emerged around the turn of the 20th century as alternatives to department stores.
Where department stores tended to offer a wide range of higher quality products and good customer
service in clean, attractive stores, discount operators sold basic merchandise in simple, often dirty or
poorly maintained stores and with little customer service.

Early discount stores tended not to sell the increasing number of branded goods coming onto the
market because various laws enabled branded products manufacturers to set minimum selling prices
that pushed branded products beyond the reach of many discount shoppers. Further, consumers had
little reason to shop in dirty, poorly-organized discount stores for branded goods that could be
purchased in nicer stores at the same price. Beginning in the 1950s, some discount stores found ways
around these laws. These stores were able to attract customers because shoppers were willing to visit
the discount store environment to purchase branded goods of known quality at lower prices.

Other factors also enabled discount stores to take market share away from department stores in
the 1950s and later. Department stores were primarily located in cities. Population growth in smaller
towns and suburbs, coupled with the spread of automobiles, provided opportunities for new stores
to open outside of city centers. Many of these stores were discount operations.

Dayton Launches Target

The Dayton Company saw the growth of discount stores and decided to enter the business. In
1962 it opened its first four discount stores under the name Target. Dayton was not alone. That same
year, Sam Walton founded Wal-Mart, Sebastian Kresge launched Kmart, and Max Kohl founded
Kohl’s. These companies remained major competitors of Target into the 21st century. Many other
discount operators, however, were founded in this same period, but had not survived.3

Target stores differed from most competing stores on several dimensions. Perhaps most
significantly, the company created an upscale discount store—one that sold quality goods at low

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Target Corporation: Ackman versus the Board 109-010


prices—in contrast with typical discount stores which focused on selling goods as cheaply as
possible. Like department stores, Target stores were clean and organized. This differed from the
minimal investments most discount competitors made in buildings, fixtures, and merchandise
displays. Because of the upscale image of the discount Target stores, early customers began calling it
“Tarzhay” using a fake French accent.4

The Dayton Company ran Target as a separate division and only a few of its managers came from
the company’s department store business while many came from other discount store operators.5
Organizationally, Target created a “chain” of stores: strategic, buying, and merchandising decisions
were made at headquarters and not at the store level as was common in the industry at that time.6

The Dayton Company went public in 1968 to raise funds to grow the Target chain. At the time, it
consisted of four Dayton department stores, nine Target stores, a small chain of bookstores called B.
Dalton, and several other stores. The IPO raised about $15 million. Later that year Dayton acquired
J.L. Hudson Company, a business larger than itself and owner of a department store in Detroit.
Following this purchase, Dayton changed its name to the Dayton Hudson company.7

During the 1970s, Dayton Hudson continued opening Target stores while operating several other
department store chains. By the middle of the decade, however, Target had become the largest unit of
the company. In the 1980s, the Target expansion continued and by the end of the decade Target stores
were located in most major markets in the U.S.8 Growth continued in the 1990s as it expanded from
approximately 400 stores to 900 over the decade. By the end of the 1990s, it had become the third
discount chain, after Kmart and Wal-Mart, to have a national presence.9

Dayton Hudson operated a number of retail store formats. Other than Target and B. Dalton
bookstores, these other formats were largely department store chains. The two biggest chains were
Mervyn’s and Marshall Field’s. Mervyn’s was a mid-priced department store chain with over 250
stores. Marshall Field’s was a chain of 62 upscale department stores. In the 1990s, the two chains were
among the leaders in their market segments. During this period, however, the department store retail
industry was losing ground to discounters. Between 1990 and 2001, in inflation adjusted dollars,
discount store sales doubled while department store sales declined slightly.10

In the 1990s, some analysts believed that Dayton Hudson should divest its other chains to focus
on Target. Ulrich, however, believed that there were synergies between the businesses that improved
the performance of each and especially helped Target keep in touch with fashion trends. He referred
to this as operating a “boundaryless organization:” one where “ideas and technologies” were shared
across the company’s different retail chains. He explained that the divisions “don’t compete alone”
and that “communication among them is strong.”11 For example, buyers for the different Dayton
Hudson chains often traveled together to view fashions and make buying decisions.12 One analyst
stated, “Target is the discount store with attitude—where department store customers feel very
comfortable shopping. The department stores help inform Target on trends.”13

In 2000, with Target sales accounting for nearly 80% of total company sales, Dayton Hudson
changed its name to Target Corporation. In 2004, Target sold its Mervyn’s and Marshall Field’s stores
to focus on its Target stores. It received a combined $4.9 billion for the two chains.14 Following these
divestments, Target stores were the only retail business remaining in the company.

Target and Wal-Mart in 2009

In 2009, Target was the second largest retail chain in the U.S. with total revenues of over $64
billion. The company sold both basic discount products and upscale products with an emphasis on

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109-010 Target Corporation: Ackman versus the Board


soft goods and apparel. It operated 1,443 Target stores and another 239 SuperTarget stores which
included a full grocery offering. The company was opening nearly 100 new stores per year and
increasing its emphasis on grocery and other consumable items. Target employed 351,000 people.
Target also had a significant credit card business that generated over $2 billion in revenue. Target,
which donated 5% of its pre-tax profits to charitable causes, had no stores outside of the U.S.
market.15 (See Exhibits 1, 2, and 3 for financial data on Target Corporation.)

Wal-Mart was the largest retailer in the world with total revenue of over $400 billion. The
company had three major segments. Wal-Mart U.S. consisted primarily of Wal-Mart Supercenters,
which carried full grocery sections, but also included smaller Wal-Mart discount stores and Wal-Mart
Neighborhood Markets stores which did not have full grocery sections. Wal-Mart’s 3,656 stores in
this segment had 589 million square feet. The Wal-Mart U.S. segment was most comparable to Target
stores. Wal-Mart also operated a Sam’s Club segment in the U.S. which consisted of 602 membership
warehouse stores covering 80 million square feet, and an International segment which consisted of
3,615 stores covering 252 million square feet in 14 countries. Wal-Mart had 1.4 million employees in
the U.S. and 2.1 million worldwide. Wal-Mart’s central strategy was having the lowest prices every
day. Its motto, “Save Money. Live Better,” was designed to remind customers that they could ‘live
better” with the money they saved at Wal-Mart.16 (See Exhibit 4 for 10-year financial and other data
on Wal-Mart. See Exhibit 5 for Target and Wal-Mart historical stock prices, Exhibit 6 for Target and
Wal-Mart 2009 stock market information, Exhibits 7 for segment wise results for Target, Exhibits 8
and 9 for Target and Wal-Mart sales by product categories, and Exhibits 10 and 11 for Target and
Wal-Mart financial ratio data.)

Target versus Competitors

During its early decades, Target competed primarily with local independent discount stores, with
small regional chains, or with other retail formats. By the 1990s, some of these competitors, especially
small regional chains, were copying Target’s strategy in both products lines and upscale offerings. In
the early 1990s, Target’s prices had risen above Wal-Mart’s and Target’s performance faltered. Target
responded by cutting prices to match Wal-Mart on products stocked by both chains. In the mid-1990s,
Ulrich described his view on pricing. “We are determined to be competitive,” he stated, “but we
don’t want to lead a downward price spiral. Wherever the competition leads us, we will follow. We
will always price within pennies of the lowest competition which means we’re usually slightly better
than Kmart and some others, and within a few percentage points of Wal-Mart.”17

As the store counts of both Target and its leading competitors increased, Target found itself going
head to head with strong competitors. In many cases, Target stores were located within a mile or two
of a Wal-Mart, Kmart, or both.

Expect More. Pay Less.

To keep Target competitive, Ulrich chose to focus on the differentiation to which the company had
always aspired: upscale discounting. One former Ulrich colleague explained that “Target has always
taken an upscale approach. The difference is that Ulrich has executed more fully on that than his
predecessors.”18 The focus on upscale discounting remained Target’s primary strategy during
Ulrich’s 14 years as head of the company. (One example of upscale—some of Target’s larger stores
included a Starbucks café while some Wal-Mart stores hosted a McDonald’s.19) To support the
differentiation, Target introduced a new slogan in 1994: “Expect More. Pay Less.” The slogan was
featured on nearly all Target advertising and on in-store signage from then through 2009.20

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Target Corporation: Ackman versus the Board 109-010


Product Offerings

Target offered products in a range of price points. At the low end were traditional discount store
goods that Target priced to be competitive with Wal-Mart. Many Target products were identical to
Wal-Mart’s and were sold at essentially identical prices. Low-priced items were common, basic items
that could be found across product categories such as apparel (simple t-shirts, underwear), home
goods (basic sheets and towels), and in some stores, grocery items (branded packaged goods).

What differentiated Target, however, were its upscale offerings that carried higher prices. Broadly
defined, these were products that had some combination of higher quality, up-to-date fashion, or
designer brand, that were generally not found at other discount stores. In order for such products to
sell in a discount store, they still had to be offered at prices within the reach of most of its customers.
Upscale products could be found in most of Target’s product categories, but were most prevalent in
home furnishings, kitchenware, and apparel. For example, a basic, discount store type dress might
sell for $15 to $20 at Target or at another discount competitor while a designer dress might sell for
$100, $200, or more at a department store or fashion boutique. Target’s upscale offer might be a $25 to
$50 dress that was comparable in some features to the designer dress, but was mass produced for the
discount market. Most of Target’s dress offerings would be priced at the lower end of the scale, while
a smaller number were offered at higher prices.21 As part of its upscale offerings, Target also tried to
carry unique items that competitors did not carry—ones that surprised shoppers.22

Target had long offered private label products that it had developed alongside national brands. As
it grew in size and gained a more powerful place in the market, it placed more emphasis on its
private label goods. Private label goods earned higher margins for Target and came with no
merchandising restrictions that limited how the products could be displayed in the stores.23

Designers At the end of the 1990s, Target added a new dimension to its “expect more” efforts:
alliances with designers who developed products exclusively for Target that would sell under the
designers’ labels. This strategy began when Target asked renowned architect and designer Michael
Graves to create a line of home products exclusively for Target.24 A few years earlier, Graves had
famously designed a $145 teakettle that sold in a few high end shops. The teakettle he designed for
Target sold for $35.25 Within a few years, Target had introduced over 1,000 Graves-designed items
including a blender, toaster, martini shaker, shoe rack, and a notebook computer carry bag.26

Target continued to offer basic items that sold well at low, discount store prices in the categories
that also carried the designer products. The idea was not that every shopper would regularly pay
more for a designer product, but that the designer products would create excitement, and draw
customers into the stores. Many Graves’ products were not big sellers.27 Target soon added other
designers including Mossimo in apparel fashions for women, men, and children; and Calphalon in
cookware.28 The strategy of signing up a large number of designers for different areas of the store
contrasted with Kmart’s approach of making Martha Stewart its primary personality.29

Target’s extensive use of designers to constantly bring freshness into the stores at relatively low
prices enabled Target to draw customers who also shopped other discounters, but were looking for
something more. It also enabled Target to attract department store shoppers looking for better prices.
One industry analyst stated, “Target is the present day Bloomingdale’s. They take international icons
like Starck and Graves and bring them to consumers at price points that are the envy of the
department store industry. This is what department stores used to do, but don’t anymore.”30

Target could produce products similar to what was available in stores that specialized in designer
products. In 2009, the Wall Street Journal asked two fashion experts to evaluate a few Target designer
items. The experts found the items to be similar in appearance to the items previously produced by

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109-010 Target Corporation: Ackman versus the Board


the designer, and came with high quality construction. A Target executive stated, “[Designers] are
amazed with what we can come back with and still keep their creative vision. Our manufacturing
muscle has allowed us to achieve high-end quality without having to make sacrifices.”31

In 2006, Target launched “GO International” through which it introduced a limited number of
products by a new overseas designer every 90 days to give its fashion conscious shoppers a reason to
come into the store repeatedly. The product lines tended to be apparel for young women.32 The
designers tended to be young, not well known, and modestly paid, but benefitted from the
publicity.33 GO International apparel sold for between $15 and $45.34 Total sales were approximately
$100 million per year.35 In 2009, Target launched another program called “Designer Collaborations”
that featured established designers and targeted slightly older shoppers.36

Target used other methods to help keep the company on the leading edge of design or fashion.
Internally, they sought advice or ideas from throughout the company.37 Target also formed a
“creative cabinet” which consisted of a diverse group of a dozen individuals, not employees, who
Target had identified as being in-touch with design trends. Target paid, and periodically consulted
with, these individuals on design ideas or to get feedback on its plans.38

Promotion and Advertising

Target’s promotion and advertising were aimed as much at creating an overall image for the
Target brand as it was to promote any particular product or sales event. It sought to create the
impression that Target was a place of fun and excitement with sophisticated, upscale, trend forward
products that customers could purchase at low prices. The company targeted both wealthier
customers from department stores looking for items at good prices and mass market, discount
shoppers looking to get something beyond just the basics.

To create the image that its stores were different, Target used promotion and advertising that was
also unique, or at least out of the mainstream. In one example, Target had been looking to open a
store in Manhattan for years without being able to find a location that worked at an affordable price.
In November 2002, Target docked a boat on a Manhattan Hudson River pier. The boat, painted in
Target colors with the Target bullseye logo, served as a temporary floating store. While the boat
offered only a small selection of the items found in a Target store, it attracted significant attention in
the city.39 Target opened several other pop-up stores in other cities. The stores were used primarily
for promotional purchases and were not expected to generate significant sales, however, speaking of
one pop-up store, an analyst stated, “It generated $10 million worth of free advertising.”40

Beyond the pop-up stores, Target held a vertical fashion show in 2005 in which a group of
gymnasts and dancers wearing Target clothing walked down the side of a Rockefeller Center high-
rise building that was covered in Target colors and logos.41 In November 2007, Target held a public
holographic fashion show at the Grand Central Terminal in Manhattan that displayed three-
dimensional appearing images of Target clothing moving as if they were being worn by a walking
model, however, no model was visible.42

Target’s television and print advertisements aimed to be similarly unique. Advertisements sought
to create a sense of excitement by using bold colors and focusing on moods and fashion perception
rather than on individual items or pricing, and were designed to project an upscale image.

Merchandising and Other Dimensions

Target sought to differentiate itself from its competitors in other areas. In stores, Target placed a
strong emphasis on merchandising products in a clean, organized, upscale manner almost like a

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Target Corporation: Ackman versus the Board 109-010


department store while many competing discount stores piled goods higher and spent less time
keeping products organized. Target also used larger, more colorful, more designer oriented in-store
promotional signage than was the norm for the discount industry. It placed a high priority on
keeping the appearance of the store and its products attractive to shoppers. Part of the reason for this
was that Target earned higher margins on its upscale, designer goods than on its discount items. To
attract the higher income customers who bought such goods, Target needed to maintain the store
environment. Target also located more of its stores in or near areas with above average incomes such
as suburban shopping districts than did Wal-Mart.

Pricing Perception

Target historically had emphasized the “expect more” part of its “expect more pay less” message
as a way to differentiate itself from other discounters. In the 2003-2007 period, when the economy
was strong, this strategy had enabled Target to consistently outperform its leading competitors. As
the economy slowed in 2008, however, some shoppers abandoned Target in search of better prices.
They believed Target’s competitors had lower prices despite Target’s belief that its prices, on similar
items, were competitive. One Target executive stated, “[Customers] are more focused on price. There
is a perception that our competition is lower-priced. We want to help erase those misperceptions.”
Another executive added, “We’re making sure our prices match Wal-Mart’s prices in all local
markets.”43 In support of its belief that it was a problem of perception, Target noted that in focus
groups, its customers expressed surprise when they learned how competitive Target’s prices were.44

In 2009 a Target marketing executive admitted that when times were good, Target had lost focus
on the “pay less” part of its message. One analyst stated, “Target’s message had been muddled for
the last half year or so. [Target] made the change in the circulars, which very clearly emphasize value.
But the TV advertising has tended to be image advertising, very hip and cool, not, ‘Come on in and
get your $10.99 jeans.’”45 In response to these concerns, the company introduced advertisements
which included statements such as “Why pay more for more?” and “A new day. New ways to save.”
Target also began including prices in its television advertising for the first time.46 To implement this
shift, Target began allocating 70% of its advertising expenditures to “pay less” messages whereas
previously it had spent 30%.47

SuperTargets and Groceries

In 1995, Target entered the grocery business with the opening of its first SuperTarget store and by
2007, it had become the second largest operator of supercenters behind Wal-Mart.48 SuperTargets
were about 40% larger than standard Target stores.49 Many of Target’s standard stores offered a
limited selection of grocery items, but its SuperTargets offered a full selection of groceries and related
services typically found at large grocery supermarkets in addition to its standard offerings.50 Several
factors led Target to expand its grocery business. Shoppers tended to visit grocery stores more
frequently than other stores and spent significantly more on grocery items than on general
merchandise regardless of the economy. Adding groceries also enabled Target to better compete with
Wal-Mart which earned a higher portion of its sales from groceries.51

Target took an upscale approach to food as it had with general merchandise. Its products, in-store
merchandising, lighting, and advertising all sought to create an upscale image. While it offered many
basic food items at low prices, its upscale products and services carried higher prices and earned
Target higher margins.52 Target also became a certified organic produce retailer; something most of
its …

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