Harvard Business School Working Knowledge has a great excerpt from the book Simply Better, which looks at Target's successful strategy to become the number two retailer.
In 2002 the Minneapolis-based Target Corporation leapfrogged Kmart to become the United States's second-biggest discounter behind the $218 billion giant Wal-Mart. According to the New York Times, every successful step that Target took brought it into closer confrontation with the formidable leader of the $430 billion general merchandise store industry. 2 Even with sales topping $40 billion in 2002, Target could not achieve the same economies of scale as Wal-Mart. Still, the company was performing spectacularly well. Revenues had grown about 6 percent per year over the previous ten years, and Target had just posted a record operating profit margin of 8.4 percent in 2002 versus Wal-Mart's 7.6 percent. Target was carrying the same categories as Wal-Mart and Kmart. Despite its smaller size, it was able to thrive and coexist profitably with Wal-Mart while Kmart hobbled toward bankruptcy. Target's success was attributable to two key factors: the right kind of differentiation and distinctive marketing communications.
When people complain about the competition in their industry, I always point to Target as one of the best examples of what to do. Differentiate your company. Target competes with Wal-Mart! You can't get much tougher than that.