Responding to Market Change to Create Competitive Advantage
Retail strategy is at a reset moment. Historically, retail CEOs have designed business strategies by creating differentiation among the 8 primary factors of location, store, merchandise/assortment, visual merchandising, staff, service, mass media and communications, and price. A retailer could achieve sustained leadership by standing out in at least 2 of these dimensions.
For example, Walmart's differentiation is based on broad assortments and low price, or Nordstrom on Service and highly specific assortments.
However, an unprecedented change in consumer technologies, and more so consumer behaviors, has transferred the balance of retail commerce power from retailers to consumers. Consumers are now more connected and informed, and have far more purchase options than ever before. Their personal technologies have changed their behaviors. Consumer expectations have increased, their loyalty has decreased and because barriers to switching brands continue to decline they are in fact switching brands at an accelerated pace.
To respond to consumers' new behaviors, technologies and purchasing power, retailers must append their business strategy with new forms of differentiation, recognize that customer relationships increasingly influence consumer purchase decisions, understand that mass media communications have given way to consumer preferences for highly personalized messaging, and that business intelligence is the new basis for competitive advantage. The diagram below visually illustrates the adjustments needed for todays successful retail strategy.
While the 8 historical differentiation factors still apply, they are fleeting and insufficient by themselves. They are also being copied and replicated by existing and new competitors in shorter time spans — a trend that will continue to erode differentiation and accelerate commoditization.
The definition of competitive advantage is differentiation that is relevant, measurable and unique. If you recognize that the retail market has changed in a way that none of the original 8 dimensions are unique, you also recognize that they are no longer capable of creating competitive advantage by themselves.
Fortunately, the rise of consumer empowerment also brings new opportunities for retailers. Consumers want to engage with their preferred brands pursuant to their terms and using their personal technologies. Retailers that apply Customer Relationship Management (CRM) strategies and supporting retail technologies to engage consumers and nurture consumer relationships can find that these Customer Relationships trump every other competitive differentiation factor for certain classes of consumers, such as loyalty members, repeat customers and high value customers.
Further, customer relationships don't deteriorate over time. In fact, just the opposite, they normally get stronger over time, making customer relationships one of only two sustainable competitive advantages available to retailers.
The other sustainable competitive advantage is the ability to apply business intelligence for improved decision making throughout the enterprise. Business intelligence is the long heralded but seldom achieved capability to get the right information to the right decision maker at the right time. And for the record, decision makers are not found in just the C-suite. Too often, business intelligence (BI) is narrowly viewed as something for corporate leaders, somehow suggesting the remaining 99% of the business can operate just fine without intelligence.
BI software can use data to create a differentiating customer experiences and more accurate merchandise/assortment planning forecasts among other things. However, executive sponsorship is required to create a culture which discourages subjective, gut or intuitive decision making (risk taking) and instead favors data driven, fact based and evidence supported decision making in all areas of the business.
"In God we trust. All others must bring data.”
- W. Edwards Deming
Not Worthless, Just Worth Less
So what about the original 8 competitive advantage factors?
- Location and Store: Omni-channel renders any single location and store less potent. More merchandise sold over more channels lessens the volume of business done in any single channel. This doesn’t suggest that the location, store or any single channel is unimportant but that channel diversification renders any single channel less important than the overall omni-channel strategy.
- Merchandise and Assortments: These are being copied by high volume imitators and lower cost competitors in shorter durations. For example, shoes, bags, apparel and new fashion trends revealed on Milan runways now have their designs copied and reproduced in hours, and are manufactured in China or Bangladesh in less than four days. However, on the flipside, better data is creating better science to compliment artful assortment planning so that any knowledgeable retailer taking advantage of the science can create improved merchandise and assortment forecasts and plans. Merchandise/assortments is still a critical success factor, but is increasingly replicable by competitors and available to any retailer willing and able to apply data and science to deliver increased accuracy, which thereby renders less differentiation and competitive advantage.
- Visual Merchandising: Still important but easily and quickly replicable. Little to no differentiation here.
- Staff: While most retailers view staff as expenses and not assets, a few retail leaders are upping their game in terms of staffing – mostly as it relates to their Customer Experience Management goals. Retail staffing as a differentiator varies considerably by sector.
- Service: Most retail customer service disappoints but the industry is taking note of the strategies and successes of retailers such as Zappos and Nordstrom. Pre-sale and post-sale service processes are easily and quickly replicable. However, upping the game from simple service scenarios to delivering rewarding and memorable customer experiences (CX) is indeed a strong competitive advantage. For reference, I include CX management within CRM. I know today they are often considered separate, but it's clear they will merge. Understanding this now will help retailers create a single CRM strategy and avoid fragmented processes and systems.
- Mass Communications: Mass media branding value and mass communications conversions are dying. I continue to hear retail marketers suggest that mass media creates branding. Unfortunately, they fail to realize that consumers determine the brand value not from paid advertising (which is at an all-time low in terms of believability) but from social media and their own consumer experiences. Retailers must engage consumers via a social media strategy and finely tuned segmentation in order to deliver relevant, personalized and contextual messaging and offers that resonate in order to achieve conversions and campaign effectiveness. This is a big transition that most retailers make at a snails pace.
- Price: Unless you are Walmart, competing on price remains a fools errand.
The unprecedented pace of change in the retail industry is producing a growing divide between those that act and those that wait and see. As innovative retailers respond to more demanding consumer behaviors they will in turn attract larger numbers of new customers while those retailers who procrastinate will involuntarily become the source of those customer defections and incur a steady business deterioration.