What Is the Most Effective Approach for a Retailer to Develop a Sustainable Competitive Advantage?

We invented the "Eight Means to Win" in 1989 as an introduction to our Strategic Planning and Management in Retailing Plan. We originally copyrighted the article "Edifice Competitive Advantage in Retailing" in 1995. It was revised in 2001 and 2011. Since it has inverse a scrap over the years. but notwithstanding provides the introduction and framework for our SPMR programs, we idea it appropriate to impress the latest version which includes thoughts on both "bricks" and "clicks", copyright 2015, for the newsletter. The almost contempo version has benefitted from the suggestions of many of our participants, but particularly from those of several senior executives at Officeworks Australia. ljr/djt

There are several ways to build competitive reward in the retailing loonshit. At a generic level, students of strategy take identified three major strategic thrusts: toll leadership, differentiation, and focusing on a niche. A niche strategy is certainly a viable strategy when playing in the corners, or in limited segments of the market. Still, as niche players grow more than successful, niches inevitably become larger and less defensible. As a result, retailers are frequently faced with a pick between the market strategies of cost leadership and differentiation. We refer to differentiation activities as working on the pentagon, and cost-leadership activities as working on the triangle. Michael Porter has written that strategy is about being unlike, and that it is non operational effectiveness. It is the pentagon on which retailers register their differences in the minds of customers, but it is the triangle on which retailers achieve operational effectiveness, and while operational effectiveness is non strategy, if a retailer is not operationally constructive, then that is goal number one.

The Pentagon

All retailers have a position in the marketplace on all five corners of the pentagon. The pentagon represents what the customer can run into when walking into the store, visiting the website, or looking at advertising and promotion—in other words, customer-facing activities. There are five major ways in which retailers can visually differentiate themselves from other retailers in the marketplace. All five corners of the pentagon likewise have important subcategories.

Nearly retailers do have a image about how they are running the business. Nonetheless, the greatest single weakness of most retailers is that they don't ofttimes go dorsum and re-examine that paradigm—re-examine whether what they are doing in all the subcategories of the 5 corners of the pentagon is even so the best way to run the business—in light of a changing economic environment, a changing consumer environment, including consumer buying behavior patterns, a changing technology environment, and a changing competitive environment.

The stronger a retailer is on the pentagon, the more customers information technology can draw to store in its stores or on its website. The ability to draw customers from swell distances powers college sales productivity in bricks-and-mortar stores. Likewise, an appealing and hands navigated website also tin be bonny in cartoon customers to a retailer online. Winning on the pentagon means driving the top line.

The Identify Variables

Every Channel

With the advent of online shopping, retailers need to exist where their customers wait to find them, whether that is in bricks-and-mortar stores, in mail-lodge catalogs, or online. The thought of omnichannel retailing is to be able to deliver a seamless, integrated experience for the customer beyond all channels.

Store Size

One of the issues related to the bricks-and-mortar identify is store size. The manner to think almost store size is for the retailer to take each department it wishes to be in and ask how much space it takes to win in that particular department in the store. This question is particularly important if the retailer decides it needs a dominant assortment in that particular department. And so, add together upward the required square footage in all the departments that you wish to be in and that determines your store size.

Of course, size is not an issue on the internet. Theoretically, a retailer can have an endless aisle on its website, provided it has the capacity and engineering science to deliver an infinite assortment.

Location

A 2d subcategory related to place is location. At that place are several issues related to location. One issue retailers don't ask themselves very often is what the optimal distance is between stores. This issue is particularly appropriate for the large and/or growing chain. One thing seems clear: If a retailer has stores that are 2 miles apart, the farthest each store can describe is one mile, which is half the distance to the next store. Even if that store downwardly the road two miles is a competitor, only is a very like shop, the answer will still exist the aforementioned. The farthest a retailer can draw a customer is half the distance to the next similar kind of shop. Most traditional department stores suffer from this trouble. As virtually local and regional department store chains grew during the last 40 years, they became the anchors of every suburban shopping heart in the region. Now, the uttermost those stores can draw is one-half the distance to the next mall.

If yous limited your sales-per-foursquare-foot opportunity by locating your stores relatively close together, there is simply one way to still ensure good operating profits per square foot and that is by having very low operating expenses per foursquare human foot. There are several retailers that understand that paradigm and accept learned to make a lot of turn a profit per square foot on relatively depression sales per square pes by deciding to become price leaders, and to become leaders in productivity.

Another location business has to do with not simply how far away my next store is, merely the quality of the location itself. Many chains have built location models to assist project sales per foursquare foot for new and existing locations. Wal-Mart has a one,000-variable traiting model that it uses to predict what its book will exist at a particular location. In improver, that model also is used to divide all the Wal-Mart stores into groups that have dissimilar trade mixes that are so fine-tuned to a item kind of population, in a detail climatic zone, with a particular buying behavior pattern expressed by consumers in those markets.

Layout and Design

Another subcategory related to identify is layout and design. The retailer that views layout and blueprint as an expense rather than an investment in competitive advantage doesn't understand how people shop stores, and doesn't sympathize the role of store environment as a disquisitional determinant of store choice.

Some retailers spend a lot of money per foursquare pes for design and construction and others spend very fiddling. This decision depends upon which business a retailer is trying to be in and whether the strategy is to exist a depression-cost role player or whether the strategy is one of loftier service/high margin. But, layout and design is merely as important as any other chemical element of identify or whatsoever other element in the overall marketing strategy.

It also is of import to look beyond what is spent to build and open the store. The more than successful the shop, the more than traffic it attracts and the faster it becomes tired. Chains likewise need to spend coin regularly to renovate and refresh their existing stores. For example, Zara and H&M refresh their stores every two years.

Online Offer

The online place, the website, is not then much a question of size and location, only more a question of online offer. For case, an office supplies retailer might accept a website that can serve three segments of the market, end consumers, small businesses, and corporate customers. The website might exist adapted for both mobile and tablet access. The offer also could include useful apps, blogs, and social media access such as Facebook, Twitter, and Pinterest. Some other important event for the online offer is what security features are bachelor.

Arrangement Usability and Navigation

But as shop layout and design are important to bricks-and-mortar stores, then, besides, is system usability and navigability to the website. Ease of apply is very important here, showtime with the ease of a login. Then, other important features include the ease and abyss of production search results, stock availability messaging, and product details. Customers appreciate product recommendations, personalized content, and aid centers and the availability of live chat. Finally, an easy checkout experience as well is disquisitional.

The Production Variables

Merchandise Intensity

Merchandise intensity in the bricks-and-mortar store is measured past how many dollars the retailer has invested per foursquare pes at cost in inventory. In general, it has been shown to be more or less truthful and consistent across retail sectors that higher merchandise intensity leads to higher sales per square human foot (upwards to a point, later on which additional inventory becomes counterproductive as the store becomes hard to store). In the yr before Macy's went into Affiliate 11 defalcation (1992), the company reduced their inventory xviii percent, nigh likely in an effort to produce badly needed cash flow. Not too surprisingly, Macy'south sales savage 18 percent in that aforementioned year.

There is a human relationship between stock intensity and sales density. In that location is some other problem, of class, because the retailer that chooses to stock high and deep nonetheless has to figure out a fashion to go it out of the store. And, there are only two means to get a lot of merchandise out the door. One manner is to price it hard—which means being the cost/cost leader. The other fashion is to sell it hard—which means existence the service leader.

The concept of merchandise intensity has little meaning for the retailer's website because there really isn't annihilation similar inventory per square foot in the online world.

Merchandise Assortment

The second major subcategory related to the product corner of the pentagon is merchandise array. A fundamental question hither has to do with how a retailer gets the right assortment. Does the retailer, for example, depend upon a set up of buyers who by some well-calibrated instincts are very practiced at going out in that location and ever buying the correct merchandise at the right time? If you are in the fashion business, that arroyo takes a lot of faith in the buyers existence able to consistently, time and again, go out and discover the right merchandise for their customers.

Alternatively, some believe the right merchandise in the store can be consistently generated but by being market driven. Existence marketplace driven means that the retailer must find a way to let his or her customers tell the retailer what they want.

By using the correct measurements, a retailer can presently discover whether an item is a winner or a loser. What isn't known, notwithstanding, is all the items not nonetheless tested. Or, is more testing needed—how much, and how oft—with bellwether stores or photos, or any? How many items should be tested, for how long, to make up one's mind their potential? The concept is the same for both nutrient and apparel, but information technology's a lot easier for a food retailer to exercise that on a systematic and continuous basis.

Another attribute of the merchandise array subcategory has to exercise with array strategy. The central here is what the retailer is trying to offer the consumer and what part assortment plays in that offer. For example, a convenience assortment ways nosotros are in the concern of saving people time rather than money, and we are not offering a wide choice. On the other hand, a power or dominant assortment means "I'm committed to offering the largest assortment in the market." Category killers such as Toys "R" U.s.a. in toys and games, Home Depot in hardware/home improvement, and Best Buy in consumer electronics come to mind.

A competitive assortment is one pretty much the same as that offered past most others in the marketplace. A differentiated or focused assortment ways a unique assortment that tin't be found elsewhere. It means you are the only place where the customer can find this array in the area. Examples include the Torso Shop, Papyrus, and Anthropologie. Private-characterization brands besides can provide differentiation. For example, yous tin can buy Gap jeans only at the Gap, and you can get Craftsman tools only at Sears.

The warehouse clubs such as Costco and Sam's Club offering velocity assortments. This strategy means that the store carries only one SKU per product class. They ask the customer to give upwards choice in club to get a very low price. Another price-focused assortment strategy is opportunistic array. In this strategy, everything in the store is bought on deal—something less than the full cost of goods sold price to suppliers. Dollar General follows this strategy, as exercise T.J. Maxx, Marshall'southward, and Ross Stores.

Within assortment strategies, retailers also define categories in terms of width and role with descriptors such as leadership, authorisation, complimentary, traffic architect, array enhancer, and impulse. Depth of assortment refers to the proportion of the category devoted to entry, good, amend, and best lines.

These assortment strategies apply to both bricks-and-mortar and online stores. However, a central question retailers must inquire is whether the online array should be the same as the in-shop assortment, or smaller or larger, and what the implications are to customers of a decision to be smaller or larger online.

Manner and Mode

We mostly think of dress when we recall of style and fashion. However, in that location also is style and fashion in furniture and home furnishings, consumer electronics, and even in food—just cheque out a Whole Foods Market place or a Wegman'due south grocery store.

In clothes, consumers have a vocabulary they use to depict manner items they purchase. They utilize the words "very latest, most fashionable," "electric current, up-to-date," "everyday, bones conservative," "contemporary," and "archetype." One way to visualize a mode market is to build a perceptual map of, for example, fashion (on a continuum from loftier to low) versus value for the money (on a continuum from best to worst). The resulting map would evidence 4 quadrants, with i being high manner/worst value, such equally Neiman Marcus (frequently referred to as Needless Markup). A 2nd quadrant might be depression fashion/worst value, where Kmart might come up to mind. A third quadrant would exist high fashion/best value, which is where the fast manner players such every bit Zara and H&One thousand reside. The fourth quadrant would exist depression fashion/best value and might include off pricers such as T.J. Maxx.

Similar thinking could be practical to other categories, such equally consumer electronics or furniture, where, once again, retailers must consider the perceived uniqueness of their offerings along with prevailing trends.

Ethical and Sustainable

In recent years, ethical sourcing and sustainability have become significant issues for retailers. These terms imply that the products a retailer sells are certified or accredited as existence manufactured and sourced ethically and/or sustainably in a mode that minimizes harm to the surround and complies with the retailer's philosophies.

Value

Value is what yous pay for what yous go. It's a combination of the price and quality variables, although it appears more than and more than driven by price. In most retail sectors, price is 50 to 60 or more than percent of the full value equation in the mind of the customer. In food, toll is 90 percent of the value equation, while in fashion the price/quality relationship is more like 50/50. And, in some categories like way, there is more than one value position. For example, a retailer can be low price/low quality such as Wal-Mart and be loftier value to a detail market segment. Or, a retailer tin can position itself a little farther upscale, equally has Kohl's, with modest quality/modest prices, and be high value to another market segment. And, so on—until we find a chain such equally Neiman Marcus operating with among the highest prices and the highest quality and perceived every bit good value by a relatively small, very upscale segment of the market.

Every bit we consider online retailing, we need to recall in terms of total cost, including any delivery charge that may apply.

Another consideration is how the retailer will set prices. Two often-used strategies are everyday depression(est) prices (EDLP) and hi-low pricing. EDLP is but what it sounds like, while howdy-low means the retailer has a small percentage of its items on auction each week, with the remainder of the items at full price. Wal-Mart is probably the most well-known proponent of EDLP, while Target and Kmart are hi-low pricers.

The People Variables

The people corner of the pentagon also has three subcategories: service, noesis, and climate.

Service Offer

The service subcategory has to do with the service levels the retailer wishes to execute. At that place is a continuum of customer feel retailers might offer from self-service to high-level retail employee service. The service level a retailer needs to execute depends upon the type of retailer it wishes to exist and how it wishes to exist positioned in the consumer's listen. For example, executives in a section store chain might ask what the longest catamenia of time is that tin can laissez passer when a customer enters a department earlier beingness acknowledged by a sales associate. Or, a more than self-service system might prepare a service standard in terms of how long it takes a customer to really make a purchase and get out the store. For example, Wal-Mart'south standard is three'due south a crowd. 3's a oversupply means that once each checkout station in a Wal-Mart store has two people standing in line, the shop manager must open another checkout station. This standard says something about the number of checkout stations a particular store needs and about labor scheduling and employee preparation.

Another way to remember about service is to mensurate service intensity. Service intensity is defined equally the number of square feet being managed by each full-time equivalent employee. A high number here indicates relatively low service and coverage, while a depression number ways loftier service and coverage.

Online, people also offer service. For case, the retailer might provide a phone call center or offering live chat.

Knowledge

The 2nd issue on the people corner of the pentagon has to do with the knowledge levels a particular retailer wishes its employees to possess. There are only two means for an employee to obtain a certain knowledge level. One way is for the retailer or supplier to railroad train the employee. The other way, of form, is to hire employees, sales associates for example, who already have that knowledge.

Online knowledge might be provided by on-site reviews and by product comparisons.

Climate

The third outcome related to people is the concept of climate. In that location are two dimensions to climate. The outset dimension has to do with what customers think about what it is similar to store at a particular store. The 2d dimension has to do with what employees of a particular store think well-nigh what it is like to work in that location. A third question has to exercise with consistency—do the climate the customers feel and the climate the employees work in demand to be the same? A major challenge for retailers is to ensure consistency of climate and feel for customers from website to store and vice versa.

Communication

The last corner of the pentagon is communication. For many retailers, communication is a tough trouble. It is tough because if a store or chain doesn't win on place, with a better or bigger or better designed location or website; doesn't win on production, more intensity or amend assortment or the right fashion position; and doesn't win on value or service, what tin it say most itself? If the chain isn't a winner on i or more of the five corners of the pentagon, about all that'south left to do is run a sale—in other words, do promotional advertising to generate immediate response.

Positioning advertising is communication that tells the client a retailer wins on one or more corners of the pentagon. Positioning advert is Nordstrom talking well-nigh having its massive assortment of men's suits or its thousands of pairs of shoes. Similarly, Wal-Mart or Nutrient Panthera leo advertizement everyday low prices (EDLP) also is positioning—positioning themselves equally the low-cost leaders in their markets. Bunnings, the Australian home-comeback retailer, boasts of lowest prices, widest range, and best service.

Another of import aspect is the office of the make in positioning and communication. This includes non only the store brand, only also the diverse production and service brands carried within.

Online retailing offers additional opportunities to personalize communications from retailers to customers, assuasive information, offers, and recommendations provided to customers to exist tailored specifically to them.

Irresolute the Pentagon

The pentagon is the retailer's face up to the public and to its customers. The corners of the pentagon agree few secrets from competitors, because they are all very visible. Why do some firms fail to re-evaluate their position on the corners of the pentagon? The most obvious answer is that many retailers are not systematically tracking the irresolute consumer, economic, and competitive environment, and, as a consequence, they are not really enlightened of what is happening out there. Frequently, the environment is changing faster than the retailers.

Another explanation is that companies sometimes get former and tired and neglect to rejuvenate their management. They stop upwards suffering from what has been referred to as epitome paralysis. Or, some companies are unable to alter on the corners of the pentagon because they don't have the financial resources. Frequently, this trouble surfaces after a private-disinterestedness buyout. Afterwards a buyout, of grade, the first phone call on the retailer's cash menstruum is the interest on the debt—not fixing the place, website, product, service, or advertizing, and then on.

The pentagon'southward corners are like shooting fish in a barrel to see and sympathise. But, for almost retailers, it is difficult to execute on those corners in such a way as to build a really sustainable competitive advantage. And, once attack a particular corner of the pentagon, the lesser-line focus most retailers have on ROI tends to insure inertia.

Often, it is new players who invent or develop new sources of competitive reward in retailing. Ofttimes, the incumbents are reluctant to modify because they have fabricated an investment in the present. The new players may come from many backgrounds. Sometimes they are former losers who have learned something—Sol Price at FedMart and then Price Company comes to mind. Or, maybe they left a winner, such as the founders of Costco, onetime senior managers at Toll Company. Sometimes, they are brand new entrepreneurs, such as Build-a-Conduct. Sam Walton was a successful Ben Franklin franchisee who tried for years to become Ben Franklin to commit to discounting in small towns. Finally, when Franklin would not back up the concept, Walton did it himself. Bernie Marcus and Arthur Blank were fired from Handy Dan Home Improvement Centers and went on to institute The Home Depot. TJX grew out of Zayre, and so forth. Amazon.com has transformed the industry, starting with books, and so moving on to other categories, by bringing retailing to the internet.

The Triangle

The pentagon has to do with all of those things a retailer does that the customer can see—the customer-facing activities. Behind the scenes, however, often not seen at all past the client, are the elements of the triangle. These elements support the pentagon and, for the most part, working hard on each of them is the way retailers reduce their costs. They reduce costs through meliorate programmed systems, logistics, and supply relationships.

It is the pentagon that drives the pinnacle line (high sales per foursquare foot), but it is the triangle that drives the bottom line (high profit per square foot).

Systems

Systems provide the mechanisms for controlling flows and operations. They are carriers for operational decisions and business processes. The information systems supply can provide a competitive advantage if timely action can be taken. Increasingly, retailers need systems that let them to manage detail by item, store by store, and online.

Logistics

This corner of the triangle concerns the movement of appurtenances from suppliers to stores and encompasses distribution centers, online warehouses, and transportation. It is a major factor in operations and financial operation that relates to time and inventory (turns). In many retail supply chains, there exist pregnant opportunities to reduce loss from theft, breakage, spoilage, intentional fraud, and unintentional inaccuracies.

Suppliers

Supply relationships decide deals, terms, delivery quantities, dates, and so on. Relationships range from adversarial to cooperative.

Triangle Activities

The many triangle activities as well can be categorized as quick response, replacement of labor past engineering science, merchandising and space management, and supply chain and logistics.

Quick response (including automatic replenishment) includes an alphabet soup of activities such as EDI, UPC/barcode, POS, CL, PSS, VMI, perpetual inventory, programmed supply relationships, and information sharing.

Replacement of labor past engineering science includes front-cease scanning, labor scheduling systems, electronic shelf stickers, fully automated warehouse/distribution centers, check robots, automatic picking lines, store security systems, and environmental controls.

Merchandising and space management includes SKU data capture, directly product profitability, rapid intensification and delisting, and modularization in store blueprint.

Supply concatenation and logistics includes the greening of the chain, more global action, RFID growth, focus on chance management, supply chain vendor consolidation, and voice engineering.

In general, the idea is to build a productivity loop—to make an investment in lowering costs by having better logistics, or better supplier relationships, or just-in-fourth dimension commitment, or systems for meliorate inventory command or meliorate labor scheduling, or whatever. Once costs have been lowered, the company tin can and so reduce its margins. Lower margins mean lower prices, and lower prices hateful the company'due south value equation improves. An improved value position results in college sales per square foot. Higher sales per square foot mean lower costs—equally a percent of sales. And, lower costs hateful that the retailer can reduce gross margins, and thereby prices, again.

The ultimate objective of working the triangle is to support the pentagon and develop sustainable price leadership. Companies that are most successful at this typically are or motion toward consistent or everyday low prices, rather than hullo-low promotional pricing.

References

1. Original Copyright 1995, revised 2001 by Lawrence J. Ring and Douglas J. Tigert, and revised 2011 past John S. Strong, and past Lawrence Ring, 2015. The most recent revision has benefited from suggestions past Officeworks Australia senior executives. This note was written with the support of the Raymond A. Mason School of Business, The Higher of William and Mary, and of Babson College. Do not reproduce without permission of the authors.

larsontryalk.blogspot.com

Source: https://www.babson.edu/academics/executive-education/babson-insight/strategy-and-innovation/building-competitive-advantage-in-retailing/

Share this post