Retailing stands at the crossroads of three concurrent revolutions. The industry is much closer to the beginning of these revolutions than to their end. These revolutions are changing the location where retailers do business, the way retailers organize their businesses, and the manner in which they communicate with suppliers, associates and customers. These three revolutions, globalization, communication and organizational re-engineering, are transforming the world of retailing. They are combining together, interacting, accelerating and reinforcing their effects on each other and on the industry. They are changing the politics that rule the industry, the economics that support it, the competition that challenges it, and the way consumers buy from it.
From Winners to Losers
These revolutions are producing an economy that is much more decentralized. They are diluting the influence and power of large bureaucratic institutions while empowering small innovative ones. They are changing winners into losers and creating a whole new class of winners. They are dramatically altering the critical success factors for all retailers. In short, these three revolutions are changing everything. In order to survive the changes that are taking place in retailing, all retailers must understand that these three revolutions are creating a post-industrial economy that is globally oriented, information-based, quality- driven and focused on the delivery of value and service to the individual.
The Globalization Revolution
The fastest growing economies in the world in the coming decade will not be found in North America, Western Europe or Japan. They will be in Southeast Asia, Latin and South America and Eastern Europe. It will be in these parts of the world where the size and the purchasing power of the middle class will grow the fastest. Wherever there is a rapidly growing middle class there will be a rapidly growing opportunity for U.S. based retailers. Retail development in these frontier economies will follow a structural path similar to what has already happened in the U.S. America’s retail history is the developing world’s retail future. Having already experienced the future, many U.S. retailers will have a significant competitive advantage. No longer will these countries be simply a place to source goods, they will now be attractive markets in which to sell goods. No one in the world does distribution and logistics better than U.S. based retailers. It is this world class capability that will draw U.S. retailers into the global arena.
China Takes the Lead
China has made the most progress on the road to a market economy. Market reforms that were started 15 years ago are producing explosive growth in the coastal regions of Mainland China. Economic growth in excess of 10% a year can be expected for the rest of this decade for the country as a whole. At its current growth rate, China will have the largest economy in the world in 30 years, although the average Chinese will still live modestly by U.S. standards of today. Nonetheless, rapid economic growth in China is creating the fastest growing middle class in the world. Southeast Asia, including Vietnam, the Philippines, Thailand, Singapore and Malaysia, are riding an economic boom that is being driven by an embracement of market economics combined with an explosion in the number of young adults. Singapore will be the first nation in the world to be totally electronically networked.
Latin and South America are throwing off the burdens of excessive debt, trade protectionism and government paternalism. The opening up of these markets and the resumption of growth has made this area the fastest growing market for U.S. exports in the world. Already, many U.S. retailers have ventured into Mexico in anticipation of this growth. By going to Mexico now, they are developing the managerial expertise that will enable them to expand throughout the rest of Latin and South America. Over the next decade, the triumph of market economics means that more people around the world will move into the middle class than in any other decade in history. Just as the creation of a middle class society in the U.S. accelerated the growth in the retail industry here, so, too, the growth in the middle class around the world will create enormous growth in retailing overseas.
The Communications Revolution
The revolution in microelectronics is being driven by the collapse in the price of computer memory. In 1978, one megabyte of computer memory cost $250,000. It was housed in a device the size of a small washing machine, weighed several hundred pounds, and required a tightly controlled environment that included constant temperature control and tight security. It was affordable to only the largest organizations and businesses. Its use was closely monitored and tightly controlled. It was a source of competitive advantage for large organizations and bureaucracies. Today a megabyte of memory costs around $50. It weighs several ounces, requires no special environment and you can hold it in the palm of your hand. Computer use is no longer tightly controlled. It is becoming a competitive advantage for the smaller business and organization. It is now a destroyer of large businesses and bureaucracies. The collapse in the price of information technology has set off a boom in business investment and a rethinking of business organization and strategy. It has changed the way retailers use information in their organizations. It has dramatically changed the way retailers communicate with their suppliers, breaking down the traditional boundaries between retailer and supplier. More importantly, from a profitability perspective, the growth of EDI (Electronic Data Interchange) has shifted the balance of power in the consumer goods value channel from suppliers to retailers.
The Growth of Cyberspace
The collapse in the price of computer memory will now be followed by a corresponding collapse in the cost of fiber optics. Bandwidth will no longer be the limiting factor to communications. The collapse in the price of bandwidth will open up the use cyberspace in much the way the collapse in the price of computer memory opened up the use of personal computers. When the cost of bandwidth was expensive, it required one-way communication from a regulated centralized source. When bandwidth is cheap, communication will be interactive and will stem from many unregulated, decentralized sources. The revolution in fiber-optics will open up cyberspace to a mass audience. Home shopping will take on an entirely different meaning and framework from the passive, entertainment based medium it is today. In an interactive world, everything has the potential of being an infomercial. Awed by a catch made in left field by Barry Bonds, just click on his glove and find out its price. Click again and its yours. Admire the outfit that Madonna is wearing on MTV, click on it and you can get color, size, style and price information. Click again and it’s on your doorstep the next day. The Re-Engineering Revolution
At the beginning of the industrial revolution, productivity improvement came from chopping up job functions into smaller and smaller pieces so anyone could do the job. With an unlimited supply of unskilled labor, costs were kept down and control of the business remained centralized. This process worked wonderfully as long as the business environment was unchanging, the work was always routine, and the output desired was uniform. Once the work became non-routine, or the business environment changed, or the desired output was no longer uniform, and once the work force became more educated, dividing work up into tiny pieces and centralizing control over it no longer made economic sense. Just as the organizational structure of the industrial revolution was a destroyer of the pastoral, pre-industrial society, so the transition to the post-industrial organization is a destroyer of industrial society. The transformation to the post-industrial revolution organization will not be an easy process. The steady drum beat of high profile layoffs, despite a modest recovery in economic growth, illustrates that this revolution is far from over. For most retailers this revolution has not even begun. This revolution requires that retailers adapt new processes for getting work done. These new processes will focus on work that is information intensive, non-routine, and decentralized.
As these three revolutions gain momentum, the pace of economic growth in the U.S. in general and in retailing in particular will accelerate. Globalization will increase the standard of living of all our trading partners. It will create millions of new customers for every product and service imaginable, increasing the overall level of aggregate demand. The revolution in microelectronics will create a whole new range of intelligent products. New products will translate into new sources of consumer spending and business investment. From personal digital assistant to virtual reality machines, the tools and the toys of the next decade will be both cheaper and smarter than they are today. The result will be higher levels of productivity and quality, increasing the overall level of aggregate supply.
These three revolutions are already underway. They have already had a significant impact on retailing as can be seen in the dramatic growth in retail productivity in the past three years.