ON THE EVE OF THE MILLENNIUM:
THE ‘INFORMATIONALIZATION’ OF RETAILING
Things fall apart; the center cannot hold; Mere anarchy is loosed upon the world.
And what rough beast, its hour come ’round at last; Slouches towards Bethlehem to be born? — The Second Coming, W.B. Yeats
Look around you. You read about it in the business and trade press. You see it in the context of your own business. You find yourself talking about it in conversations with your peers. It doesn’t matter if you are looking at retailing, information technology, financial services, management consulting or public education. As we approach the end of the millennium, technological change is creating not a sense of progress but a feeling of chaos. Can technology be Yeats’ rough beast that is slouching towards Bethlehem to be born?
The Duality of Change From the Greeks we learned that all change has two different and opposite dimensions to it. Change brings both threat as well as opportunity. The challenge in managing and coping with change is to find, understand and exploit this duality. Exploiting the duality of change is growing more difficult, as the nature of change itself is growing more problematic. Twenty-five years ago, Alvin Toffler captured the changing nature of change in his book Future Shock. Toffler’s basic thesis was that the pace of change was accelerating.
Another change in the nature of change is now taking place. Not only is change accelerating but it is also becoming much more erratic. Change is now out of control. Where change in the past was predictable, controllable, simple and understandable; change is increasingly becoming unpredictable, uncontrollable, complex and incomprehensible. Change is out of control as technology is transforming the institutional foundation of retailing from a hierarchical to a networked-based business structure.
From the boardroom to the stockroom, retailing is experiencing a broad-based, technologically driven, institutional breakdown. The specter of bankruptcy is again stalking the business. The problem this time is not too much debt but an inability to deal with technology-driven change. Fixing these problems will be well beyond the capabilities of management or the patience of most lenders. Liquidation will be the option of choice for many of the companies now facing bankruptcy.
The Informationalization of Retailing Much of the institutional breakdown of retailing is being driven by the “informationalization” of the business. The informationalization of retailing is a technologically-facilitated process that is transforming the critical assets of all retailers from inventory and real estate into information. For most retailers, this will not be an easy change. As a result, retailing is going from a business where success was based on location and merchandise to one where success depends on the unwieldy trinity of information, communication, and entertainment systems combined with the knowledge workers to create, maintain and utilize these systems. It is a social/technical duality.
The informationalization of retailing first transformed the cost side of retailing, increasing flexibility and reducing overhead. Using first-generation mainframe applications, traditional retail business processes were automated, improving the efficiency of these processes. The combination of falling costs and increased competition translated these gains into lower prices for the consumer, and higher volumes but not always higher profitability for the retailer. As this process was repeated, it became a loop, what many retailers hoped would be an unending productivity loop.
The ‘Productivity-Loop’ Paradox Less than a decade ago, the discount department store sector discovered the “productivity loop.” The concept was simple and compelling. If you drive costs down, you can lower prices. Lower prices would lead to increased volume. In the short run, retailers who were on the leading edge of the productivity loop gained market share and gross margin dollars, at least until their competitors did the same thing, which, unfortunately, they eventually always seemed to do.
The positive aspects of the productivity loop for the discount department store industry came to an end in 1992. The ability to reduce costs as a percentage of sales ran into what seems to be a physical limit. While costs have stabilized just above 17 percent of sales, margins have continued to drop. It is the squeeze on operating profits due to the breakdown of the productivity loop that is one of the primary factors behind the new wave in retail bankruptcy.
The net result of the productivity loop is lower profits for everyone and a depressing sameness from chain to chain. While not benefiting retailers, the drop in costs and profitability does show up in a drop in prices. The productivity loop is one of the prime drivers of deflation.
No single company understood and implemented the productivity loop better than Wal-Mart. Combining state-of-the-art information technology with world-class distribution skills, Wal-Mart ruthlessly drove down their sales, general and administrative costs as a percentage of sales. The competitive advantage of low cost enabled Wal-Mart to grow to $100 billion in its first 30 years of operation. If Wal-Mart is able to grow over the next six years at half the pace of growth it achieved in the preceding 10 years, it will add another $100 billion in sales. Wal-Mart left thousands of small and not-so-small businesses floundering in its wake. Imagine the competitive wreckage that will follow the compression of that volume of growth from 30 years to six.
‘Relationship Marketing’: Learning to Fire the Customer The focus of informationalizing retailing will next shift to the demand side of the business and “relationship marketing.” The object of relationship marketing is to capture information about the very best customers to customize the marketing message down to the individual. The biggest challenge of this change is not technological but organizational.
Communicating with customers on an individual basis requires maintaining an ongoing, one-to-one relationship with the customer and a shift in marketing strategy. Not all customers will be worth the effort. Successful retailers will learn to be selective in the choice of customers, firing customers who do not fit their marketing objectives. Viewing the customer not as one transaction at a time but as a customer for life will be a difficult if not impossible transition for many retailers.
One-to-one relationships with the consumer enable the retailer or supplier to get continuous feedback on how the product is being used, what improvements would be of value to the consumer, and what shortcomings exist in the current version of the product. When done across an electronic medium, relationship marketing offers retailer and suppliers the opportunity of having ongoing, low-cost, never-ending focus groups. With the eventual development of virtual reality, this type of interaction will allow consumers to design their own products or even their own store. Technology will bring about a true revolution in retailing, returning the customer-service level of the business back to what it was 100 years ago when it was a carriage trade.
Creating a “sense of community” will lie at the heart of all relationship-marketing processes. These relationships will become not just company-to-consumer relationships but, more importantly, customer-to-customer relationships. This will alter the relationship between retailer and consumer, returning profitability to the industry, and allowing the industry to shift back from a commodity business to a fashion business.
The Rise of Networks: The Technological Imperative The growing role of communications technology will make retailing a network-focused business in both a social and technological context. By the end of the century, the network will be the dominant form of business organization and the way all retail executives will think about their business. Networks will connect the major stakeholders in both the individual business and in the broader value web.
Today retailing is a hierarchical, top-down, power-down, real estate-rich, control-focused, inventory system that delivers, at best, moderately differentiated products to a mass market. Technology is transforming retailing into a membership-focused, collegial, power-dispersed, information-rich, network system that delivers personalized services and products on an indivi-dualized basis. Technology is enabling retailing to return to what it once was: a personalized business where the consumer was treated as an individual, where his or her needs were well known and understood by the retailer, and where a long-standing personal relationship existed between retailer and customer.
The speed at which this transformation is taking place is accelerating. It is being driven by an unexpected interaction of social and technological forces. These forces include the dramatic improvement in the price-performance of information and communication technology coupled with the growing fragmentation of society along ethnic, income, educational, regional and age fault lines. As technology permeates society, the value chain in all retail channels of distribution from raw-material supplier to the final consumer is being transformed in terms of power, communication and the ability to add value.
From Mainframes to Distributed Processing to Network-Based Systems In a networked world, power, decision-making and value come not from how high you are up in the hierarchy or even where you are in the value chain. Instead, value comes from the relationships and the connectivity that you develop in your networks. The value chain is no longer a chain. Rather it is an ever-expanding web of connections, relationships and information.
The price performance of information and communication technology is improving by roughly 50 percent every 18 to 24 months. We are rapidly approaching an age where bits, memory and bandwidth will be essentially free. The real cost in implementing any new system will not be in the hardware but in the cost of the people needed to create, maintain and run the system. The improvement in the price performance of information and communication technology is splitting the retail economy into the “bit-based” economy and the “atom-based” economy; the digital, cyberspace business and the real, physical business. The real cost in implementing and using this new technology will not be in changing and upgrading the hardware and software but in changing and upgrading the people and the business processes.
While the real business sector is subject to the traditional laws of economics, the business cycle, government control and direction, the virtual business is not. The physical, atom-based retail business will contract over the next five years. The digital retail business will experience exponential growth. For retailers to survive to the end of the decade, they must grasp this transformation and become more a part of the digital networked economy.
The Community of Networks The interaction of improved communication technology, with the growing sociological need for community, is creating a new way of approaching the age-old problems of marketing. This socio-technological transformation will result in the creation of networks of consumers, suppliers and retailers, held together by common bonds of self interest, trust, community, myth and technology. It is these networks that will become the focus of attention for retail marketers and technology providers over the next five years and beyond.
The development of supplier networks that are electronically linked together has been key to reducing the cost and improving the efficiency of retail distribution. Over the next five years, winning retailers will develop similar networks both among their top customers as well as among their own associates. Within large retail organizations, corporate hierarchies will slowly give way to organizational networks as the generators of value.
The downside of these networks is that they will be increasingly impossible to control. The loss of control is being driven by the increased complexity of the networks. The critical challenge that arises from networks is managing the boundaries of the network. The goal of senior management over time will be the expansion of the network and the management of the network’s boundaries.
The Role of Myth The importance of myths to marketing is growing as marketing shifts from the mass market to the use of networks and community as a vehicle for getting a company’s story out and selling its product. In the age of alienation and individualism, Americans are looking for common bonds that give them a connection to the community around them. The desire for community is even greater among Generation Xers, as 70 percent of them lived in broken homes at some time in their upbringing. Once community is established, the opportunities to sell products will follow. To do that, shared myths are needed to bind a community together, to give it a common vision, shared values and a joint purpose.
Retailers need to focus on the growing importance of myths as a key source of sustainable competitive advantage. While every other aspect of the marketing mix from store locations to merchandising can be easily copied, a powerful set of myths is unique to a particular retailer or supplier and can not be copied or knocked off. In this age of market saturation, myths will be one way winners differentiate themselves from the rest of the pack.
The network challenge of the next five years will be creating myth-driven, customer-based networks. Several retailers and suppliers, including Harley-Davidson and Saturn Automobile Co., are in the process of developing the model for this.
A customer-driven network is a community of people who have shared values, myths, mutual trust, history and experiences that are intimately tied to a product, store or lifestyle. A robust network has a shared passion for the myths and rituals of the lifestyle, store or product. That passion gives the network its unique character. These networks are open and communication flows among its many members through many different mediums. These networks are highly decentralized. They have no single location. Because these networks have a life of their own, they will evolve, and last long beyond their original purpose.
Saturn Automobile Co. has created such a network. Saturn car owners share information on the zinternet with other car owners and even meet once a year in Spring Hill, Tenn. Nordstrom has a customer network that is based on the company myths and realities about customer service. This network creates a high level of customer loyalty to the store.
Network ‘Co-Evolution’: From Customer Networks to Shared Competitive Networks The airlines started it. Both United and American tried to have their own reservation systems. The cost was great and the results were disappointing. They eventually created a reservation network that included other airlines, rental-car agencies and hotels. They were better off with an open network than they were with their closed proprietary networks. What they created by giving up control is a shared network that is customer driven. The more suppliers on the system, the more attractive it is to their mutually shared customers.
Credit card companies and banks have moved heavily into a similar type of arrangement. With a Plus System or Cirrus-based bank ATM card, you can get cash in any currency just about anywhere in the world. The arrangement benefits all participants in the network, producing a higher level of value and lower unit cost as more banks join the network. Network “co-evolution” is the next step for retailing. By giving away exclusive control of a competitive advantage, retailers can make their offer of more value to the consumer.
Walgreens has done it. After developing a prescription network several years ago, Walgreens had a difficult time in getting physicians to use it. Most did not want to lock their patients into a single prescription provider. Walgreens eventually opened up the network to competitors, losing control of the network but dramatically increasing its value and use by consumers. Walgreens now gets substantially more business from its open competitive network than it ever got from its network when it was closed and exclusive.
The Shift in the Value Chain: A New Model of Value By creating a new source of value, networks will destroy much of the old system of value creation. Just as the shift in the value curve in the 1970s due to the explosive growth in low-cost overseas manufacturing capability destroyed the manufacturing-based businesses of the old “Rust Belt,” the coming shift in the value curve will have an equally destructive effect on distribution-based businesses.
Once again, the ability of manufacturing to add value will be reduced. Production or at least the planning of that production will be done by the customer at the point of purchase as all production moves towards mass customization. New opportunities will be created for information-based, customer-relationship-marketing-driven businesses to thrive. Wholesalers are the most at risk of being squeezed out of the value chain altogether.
The technology of networks is also creating a new model for adding value. In the past, value was based on scarcity. The power of networks means that value in the future comes from connectivity to, relationship with and the overall size of the network. A single fax machine, although unique, would have no value. The value of your fax machine increases as the total number of fax machines increases. Value comes from the ability to connect to others. The value of Microsoft software increases as more people use it. The value of the Saturn network, both to Saturn and to those people in the network, increases as more people join.
New-Wave Marketing In a world that is increasingly digital and informationalized, the cost of producing an additional unit of output approaches zero. In this environment, marketers will find that it makes more sense to give these zero-cost products away so as to expand their network, create closer community bonds and establish the market standard.
Cellular phone providers are doing this, as are software providers like Netscape. In a similar manner, the airline companies have been doing this for more than a decade with their frequent flier programs. In the future, retailers will do this as a way of cementing a closer relationship with their best customers. In order for retailers to do this successfully, their distribution system will focus on the individual as the customer. Information will have to be collected and available at the point of sale to distinguish high-performance customers from the rest of the crowd. Service will have to focus on the high-performance customer. Merchandising, market positioning and pricing will all have to be designed with only that customer in mind.
Technology and the Changing Organization of Work While the price of technology is falling through the floor, the price of highly qualified, technologically astute employees is going through the roof. The prices of higher education has been one of the fastest growing segments of the consumer price index over the past five years. Putting a child through college will be the largest single investment many middle-class households will make. At the same time, the return on education has never been higher. The income differential between college educated and non-college educated has grown and will continue to do so.
Technologically educated workers will be harder to organize and impossible to control. Given the many choices they will have in the workplace, they will require a different type of work environment than traditionally low-educated retail employees. These types of workers will demand more autonomy. They will work in environments that will allow them to spontaneously organize and reorganize around key problem areas. Once the problem is solved, these temporary groups will break up and reorganize again. To do this successfully will require a shared vision or goal to help them self organize. A measurement and reward system to direct and give them focus and direction will also be a requirement for success.
The Need for Passion Passion will replace control as the mechanism for making things happen. Where control is at best reactive, passion is proactive. Where control is limiting, passion is empowering. Highly educated knowledge workers need to be offered work environments that evoke passion will be critical. As hierarchies break down and the ability of command organizations to function declines with it, passion will be needed to create organizational motivation and direction. Where there is a strong sense of purpose, there is also a high level of passion. Being passionate about work will be the critical dimension that differentiates high-performance companies.
The inability to generate the passion needed to adapt to the changes created by information technology has brought about everything from the collapse of the Soviet Union, to the bankruptcy of many old tradition-bound retail businesses. Technology is informationalizing the retail business and forcing retailers to rethink and transform how they organize their business to create value. Passion, not control, is the lubricant needed to make that change happen. This sociological dimension of change is the biggest challenge facing the successful application of retail technology today.
This leadership problem is also a generational problem. Those in authority tend to be older. They are in positions of responsibility but unable to be responsible because of the accelerating nature of change. No one has any experience with the nature of the change now occurring. We are all new pathfinders. The older you are, the less able you are to deal with that change. Effective organizations will need to be turned upside down, with those at the bottom running the show. In a crazy world, the lunatics really do need to be in charge of the insane asylum.
Opening the Door to Tomorrow
The future of retailing will look very different from the reality of retailing today, but surprisingly much more like retailing of 100 years ago. The key to future retail success is opening up the value web to many smaller players and to smaller transactions. That will enable retailing to transform itself from a commodity business back into a fashion business.
The network greatly reduces the cost of transactions. It eliminates the economies of scale that come from large-scale industrial production and empowers the informational elements of the production process: the identification of the consumers’ wants and needs, the communication with the customer, the design of the product or service, the servicing or delivery of the product or the service, the financial elements of the transaction.
Retailers who look to the network will always find the ways to add value through information. That process will require breaking down the traditional barriers of the organization, co-evolving with your customers and engaging in antagonistic cooperation with your competitors. Increasingly, the network will become the sole focus for creating value.