Retail impacted by digital finally changing business models


Supply chain software, and a minority stake at that, wrote Loretta Chao to WSJ readers made it clear that Nordstrom definitely is intent on preserving their advantages.  As a retailer, they definitely get what digital business means–they are actively engaged in shifting distribution and inventory control, not merely adding data points to track, but redirecting their fulfillment.

Yesterday, the Wall Street Journal also reported shifting focus by big mall developers, who have leveled the mall spots once anchored by top retailers to make room for a new wave of experience magnet attractions. Fewer and fewer people respond to traditional retailer marketing and sales cycles.  Ron Johnson’s early insight that shoppers were ready for greater transparency was ineffectively translated and instead of turning JCPenny’s into a winner, he managed to accelerate its decline.

In a 2013 blog post following a peer discussion of this strategic failure, I wrote:

“The days in which stores stood between buyers and consumer good manufacturers are dwindling. Location or proximity to the consumer may still have an edge but your competition’s ability  to insert themselves into the face to face transaction has dramatically altered the sales dynamic. Mobile communication devices  make it easy for sellers to find buyers anywhere anytime; and yet, the playbook  for many stores , from department stores to specialty retailers,  fail to keep pace with the change in buyer behavior, perception and thus fail to live up to  increased expectations.”

(Click the link for the full post:  For JC Penney and Ron Johnson experience counts, but which one will deliver growth? )

The realization of end-to-end digital retailing has been slow to arrive. True to form, it has not materialized evenly. The latency, or the time interval that separates store buyers’ pre-order of seasonal merchandise, and its staged manufacture, delivery to warehouses and distribution centers before making it to the store created more than one headache for retailer. In a stable environment, where information was as limited as resources , retailers may have been better at holding customer’s captive and thus been more effective in their ability to  forecast, price, track and sell in keeping with customer demand.  The once innovation of a sale to prime the pump, by Ron Johnson’s time had become a fixture in the sales cycle.

Was it really Amazon who introduced the idea of “Drop shipping?” No, as far as I know, Amazon merely managed to take advantage of Chris Anderson‘s description of Long tail distributions as it applies to supply and demand on the internet.  Amazon’s platform that made it easier for interested buyers to find a supplier no matter how rare or plentiful the good. In other words, Amazon freed consumers from the restraints of retailers merchandising and elaborate distribution schemes.

clip_image002Drop Shipping Loretta Chao explains doesn’t merely reduce retailer’s inventory storage and management costs.  Instead it enables retailers to reinvent their old process for securing product and putting it in the hands of consumers. This lets them compete directly with e-commerce players like Amazon and gain the same, if not greater advantage than Amazon’s platform provides.

Personally, I’m just really excited about what else will emerge, and realizing that DropShipping is just one element of the changes that are here but just not evenly distributed. For example, remember why Kickstarter exists? On one hand it represents the unshackling of constraints forced by manufacturers who limited what designs made it to the mass market.  New designers share their idea and get people to pre-pay and pre-order which makes it possible for more alternative goods making it into production.  The presumption of scale still embedded into the calculations that the manufacturers would need a minimum order to make production worthwhile.

Democratizing design is one thing, but imagine a non-inventory business model, one that puts goods in the hands of consumers faster with more control and choice.I recently heard a panel entitled Rethinking the Design Process at a thoght leader summit sponsored by soho house, Samsung and surface magazine, entitled Intersection 2016. Scott Wilson , original maker of MNML design, spoke with Charles Adler (founder of Kickstarter), Jesse Harrington , designer at Autodesk and Dean DiSimone , creator of Othr dedicated to minimizing the environmental footprint of remote manufacturing.

Direct to consumer, suggests that retail as it has existed for the last few centuries is finally catching up to technology, are at least some retailers. If you want to see who, check the panelists recommended you look at the following: Rapha –a completely different sales model; Tesla back to the pre-order and customize and personalized delivery; and finally Story–who boasts “Point of view of a Magazine,Changes like a Gallery, Sells things like a Store.”

If you have any other evidence of the shift, I’d love to hear about them.

 

Advertisements

Successful businesses both Create and Capture value, Can you?


A year ago,  Casey Winters then data analytics guru at Grub Hub, shared the data analytic tools that Grub Hub found contributed value to improving long buy-cycle results.  His list of dominant vendors who then weren’t cutting it made me wonder what tools he found most useful now.  Casey  has since moved on to Pinterest, to further the message its CEO recently sent about its power to create beauty and creativity not merely provide social bookmarking. Double congratulations seemed to be the right tone for my note for landing the job and completing his Chicago Booth MBA.  I wondered whether Casey credits his experience at Grub Hub or his analytic experience coupled with his concurrent studies at Chicago Booth to his greater understanding and usage of predictive analytics?  Before asking, I found myself distracted by content in Casey’s tweet stream, especially a story he found akin to GrubHub’s experience–a start-up that had launched in 30 cities in 6 months.

Casey reminded me what value exactly analysis delivers.  Sure, telling stories grabs headlines and has a way of rippling to the very combination of people responsible for business growth.  I’m not just talking investors, but sexy company stories draw employees and on the web, links make it easy for customers to find you too.  Increasingly the value created in the data streams seemed to be secondary to the primary business operations.  Google in sharing the under the hood analytics understands the mutual value creation venture and so do a great many others in the tool creation business.  But that’s just the beginning. Value may be created but unless you capture it then your business won’t last very long.  At least that’s what a number of successful investors track.

Patterns

Sure, start-up fever seems to infect everyone today.  We love stories about founders who go from nothing to something based on their own grit and determination.  Sound familiar?  This quintessential bootstrapping myth  fuels American’s reverence for business. The reincarnation of Horatio Alger stories as rags to riches tales, applaud individuals who by their own hand pull themselves up. In fact, the origins of the term boot-strapping comes from the idea that regardless of one’s background, you too can create a livelihood and viable business from scratch. Adora Cheung’s startup  recently named San Francisco startup of the year story follows this pattern.

Of personal interest, are the patterns that emerge from both Adora’s story and that of Casey Winter.  Both of them developed an expertise acquiring online users and retaining them, a key growth driver for any business. I suggest that they not only understand how to create value, but their skills bring critical value.  What advantage does a web-based business at least for now, have over on premise businesses? The ability to focus on the behavior of the end users, find patterns and then build profiles that allow them to tweak the site to improve not the data analysis capture but convert the information into tangible financial benefits.

“They’re focused on optimizing everything,” said [Michael] Hirschland, adding that its systems allow it to be far more data-driven than its peers. It’s already using data to predict where best to expand beyond city centers, into the suburbs.

 

Admittedly, simple businesses make it easier to focus on the few moving parts at once and understand what works.  Long buy-cycles tend to show more complex business decisions, where the co-dependencies may lie beyond the control of the user your connections allow you to observe.  Both Casey and Adora honed their experience analyzing  businesses appealing to  simple users direct needs. This no doubt helped them increase the contribution value of their analysis, make insights easier to uncover and use them to move their businesses to greater advantage by exploiting opportunities beyond simplifying their users’ on site journey.As they accumulated additional perspectives of happy online users and recommended tweaks to improve the ease of their site’s use they took a slight turn.

human advantageNaturally we compare and contrast personal and experiences, and no doubt Casey and Adora compare and contrasted their personal site experiences to wider systems of experience.  They exercised these skills to leverage the value created by their analysis and tools and explore using them to optimize offline services.  These associative connections remain outside the realm of predictive algorithms and require human know-how.  This level of strategic thinking allows a business to scale and in their case replicate  in multiple locations quickly.

The analytics know-how does more than create value, it offers the advantage that comes from capturing the value too.

The value chain break down

Let’s face it,our brains are wired to find short cuts.  Anything that saves us from thinking about a routine action allows us time and energy for other things.  A mobile app spares us from having to remember the URL, or type it accurately into our smart phones and access the information we want quickly.  Why should we have to think about basic things when there’s an app that captures the necessary information and simplifies if not eliminate s the guesswork for a host of activities.  That’s what GrubHub did and that’s what Homejoy does online, though it might want to merge with  HouseCall.

Simply put, the reason businesses must be online, happens to be why everyone realized the value Facebook or Twitter offered–a connected, concentrated user community.  Decades ago, businesses opened in the mall for the same reason, be where your customers will find you.  Search engines remain important but increasingly they take second place to an established phone app.  Each tool creates value but they capture value very differently. Snaring customers may be the first step, but mobile apps done well allow you to keep them–one of the fundamental drivers of growth.

Websites when linked to effective traffic directing vehicles has been the principles fueling and giving new life to direct marketing analytic firms for a long time.  Today, successful analysis of logistics matters.  What steps a business takes to simplify real world experiences certainly creates value, but the trick again is to capture it.  A host of online tools exist to make it a snap for users to find, pay for and track the delivery of  what they need.

There’s evidence that Jeff Bezos understood this from the beginning and increasingly stock analysts ascribe greater value to Amazon’s combined capabilities over its narrow profit margins.

Today, Amazon  offers its users one stop search, payment and delivery platforms. The early versions of online e-commerce focused on one aspect of business, displacing if not eliminating the middle man by competing on price that squeezed  the markup between wholesale and retail. Amazon’s  logistics expertise and value capture to date make it a significant threat but will this advantage sufficiently keep them winning over other retailers?

The array of sensors residing in smartphones no longer tip the advantage to online service providers.  These changes impact how everyone in the ecosystem accesses the data, and gets meaningful information from the various readings, like Geo-location, gyroscope, accelerometer, or even the magnetic flux. In the near term,  smaller service business like Grubhub, Pinterest and HomeJoy are deriving benefit from mastering logistics.

For each business the advantages go beyond match making and into literal service management for both consumers and suppliers/providers.  That’s the beauty behind HomeJoy.com.  Consumers  find qualified, cheaper house-cleaning services, and the cleaners benefit from vastly improved wages, simplified scheduling help and timely payments.  If that’s not logistics than I don’t know what else to call it.

None of these were businesses that followed the simple pattern representation of “If you build it they will come.”  The article details can fill you in and tell the story better. so, do take a look:

Summary

What’s the key to creating and capturing value? Here are three suggestions.
1. Mine the Gaps
It’s not about whether your business plan happens to online or on premises.  Can you find gaps between value created and its full capture, aka system level inefficiencies?  I urge clients to look for areas where one or more parties in a transaction leave money on the table.  In the case of HomeJoy, Adora and her brother didn’t seek to create a cleaning service, they merely reflected on their own experiences and applied their knowledge of logistics to realize that the home cleaning service business suffered from inefficiencies they could exploit.
The Gap:  Established cleaning companies were prohibitively expensive.  At the other end of the home cleaning market classified or posted ads for cleaners  were unknown entities.  Users face a choice between paying prices that prohibit frequent purchase of “qualified cleaners, ”  or hiring unknown, self-qualified cleaners at more affordable prices, with little or no recourse if the service proves unsatisfying.
The system level inefficiencies suggested that if they could resolve these issues, they could easily scale the business to become an established cleaning company.  No HomeJoy was doing nothing to disrupt the market, they merely used their ability to mine and funnel the knowledge within the system for greater efficiency.
2. Chicken or egg
What you don’t know makes it harder to understand where to start.  Both Casey and Adora and even Jeff Bezos leveraged what others know, but couldn’t put to work for their own benefit. The know-how necessary for success generally exceeds what’s available in a book or published article.  Few successes come to us from merely reading it, we need to try it out and integrate it with what our experiences have already informed us.  Instead find ways to learn directly from your competition, study from the inside as much as possible. (Of course this can be very challenging to do, as Adora can attest).
Surprise, this same chicken and egg problem often makes it hard for  other players in the system.  For example, consumers often need help finding what they want, and suppliers need help finding customers.  That’s why  focus groups often falls short.  The insights may be sufficient to get you past your current obstacle but won’t necessarily offer you competitive advantages that come when you challenge and improve opportunities at the higher systemic level.  You will learn more about the issue, but the difference between success and failure comes from really finding where the untapped value lies.  In these cases the business benefited from focusing on logistics and using analytic tools that weren’t only monitoring and tracking observable patterns. .
3.  Give to Get
  Many start-ups start by thinking they will give something away for free, but you can’t give away your service and then turn around and ask for payment later.  In the case of HomeJoy they used simple old-school growth hacking tricks–printed flyers and compelling copy wasn’t hard but unless people read them they would have no customers.  So they used the advantage of satisfying an immediate need within a concentrated geography to get their message out. They passed out free water with their flyers and sure enough they built their initial customer base and then their site analytics and the web tools to help these customers share with their friends their satisfaction and grow their business.
4. Research, research, research
Matching software may be the basic kernel of value for which many real services or products depend on the web to help coördinate or connect them to their users located anywhere.  Throw in a rating system  for the service/product and now the site itself creates value, right?  But a host of very established sites such as yelp address these needs and yet both Homejoy and Grubhub are growing and co-exist with the search engines and rating sites.
The razor-thin operating margins underly the basic business models for all of these online businesses, whether you are talking about Amazon, Grubhub or Homejoy.  Created value alone won’t keep them afloat.  Each and every one of these businesses must capture that value and they did it by replicating the model. For Grubhub and Homejoy they quickly expanded to multiple markets.  Amazon used their integrated book sales systems to sell other long shelf-life products, then their excess server capacity to offer retailers online commerce  and increasingly are moving into perishables.
If you are incorporating analytics in your business, at what level of the system are you applying the insights you learn? Investing in strategic thinking can go a long way to sustain your business and insure you capture the value you create. 

Growth doesn’t elude those who connect to customers


Jeff Bezos and anyone else holding Amazon stock must be pretty happy this past week after seeing the stock shoot up 15 % as the last quarter revenue was up 34%.  Grwoth and performance are the cats’s meow in capital markets!  But Amazon is afterall just an internet company, right?  Steve Henn of NPR interviewed Ben Rose, president of Battle Road Research who offered a little perspective. 

 while Amazon made $190 million dollars in profits last quarter – McDonald’s, which is now worth less on the stock market, earned more than 1.2 billion. .. the reason so many investors are excited about Amazon is that it is growing – fast.

 

Fast growth means a lot to the street, investors as well as senior managegment.  The double hockey stick, or ability to repeat performance over time before hitting the point of stagnation sounds precisely in keeping with our expectation of CEOs and yet their inability to knock them out of the park consistently puts Bezos into a very exclusive class.  

The difference in earnings for  Amazon and McDonalds illustrate that there’s a lot more to the picture. Rapid growth requires more than stepped up demand, but an ability to also step up quality, supply and  delivery efficiency, generate positive experiences while sustaining your reputation increasingly matters.  

For years, McDonald’s strategy for growth emphasized opening more restaurants to reach more customers. The problem was that as the efficiencies from scale began to stagnate , flattening the upward  trajectory of the growth curve.  As masters of scale and efficiency and even quality, the price advantage certainly helped them during the recession but by their own standards of success they recognized they needed to do more.  They turned to their innovation team and began to set in motion a series of tests that not only allowed them to upp sales per customer but returned their growth rates to an upward trajectory.  Design helped them completely shift their thinking and relinquish some of the central control and dictates allowing the individual outlets flexibility to satisfy the local tastes and prefrences from menu items to the restaurant design itself. 

 

The shift from central to decentralized control  is not merely the return of the pendulum swing. 

 John Kotter, writing for Forbes,  observing the ever-increasing rate of change and the inability of many organizations to thrive, also observed that static management principles stymie timely transformations.  What stops organizations from adapting or flexibly responding to the larger dynamics at work in the market?  

20th-century, capital “H” Hierarchy (a sort of hardware) and the managerial processes that run on it (a sort of software) do not handle transformation well.

I read this comment and immediately began to understand something I had failed to grasp.  It’s easy as an outsider to recognize and empathize with the challenges of an organization whose leadership voice the words and know deeply they they need some of that innovation. I thought it was thier lack of vision, or their inability to appreciate and value the customer experience or a series of solutions that have been echoed in innovation circles by business strategy, design thinking  and change management professionals.  What I missed was a lesson I had learned and quickly forgotten because it was a painful chapter when I worked for Fortune 50 banks and found myslef the change agent.  Most managemetn teams are responsive up the chain, and in my experience the marching orders they followed were reinforced with clear rewards for delivering performance. 

Getting to the C Suite requires making all the right moves, delivering the results that were expected and that’s the system you know. The trend to outsource was an innovation to cost reductions and creating efficienciey when what mattered was being lean and oil was bad for your diet.  Consumers adapted becasue they never did know the difference between a local company paid customer service rep who spoke english and seemed to know the score and one paid by an outsource firm and could repeat the tasks for multiple companies.  

The price for that efficiency is the loss of control, the ability to truly be agile, nimble and responsive to shifts in the market. You may have surrendered to the forces that Joe Pine describes commodotized your business, swapping out tasks to experts while stepping up the your investment in the new new thing.  

The entrepreneurs who are running circles around the larger providers can do it becasue either they control every inch of their value chain, or the are able to begin by leveraging technology that is fully integrated, seamless and allows for transparency across the system. 

Its unclear how long Amazon will be able to keep up their growth rates by challenging new business sectors failing to make the transition.  Revisiting your structure and decision-making hierarchy certainly helps ….